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STOXX® GLOBAL ESG LEADERS INDICES
November, 2013

1
Agenda

1. Incorporating ESG data into investment decisions

Page

3

2. STOXX ESG offering

Page

6

3. Performance

Page...
1. INCORPORATING ESG DATA
INTO INVESTMENT DECISIONS

3
The “magic triangle” of investment decision making is
changing to a “magic square”
Sustainability is the fourth element

R...
Sustainability as an investment strategy

Reasons for sustainable investing
Avoiding “black » The reputational damage and ...
2. STOXX ESG OFFERING

6
STOXX partners with Sustainalytics to provide an ESG index
family with wide market acceptance
Inclusion in the index depen...
STOXX method leads to strong emphasis on sustainability
using proven, independent ratings framework
Construction of STOXX ...
Ratings based on standardized scores for each KPI
Example: Environment Rating construction for Pernod-Ricard
KPI (based on...
3. PERFORMANCE

10
STOXX Global ESG Leaders index compared to competitors’
indices
Performance chart1)

Overview

190
STOXX
STOXX
Global
Glob...
STOXX ESG Leaders Index has lower exposure to US
companies compared with the universe
Country allocation
Misc.*
17.2%
JP

...
STOXX ESG Leaders Index more exposed to financials, less
exposed to health care compared with benchmark
Industry allocatio...
Country analysis for MSCI World ESG as of October 2013
Comparing country allocation of MSCI and STOXX
Country allocation
M...
Industry analysis for MSCI World ESG as of October 2013
Comparing industry allocation of MSCI and STOXX
Industry Allocatio...
4. CONCLUSION

16
Four key points

…
» Transition of “magic triangle” of investment decision making to “magic square”
» Avoiding “black swan...
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Rosanna Grimaldi

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Measuring the impact of investments remains a main challenge for sustainable finance professionals and, together with Climate Change, an overarching theme at TBLI. Sixteen related workshops offer debate on ESG and Impact Investing trends, private equity, portfolio strategy, food production, emerging markets, sustainable energy or philanthropy investing.

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Transcript of "Rosanna Grimaldi "

  1. 1. STOXX® GLOBAL ESG LEADERS INDICES November, 2013 1
  2. 2. Agenda 1. Incorporating ESG data into investment decisions Page 3 2. STOXX ESG offering Page 6 3. Performance Page 10 4. Conclusion Page 16 2
  3. 3. 1. INCORPORATING ESG DATA INTO INVESTMENT DECISIONS 3
  4. 4. The “magic triangle” of investment decision making is changing to a “magic square” Sustainability is the fourth element Return Return Risk Risk Liquidity Liquidity Sustainability Goals of investment decision making 4
  5. 5. Sustainability as an investment strategy Reasons for sustainable investing Avoiding “black » The reputational damage and pecuniary costs of unethical or even illegal activities can lead to huge investment losses swan” events » Short-term gains possible but will be lost completely if any misconduct is revealed » Companies do not necessarily gain points for good corporate governance but suffer a massive discount when ESG issues are poorly managed Long-term strategy » No guarantee of outperformance in the short-term » Sustainable investment to be considered a long-term strategy only » Environmental protection, staff benefit programs, transparent accounting standards and other socially responsible criteria require upfront investments to achieve sustainable growth » Initial costs hold potential for long-term benefits. For example, staff benefits lead to motivated employees, which leads to increase in company value 5
  6. 6. 2. STOXX ESG OFFERING 6
  7. 7. STOXX partners with Sustainalytics to provide an ESG index family with wide market acceptance Inclusion in the index depends on 134 Key Performance Indicators (KPIs) Data Broad index Specialized indices » Sustainalytics provides KPI data, which is endorsed by the DVFA1) (the German Society of Investment Professionals) » Sustainalytics, an ESG research provider, is headquartered in Amsterdam and has 12 more offices around the globe, with 120 employees » STOXX combines its indexing expertise with data from Sustainalytics to create the STOXX Global ESG Leaders index, which contains global leaders in the E, S and G areas. The index is based on the STOXX Global 1800 index universe » STOXX Global ESG Environmental Leaders, Social Leaders and Governance Leaders indices select companies which rank highest in each area 1) DVFA is the German counterpart of EFFAS 7
  8. 8. STOXX method leads to strong emphasis on sustainability using proven, independent ratings framework Construction of STOXX Global ESG Leaders from base universe » UNIVERSE: STOXX Global 1800 Step 1: STOXX Global » FILTER out ineligible companies (controversial weapons and ESG Leaders non-compliance with UN Global Compact) » COMPUTE each stock’s rank percentile in each category ESG » ELIGIBILITY if score is in the top 50% in each of the three categories » SELECT1) if score is in the top 25% of the corresponding category » WEIGHT stocks proportionally to their ESG score (no caps) » Aggregate the 3 Global ESG Leaders indices Step 2: » SELECT1) all stocks in the 3 Global ESG Leaders STOXX Global » WEIGHT each stock according to its average weight in the ESG Leaders 3 Global ESG Leaders indices2) 1) Buffer rules apply upon rebalancing, reducing turnover 2) A stock missing from an index has a weight of 0% in that specific index Sustainability ratings framework and ratings from independent sources (DVFA and Sustainalytics) The weights for each KPI differ depending on the sector allocation of the rated company Weighting by ESG rating, not market cap No restrictions regarding deviations from base index risk factors 8
  9. 9. Ratings based on standardized scores for each KPI Example: Environment Rating construction for Pernod-Ricard KPI (based on DVFA KPI 3.0)1) Weight Score Weighted Score 7.8% 100 7.8 Environmental Management System 6.3% 100 6.3 External Certification of EMS 6.3% 75 4.725 Programmes & Targets to Reduce Water Use 6.3% 100 6.3 Programmes and Targets to Reduce Direct GHG Emissions 3.1% 100 3.1 Programmes and Targets to Improve the Environmental Performance of Own Logistics and Vehicle Fleets 3.1% 50 1.55 21.9% 100 21.9 Formal Policy or Programme on Green Procurement 5.7% 60 3.42 Contractors & Supply Chain Related Controversies or Incidents 5.7% 100 5.7 11.4% 40 4.56 Policy on Use of Genetically Modified Organisms (GMO) in Products 2.9% 75 2.175 Products & Services Related Controversies or Incidents 8.6% 100 8.6 Total Rating 100% n/a 84.1 Operations Related Controversies or Incidents Organic Products … … Water Intensity Relative Rating 2) 96.8 1) For the Consumer Goods sector, of the 134 KPIs, there are 56 for E, 50 for S and 28 for G. For the sector above, there are 19 KPIs for the environment rating that are of importance, according to Sustainalytics. Only 12 of them are listed here 2) Compared to all STOXX Global 1800. Data as of Sept. 2012 9
  10. 10. 3. PERFORMANCE 10
  11. 11. STOXX Global ESG Leaders index compared to competitors’ indices Performance chart1) Overview 190 STOXX STOXX Global Global ESG 1800 Leaders DJSI FTSE4Good World Global Index Index MSCI World ESG Index 170 150 Annual returns 4.4% 7.7% 7.3% 5.5% 8.1% 130 Volatility 20.6% 15.9% 17.0% 18.2% 15.8% 110 Sharpe ratio 0.19 0.46 0.44 0.28 0.48 Beta 1.24 1.00 1.05 1.11 0.99 90 70 Correlation 0.96 1.00 0.99 0.97 0.99 Maximum drawdown 31.2% 22.3% 23.9% 26.3% 22.0% Jul-03 Jul-05 Jul-07 STOXX Global ESG Leaders (USD PR FTSE4Good Global Index (USD PR Jul-09 Jul-11 Jul-13 STOXX Global 1800 (USD PR) DJSI World Index (USD PR) MSCI World ESG Index (USD PR 1) Source: STOXX Global 1800 data from Jul. 1, 2003 to Oct. 25, 2013. STOXX Global ESG data from Mar. 25, 2011 to Oct. 25, 2013. Other data taken from Bloomberg. All figures are based on live data. 11
  12. 12. STOXX ESG Leaders Index has lower exposure to US companies compared with the universe Country allocation Misc.* 17.2% JP -4.8% CH -0.5% CA 2.2% DE 2.3% AU 3.3% ES 3.4% GB 5.8% FR 6.9% US -50% -35.8% -40% STOXX Global 1800 -30% -20% -10% 0% STOXX Global ESG Leaders Index 10% 20% 30% 40% 50% 60% STOXX ESG Leaders vs. STOXX Global 1800 Source: STOXX data as of Oct., 2013 Miscellaneous countries : SE, HK, NL, IT, SG, DK, BE, FI, NO, IE, AT, PT, LU, NZ, GR and CZ 12
  13. 13. STOXX ESG Leaders Index more exposed to financials, less exposed to health care compared with benchmark Industry allocation Health Care -7.1% Oil & Gas -2.7% Technology -1.6% Consumer Services -0.1% Industrials -0.01% Utilities 0.9% Telecommunications 1.2% Consumer Goods 1.4% Basic Materials 2.9% Financials -10% STOXX Global 1800 5.1% -5% 0% 5% STOXX Global ESG Leaders Index 10% 15% 20% 25% 30% STOXX ESG Leaders vs. STOXX Global 1800 Source: STOXX data as of Oct. 2013 13
  14. 14. Country analysis for MSCI World ESG as of October 2013 Comparing country allocation of MSCI and STOXX Country allocation Misc.* -2.1% 31.3% JP -0.1% -4.8% GB 0.1% 5.8% CA 0.7% 2.2% AU 0.6% 3.3% US 0.7% -35.8% -60% STOXX Global 1800 -40% -20% MSCI World ESG Index 0% 20% MSCI vs. STOXX Global 1800 40% 60% STOXX ESG vs. STOXX Global 1800 Source: MSCI Factsheet data as of Oct. 2013. STOXX data as of Oct. 2013 Miscellaneous: CZ, GR, NZ, LU, PT, IE, NO, FI, BE, DK, SG, IT, NL, HK, SE, ES, AU, DE, CH and FR 14
  15. 15. Industry analysis for MSCI World ESG as of October 2013 Comparing industry allocation of MSCI and STOXX Industry Allocation Consumer Goods & Services -1.8% Industrials 1.3% -1.3% -0.01% -1.3% -2.7% Oil & Gas Telecommunications -0.4% Financials 1.2% -0.04% Utilities 0.02% Basic Materials 0.9% 0.3% Health Care Technology 2.3% -1.6% -10% 2.9% 2.2% -7.1% STOXX Global 1800 5.1% 0% MSCI World ESG Index 10% MSCI vs. STOXX Global 1800 20% 30% STOXX ESG vs. STOXX Global 1800 Source: MSCI Factsheet data as of Oct, 2013. STOXX data as of Oct, 2013 15
  16. 16. 4. CONCLUSION 16
  17. 17. Four key points … » Transition of “magic triangle” of investment decision making to “magic square” » Avoiding “black swan” events » STOXX Global ESG Leaders indices give visibility to ESG performance of companies » Transparent KPI model offers an example of how to incorporate ESG performance into investment products 17
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