Asset owners

Consulting firms

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The need

BlackRock was looking to offer ETF clients interested in investing in German equities a sustainable alternative to its standard ETF which was Willis Towers Watson (WTW), a global consulting firm, was looking for a partner to help them develop indices that would incorporate their proprietary climate data and provide investors with a sophisticated way of managing climate transition risk.

The challenge

The new indices required the integration of WTW’s Climate Transition Value at Risk (CTVaR) data. This is a proprietary measure that analyzes the impact on projected company cashflows of transitioning from a ‘business as usual’ scenario – reflecting current policies – to an environment where emissions pathways are consistent with the goals of the Paris agreement.

The solution

Our open data architecture approach combined with our index construction expertise enabled us to collaborate with our client to develop the STOXX^® Willis Towers Watson Climate indices. Starting from broad STOXX universes, securities are evaluated in terms of predefined sustainability characteristics. Companies identified as non-compliant based on Sustainalytics’ Global Standard Screening assessment or companies that are involved in controversial weapons, thermal coal and oil sands are removed from the universe. The remaining eligible companies are weighted according to their free-float market capitalization adjusted by the Climate Transition Value at Risk (CTVaR) metric calculated by WTW. In general, the indices tilt away from companies with high exposure to climate transition risk.

Asset Managers

ETF providers

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The need

FlexShares, part of Northern Trust Asset Management, wanted to launch ETFs based on indices that meet sustainability criteria while considering high dividend and low volatility requirements.

The challenge

Northern Trust Asset Management wanted to incorporate their proprietary ESG and quality scores into the index construction process.

The solution

We collaborated with FlexShares to develop strategies that efficiently manage the risks and opportunities arising out of ESG and climate issues while avoiding companies that are poorly managing them. With the open nature of the Axioma Portfolio Optimizer^TM , we integrated FlexShares proprietary ESG and quality scores. The investment philosophy behind the designed strategies was to capture the excess returns from rewarded factors such as quality, low volatility and dividend yield while controlling for sector, region, country and security-level biases that add to risk but not to returns. The following resulting indices are being used as benchmarks for ETFs:

• iSTOXX^® Northern Trust Developed Markets Low Volatility Climate ESG Index
• iSTOXX^® Northern Trust Developed Markets High Dividend Climate ESG Index
• iSTOXX^® Northern Trust Emerging Markets Low Volatility Climate ESG Index
• iSTOXX^® Northern Trust Emerging Markets High Dividend Climate ESG Index

Asset owners

ETF providers

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The need

BlackRock was looking to offer ETF clients interested in investing in German equities a sustainable alternative to its standard ETF which was based on the iconic German DAX^® index.

The challenge

BlackRock wanted to provide its clients with an ETF that reflected the risk/return characteristics of the original German DAX index while also taking into account carbon reduction and ESG requirements.

The solution

Using the power of the Axioma Portfolio Optimizer^TM and our leading index construction capabilities, we collaborated with BlackRock to develop the DAX ESG Target index. The index provides a portfolio optimization (re-weighting) to meet tracking error constraints (< 1.5% versus the parent DAX index) and carbon reduction goals. Additionally, the index creation incorporates ESG rating information from Sustainalytics, a leading global provider of ESG research, ratings and data. The index also applies Global Standards Screening provided by Sustainalytics as well as product involvement screens for weapons, tobacco, thermal coal, nuclear power, and oil sands.

Asset Owners

ETF Providers

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Summary

APG Asset Management (APG), based in the Netherlands, is one of the largest pension providers in the world. Like other asset owners, APG requires custom capabilities in order to accurately capture the sustainability objectives of their pension fund clients including integrating sustainable development investments (SDI) and low carbon targets.

The Need

APG’s desire was to help clients steer more capital towards solutions contributing to the United Nation’s Sustainable Development Goals (SDG). Existing benchmarks did not reflect the unique sustainability criteria developed by APG, making it more challenging to execute on clients’ investment objectives and accurately measure progress towards clients’ sustainability targets. APG needed a customized investable index solution that fully and transparently reflected a range of sustainable investment policies.

The Challenge

To accurately reflect the pension funds’ sustainable goals, we needed to meet several requirements: Benchmarks that incorporated unique ESG criteria and proprietary data; minimization of tracking error relative to the broad developed market by managing unintended bets including sector, country, and factor exposures that might emerge as an outcome of the sustainability targets; and the ability to measure and report on the impact of the risk budget on each of the ESG criteria or constraints. To meet all of these objectives, APG required a flexible and nimble partner with expertise in sustainable investing, index design and portfolio construction.

The Solution

Using the power of the Axioma Portfolio Optimizer^TM and our leading index construction capabilities, we collaborated with APG to develop a set of customized indices that ‘layered in’ various sustainability criteria to meet the sustainable investment goals of APG’s clients and allow for the measurement of risk impact across various ESG criteria and other constraints. Starting with the iSTOXX World A Index (a developed markets index covering more than 1,700 companies), each layer or index incrementally added in ESG criteria: ESG exclusions, ESG leaders, lowering carbon footprint and enhancing SDI exposure. In this way, we were able to quantify the risk impact (measured by tracking error to the broader developed market) of each sustainability parameter all while being mindful of any unintended sector, regional and factor bets.

Through our open architecture approach, we were able to ingest data from APG which included data derived from the Sustainable Development Investments Asset Owner Platform (SDI AOP) data to accurately reflect APG’s pension fund clients’ sustainable investment objectives. Overall, the collaboration resulted in an innovative series of layered indices that reflect APG’s and its clients’ responsible investment and risk measurement goals.

iSTOXX APG Responsible Index Family: Constraints & Objectives

Asset Owners

ETF Providers

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The Need

Investors have in recent years turned to smart beta strategies as a way to generate above-market returns while capturing the low-cost, simplicity and transparency benefits of index-based investing.

The Challenge

One of Asia’s largest banks sought to offer smart beta products to its asset owner clients to tap growing demand and meet their investment needs. Despite its longstanding experience in developing active strategies, the bank lacked the capabilities to design and manage sophisticated indices.

The Solution

Working in conjunction with the client, we devised a series of co-branded indices that offer investors a spectrum of strategy tools, each one with specific optionality that gives them versatility and flexibility in constructing their passive portfolios. We also provided full support in index development and management, allowing the bank’s end-users to benefit from our strength and experience, and from the objectivity and neutrality of having a third-party index provider.

Trading Desks

Fund Managers

Portfolio Managers

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The Need

Investors need new indices that can accurately reflect sustainable mandates and underlie appropriate investment instruments such as listed derivatives to better manage and hedge portfolios.

The Challenge

When one of Scandinavia’s largest asset managers extended its responsible investing principles to all types of instruments, its trading arm could not use listed derivatives anymore to manage flows and risk on many equity portfolios, as existing European equity index derivatives had exposure to controversial activities banned by the firm’s responsible policies.

The Solution

We devised versions of well-established STOXX benchmarks that consider responsible policies without incurring significant tracking error. Through a market consultation we identified the standard policies of leading asset owners and incorporated them into the design of the indices. Thanks to our close collaboration with Eurex, a broad range of derivatives on STOXX & DAX ESG indices are available today: EURO STOXX 50 ESG, DAX 50 ESG, STOXX Europe 600 ESG-X, STOXX USA 500 ESG-X, STOXX^® Europe ESG Leaders Select 30, EURO STOXX^® 50 Low Carbon and STOXX^® Europe Climate Impact. Futures on the STOXX^® USA 500 ESG-X Index are the first ones available on a US benchmark featuring a screening for thermal-coal mining and coal-fired power plants.

Futures on the STOXX^® USA 500 ESG-X Index are the first ones available on a US benchmark featuring a screening for thermal-coal mining and coal-fired power plants.

STOXX Products

Benchmark Indices

STOXX Benchmark Indices cover global, regional and country markets, offering efficient exposure to each investable universe.

 

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The STOXX Sustainable Investment Ecosystem

Indices that increase liquidity and lower trading costs to help meet your specific and diverse sustainable investment goals

 

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STOXX^® Europe 600 ESG-X

The STOXX^® Europe 600 ESG-X index is based on the STOXX^® Europe 600 index, one of Europe’s key benchmarks, with standardized ESG exclusion screens applied.

 

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STOXX^® USA 500 ESG-X

The STOXX Benchmark ESG-X Indices are based on a selection of STOXX Benchmark Indices and apply standardized ESG exclusion screens. The screens are based on the responsible policies of leading asset owners and aim to reduce reputational and idiosyncratic risks.

 

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EURO STOXX 50^® ESG

The EURO STOXX 50^® ESG Index is based on the EURO STOXX 50^® Index, one of Europe’s flagship benchmarks. A set of standardized ESG exclusion screens, based on the responsible policies of leading asset owners, are applied with the aim to reduce reputational and idiosyncratic risks.

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DAX^® 50 ESG

DAX^® sets the new benchmark for sustainable German equity portfolios.

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