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¹ The World Bank, 2021, Publication: The Economic Case for Nature: A Global Earth-Economy Model to Assess Development Policy Pathways, p47.

DAX 50 ESG

No changes

DAX 50 ESG+

DAX 30 ESG

DAX ESG Target

DAX ESG Screened

No changes

MDAX ESG+

MDAX ESG Screened

DAX

No changes

Different strategies

The DAX 50 ESG combines negative screening and best-in-class ESG integration, and was developed as a broad-market ESG benchmark with a larger composition than that of the flagship DAX.¹

The DAX 30 ESG excludes controversial companies from a starting universe, and from the largest remaining companies selects the 30 securities with the highest ESG Performance Score from ISS ESG.²

The DAX ESG Target follows an optimized weighting methodology whose objective is to improve the portfolio’s ESG score and decrease its carbon footprint relative to the benchmark, while limiting the tracking error.

The objective of the DAX ESG Screened index is to reflect the performance of the DAX after removing companies that fail screenings for global norms, controversial weapons, product involvement and a minimum ESG rating.

The DAX 50 ESG+ reflects the performance of the 50 highest ESG-ranked German companies after using sustainability exclusion filters.³

The MDAX ESG indices follow similar methodologies as the DAX ESG indices while tracking mid-cap companies.

The next regular review of the DAX ESG indices will take place on June 6, 2024. 

^1,2,3 The selection universe for these indices is the HDAX®.

The advent of ESG derivatives marked an important milestone for investors who need to observe responsible mandates while managing their portfolios’ risk and flows. With the market for sustainable funds continuing to grow, and more regulation driving ESG disclosure and flows, listed and centrally-cleared derivatives will play an increasingly large role for investors.  

Standard exclusions – a starting point

The first ESG contracts at Eurex linked to STOXX indices included futures on the STOXX^® Europe 600 ESG-X, which implements a negative exclusions strategy on the popular European benchmark. The contracts saw quick adoption, not least because negative screens are considered a starting point in the sustainability ladder: they are a simple strategy that limits market and reputational risks with a generally low tracking error. 

Over 1.7 million futures and more than 320,000 options on the STOXX 600 ESG-X exchanged hands in 2023, for a notional value of EUR 35 billion, representing around two-thirds of the entire ESG segment at Eurex (Figure 1). Since listing in February 2019, more than 7.4 million STOXX 600 ESG-X futures have traded on Eurex. Volume in the STOXX 600 ESG-X futures now amounts to over 7% of the total in the benchmark’s products. 

Figure 1: STOXX 600 ESG-X derivatives volume

_{Source: Eurex.}

ESG integration

As investors’ objectives and preferences evolved, the number and type of available solutions have increased — and Eurex and STOXX have continued to pioneer ESG products. In November 2020, the EURO STOXX 50^® ESG became the underlying for futures and options, bringing a second generation of ESG indices to the derivatives space.

The ESG version of the flagship EURO STOXX 50^® follows standard investment exclusions but also integrates companies’ ESG scores into the stock selection, replacing controversial companies and the least sustainable ones with peers from the same ICB Supersector group.

Contracts on the EURO STOXX 50 ESG have seen significant uptake (Figure 2), helped by the popularity of its benchmark. The EURO STOXX 50 is the center of a unique and extensive ecosystem that includes funds, ETFs, listed derivatives and structured products.

Figure 2: EURO STOXX 50 ESG derivatives volume

_{Source: STOXX, Eurex. Only roll months are shown. Compound annual growth rate is based on total annual volume per year.}

“The ESG segment has seen an astounding pace in innovation in only a few years, a reflection of strong customer demand,” said Zubin Ramdarshan, Head of Eurex Equity & Index Product Design. “Listed ESG index derivatives enable a broader pool of investors to implement, manage and hedge their desired strategies, and help bring efficiencies to sustainable portfolios. That’s why they are key in the transition to a responsible marketplace.”

Broadening strategies

Just this year the evolution in ESG index derivatives took one step further with the introduction of a Socially Responsible Investing (SRI) strategy. On January 22, Eurex listed futures on the STOXX^® Europe 600 SRI, an index with norms and product-involvement exclusionary screens, as well as best-in-class filters to include companies with the highest ESG scores and lowest emissions. The latter is provided by ISS ESG.  

The STOXX Europe 600 SRI’s exclusionary filters go beyond those represented by the STOXX Europe 600 ESG-X (Figure 3). For example, they remove high carbon-intensity companies as well as those involved in Oil & Gas. The screens are also aligned with the enhanced requirements of large asset owners. 

Following the screens, the remaining securities are ranked in descending order of their ESG scores within each of the 11 ICB Industry groups. The STOXX SRI Indices select the top-ranking companies in each of the ICB Industries until the number of stocks reaches a third of that in the starting benchmark.

Figure 3: Methodology comparison STOXX Europe 600 ESG-X vs. STOXX Europe 600 SRI 

_{Source: STOXX.}

While not part of their remit, many ESG indices have shown higher returns and lower volatility levels than their benchmarks. This is the case, for example, with the EURO STOXX 50 ESG and STOXX Europe SRI (Figure 4). 

Figure 4: Risk and return

_{Source: STOXX.}

Evolving demand

The family of STOXX-linked ESG derivatives at Eurex is complemented by contracts on the EURO STOXX 50^® Low Carbon, STOXX^® Europe Climate Impact Ex Global Compact Controversial Weapons & Tobacco and STOXX^® Europe ESG Leaders Select 30 indices, which further expand the possibilities for investors.

The DAX space, covering German equities, also got a sustainable alternative in derivatives with the introduction in 2020 of listed futures and options on the DAX^® 50 ESG. As with the EURO STOXX 50 ESG, the DAX 50 ESG removes companies in undesirable or controversial activities, and also integrates sustainability parameters into stock selection. There already are ETFs and structured products that are linked to the German sustainable benchmark.

“We see a trend of broadening demand, specifically towards more advanced, elaborated and targeted products,” said Antonio Celeste, Global Head of Sustainability Index at STOXX. “And we are also meeting investors’ changing needs in updating some of the underlying methodologies when needed.” 

For example, there have been two updates to the STOXX Europe 600 ESG-X rulebook. As of March 2023, companies that Sustainalytics identifies as having a ‘Severe’ ESG Risk or Controversy Rating have been removed from the index. The threshold to exclude companies with revenues from thermal coal was also lowered to match the requirement of an increasing number of users. Similarly, the EURO STOXX 50 ESG and STOXX Europe 600 SRI indices have also undergone adjustments in their rules. 

The next five years

The ESG space is evolving, and in few places is that as palpable as in the derivatives market. STOXX is excited to have worked alongside Eurex over the past five years in developing solutions that enhance transparency, liquidity and cost efficiency. In a segment where customization is commonplace, listed derivatives also bring standardization in strategies, facilitating trading. 

In the short term, new regulation such as the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD) may guide flows into ESG investments. The next five years promise to bring more volumes, and continued innovation and ambition in the world of ESG index derivatives.

The DAX 30 ESG is a benchmark of Germany’s large-caps with the highest ESG scores. Index selection starts with the universe of the HDAX^®[1], which consists of roughly 100 stocks. Companies that fail the ISS ESG Norms Based Screening assessment^[2] are ineligible for inclusion. Exclusion filters are also applied for involvement in Controversial Weapons, Tobacco, Coal, Unconventional Oil & Gas, Civilian Firearms, Nuclear Power and Military Equipment, as determined by ISS ESG.

From the remaining companies, the largest 60 by free-float market capitalization are pre-selected. Thereafter, the 30 securities with the highest ESG Performance Score from the ISS ESG Corporate Rating are finally included in the DAX 30 ESG.

ISS’s ESG Corporate Rating system allows investors to evaluate companies’ ESG-related risks and factors, and their impact along their value chain. The ESG Performance Score enables cross-industry comparisons using a standardized best-in-class threshold.

“The new index combines Germany as an investment region with the consideration of sustainability aspects,” said Kim Yvette Remmert, Responsible Product Manager at DZ BANK. “This will enable us to close an existing gap in the product range with an attractive underlying asset, especially for underwritten products.” 

Certificates are products issued by banks or other firms whose return depends on the performance of an underlying asset such as an index or stock. DZ BANK, one of Germany’s largest, issued its first investment product with an ESG underlying in April 2021. 

A recent article on this blog explored the performance of the DAX 30 ESG.

Decrement version

DZ BANK is offering as well certificates linked to the idDAX^® 30 ESG Decrement 4.0%. The underlying replicates the performance of the DAX 30 ESG net return index assuming a constant markdown of 4% per annum. Decrement indices are popular with structured product issuers as a tool to hedge their dividend risk. 

Growth of responsible investing 

“This new ISS ESG-supported version of DAX complements our existing range of ESG versions linked to the DAX,” said Serkan Batir, Managing Director at STOXX. “It meets the increased demand for bespoke indexing on sustainability.”

As demand for sustainable investing in the German market has grown strongly in recent years^[3], STOXX has introduced several ESG alternatives to the benchmark DAX^®. While the indices differ in scope and approach, they have the transparent methodologies and liquidity considerations that are common to all DAX indices, and use the best available data for each case.

^[1] The HDAX groups all equities that belong to either the DAX, MDAX^® or TecDAX^®  indices.

^[2] Companies are assessed against their adherence to international norms on human rights, labor standards, environmental protection and anti-corruption established in the UN Global Compact and the OECD Guidelines. Companies identified as ‘Red’ are excluded. ISS ESG identifies companies as ‘Red’ if they fail to respect established norms and the issue remains unaddressed.

^[3] See, for example, ETF Stream, “Germany asserts itself as ETF powerhouse following retail investment boom,” January 11, 2022.

The DAX 30 ESG index expands the options for ESG (Environmental, Social, Governance) investing in German equities and, as of today, forms the basis for several discount certificates that are tradable on the Frankfurt Stock Exchange. The index is comprised of the 30 stocks with the best ESG performance score determined by reference to the ISS ESG Corporate Rating and drawing from the largest companies listed on the Frankfurt Stock Exchange, following initial exclusionary ESG screening.

“We have developed the DAX 30 ESG Index in collaboration with DZ Bank. The index employs the ISS ESG Corporate Rating which enables investors to assess the companies’ exposure to ESG factors and risks. This new ISS ESG supported version of the DAX complements our existing range of ESG versions linked to the DAX. It meets the increased demand for bespoke indexing on sustainability.”

Serkan Batir, Managing Director at STOXX Ltd

The starting universe for the index is the HDAX, which consists of the DAX, MDAX and TecDAX and currently comprises 101 stocks. Companies that fail the ISS ESG Norms Based Screening assessment are ineligible for inclusion. Exclusion filters are also applied for involvement in the following areas: controversial weapons, tobacco, thermal coal, unconventional oil & gas, civilian firearms, nuclear power and military equipment.

Among the remaining companies, the 60 most valuable companies are pre-selected based on free-float market capitalization. Finally, 30 companies are selected to be included in the DAX 30 ESG according to the highest ESG performance scores under the ISS ESG Corporate Rating.

“The new index combines Germany as an investment region with the consideration of sustainability aspects. This will enable us to close an existing gap in the product range with an attractive underlying asset, especially for underwritten products.”

Kim Yvette Remmert, responsible product manager at DZ BANK

Together with the DAX 30 ESG, the idDAX® 30 ESG Decrement 4.0% Index was launched to be used as an underlying index or further DZ BANK certificates from mid-February onwards. The index tracks the performance of the DAX 30 ESG Net Return Index with a constant markdown of 4 percent per annum. Decrement indices are important for structured product issuers as they act as a tool for advanced dividend risk hedging.

DAX^®, MDAX^®, TecDAX^® and DAX^® 30 ESG are registered trademarks of ISS STOXX Index GmbH.

About STOXX 
STOXX^® and DAX^® indices comprise a global and comprehensive family of more than 17,000 strictly rules-based and transparent indices. Best known for the leading European equity indices EURO STOXX 50^®, STOXX^® Europe 600 and DAX^®, the portfolio of index solutions consists of total market, benchmark, blue-chip, sustainability, thematic and factor-based indices covering a complete set of world, regional and country markets. STOXX and DAX indices are licensed to more than 550 companies around the world for benchmarking purposes and as underlyings for ETFs, futures and options, structured products, and passively managed investment funds. STOXX Ltd., part of the ISS STOXX group of companies, is the administrator of the STOXX and DAX indices under the European Benchmark Regulation. 

About ISS STOXX 
ISS STOXX GmbH, through its group companies, is a leading provider of comprehensive and data-centric research and technology solutions that help capital market participants identify investment opportunities, detect qualitative and quantitative portfolio company risks, and meet evolving regulatory requirements. With roots dating back to 1985, we today deliver world-class benchmark and custom indices across asset classes and geographies and serve as a premier source of independent corporate governance, sustainability, cyber risk, and fund intelligence research, data, and related offerings. Our products and services give clients the scale and leverage they need to grow their business more effectively and efficiently. ISS STOXX, which is majority owned by Deutsche Börse Group, is comprised of more than 3,400 professionals operating across 33 global locations in 19 countries. Its approximately 6,400 clients include many of the world’s leading institutional investors who turn to ISS STOXX for its objective and varied offerings, as well as companies focused on ESG, cyber, and governance risk mitigation as a shareholder value enhancing measure. Clients rely on ISS STOXX’s expertise to help them make informed decisions to benefit their stakeholders.

Legal disclaimer: 
STOXX Ltd., ISS STOXX GmbH, ISS STOXX Index GmbH, Deutsche Börse Group and their licensors, research partners or data providers do not make any warranties or representations, express or implied, with respect to the timeliness, sequence, accuracy, completeness, currentness, merchantability, quality or fitness for any particular purpose of its index data and exclude any liability in connection therewith. STOXX Ltd., ISS STOXX GmbH, ISS STOXX Index GmbH, Deutsche Börse Group and their licensors, research partners or data providers are not providing investment advice through the publication of indices or in connection therewith. None of their products or services recommends, endorses, approves or otherwise expresses any opinion regarding any issuer, securities, financial products or trading strategies. In particular, the inclusion of a company in an index, its weighting, or the exclusion of a company from an index, does not in any way reflect an opinion of STOXX Ltd., ISS STOXX GmbH, ISS STOXX Index GmbH, Deutsche Börse Group or their licensors, research partners or data providers on the merits of that company and may not be relied on as such. Financial instruments based on the STOXX^® indices, DAX^® indices or on any other indices supported by STOXX are in no way sponsored, endorsed, sold or promoted by STOXX Ltd., ISS STOXX GmbH, ISS STOXX Index GmbH, Deutsche Börse Group or their licensors, research partners or data providers. Certain environmental, social and governance ratings, scores and other analytical assessments which may be used as inputs to certain STOXX^® and DAX^® indices are produced by Institutional Shareholder Services Inc., (“ISS”). ISS is a wholly-owned subsidiary of ISS Stoxx GmbH. ISS is a Registered Investment Adviser under the Investment Advisers Act of 1940. ISS materials, including any materials used for the indices, have not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body.

The three new Xtrackers ETFs track, respectively, the following indices:

• ISS STOXX^® Developed World Biodiversity Focus SRI
• ISS STOXX^® Europe 600 Biodiversity Focus SRI
• ISS STOXX^® US Biodiversity Focus SRI

We took the opportunity to get the perspective of the three parties involved in the design of the new products. Below is our exchange with Olivier Souliac, Head of Indexing at Xtrackers by DWS; Hernando Cortina, Head of Index Strategy at ISS ESG, which provides the biodiversity data; and Antonio Celeste, Director for Sustainable Product Management at STOXX.

Olivier, what was the driver behind the launch of the Biodiversity Focus SRI ETFs?

Olivier (Xtrackers): “There was not one but several drivers behind this project. The first one is local regulations and multilateral initiatives. There is a strong push from regulators to measure the impact on biodiversity of an investment, something that has been complemented by a number of initiatives such as the Science-Based Targets for Nature (SBTN) and the Taskforce on Nature-related Financial Disclosures (TNFD). Setting up the methodologies and the normative framework to understand, quantify and report the nature-related impact of an investment and of companies has enabled us to tackle the issue of biodiversity investing. Only then could we consider launching a product: only when you know how to measure, will you know how to improve.

A second driver has been the availability of an index-based response. What persuaded us to launch ETFs is that not only do we now have a framework but also an application of that framework — in the form of indices — based on credible datasets and a credible methodology.

The last factor is emerging demand for investments that address the financial materiality that comes with the loss of biodiversity. The sustainability offices of large investors such as asset owners have identified biodiversity risk as one of the next challenges that they want to address at a firm level in the near future.”

What are some of those risks for investors associated with biodiversity loss?

Antonio (STOXX): “Biodiversity loss has emerged as a key source of risk for investors and companies. The move to protect our habitats raises the regulatory liabilities for corporates and investors (for example, increasing legislation such as the banning of pesticides). This comes at a time when they are already facing biodiversity-related physical, transition and systemic risks. Physical risks include the loss of raw materials and the disruption of operating environments. Transition risks cover policy shifts, changes in market preferences and voluntary commitments. Systemic risks include the increased odds and breadth of global pandemics derived from ecosystem change.

Looking at the flip side, there are opportunities as well. Some companies are managing their supply chain and operations, and creating products and services with a positive impact on biodiversity.”

Antonio, can you describe the concept and process behind the ISS STOXX Biodiversity indices?

Antonio (STOXX): “The ISS STOXX Biodiversity framework has been designed as a holistic approach for investors to tackle those risks and opportunities described earlier. The ISS STOXX Biodiversity indices employ that framework and follow a multi-step process that approaches biodiversity through three different angles: Avoid (excluding companies that cause harm to biodiversity), Minimize (removing companies with the most negative biodiversity footprint), and Enable (tilting towards companies whose products and services aid biodiversity-related goals). An additional layer reduces the portfolio’s carbon footprint.

The framework can be applied to match investors’ specific preferences, integrating its steps and data on existing indices and strategies. For example, you can have a Paris-aligned benchmark and add a biodiversity layer on top of it. 

Our off-the-shelf offering includes two categories of ISS STOXX Biodiversity indices: the standard and the ‘Leaders’ indices. The latter have a more ambitious threshold in terms of exposure to biodiversity-related Sustainable Development Goals (SDGs), and select Sustainable Investment (SI) companies to ensure compliance with SFDR Article 9. But clients can customize their own products within our framework, as has been the case with DWS.”  

Figure 1 – ISS STOXX Biodiversity indices framework 

_{Source: STOXX.}

Why is it important to have different steps or layers to come up with a comprehensive biodiversity impact investment strategy?

Olivier (Xtrackers): “We think of this range as being a logical continuation of the core ESG ETFs that have come to market in recent years. It remains indeed focused on integrating sustainability risks. When you tackle biodiversity, you may want to integrate it within your existing sustainability agenda. In this sense, there are three key considerations related to biodiversity that Antonio already touched upon: the first one is the incorporation of Socially Responsible Investment-related exclusions (also integrating activities that are established to be controversial with regards to biodiversity, or “avoid”). The second factor that needs to be taken into account, and it is probably the most challenging, is the qualitative measurement of a company’s biodiversity impact. This is where the heart of the strategy lies. Here, adopting a traditional best-in-class strategy makes sense: just as you have low-carbon indices, you can obtain a lower biodiversity risk impact approach, where you don’t change the breadth and depth of the investment and you maintain the diversification and representativeness in terms of industry exposure.  

The last point touches upon company operations and revenues. Which is, to what extent the activity of a company supports certain SDGs linked to biodiversity. Here, removing worst-in-class companies adds a forward-looking element to the overall approach (the ‘Enable’ part).”  

Hernando, advancements in biodiversity data in recent years have been key to the design of the ISS STOXX Biodiversity framework. Where are we in the evolution of these datasets?

Hernando (ISS ESG): “ISS ESG has invested heavily in biodiversity data over the last couple of years, driven by both regulatory changes as well as underlying investor demand. Over this period, we have indeed seen a major evolution with more advanced and refined data. 

The focus of the data has evolved as well. The central element now lies in tying a corporation to its biodiversity impact, whereas before there was a more general focus on the products that a company makes or simply where it is located. We can now quantify more precisely the metrics that biologists and scientists have developed. 

The two most common metrics are the Potentially Disappeared Fraction of Species (PDF) and the Mean Species Abundance (MSA), both part of ISS ESG’s Biodiversity Impact Assessment Tool (BIAT). PDF quantifies the potential loss of species richness due to adverse environmental pressures, relative to species richness in undisturbed ecosystems. MSA quantifies the mean abundance of original species relative to that in undisturbed ecosystems. We are the only provider that currently delivers both PDF and MSA. 

We also have another subset of data within BIAT called Ecosystem Services. It allows us to know how dependent a company is on biodiversity to generate its products and services. 

That said, as an industry we are still at a relatively early stage in the biodiversity analytics process. Companies have only started to understand what they need to report. Currently, the data is all modelled. Over time, we hope to get more comparable data directly from companies. TNFD should be a significant accelerator of this process.” 

What are some results of integrating such datasets at a portfolio level, relative to a benchmark?

Hernando (ISS ESG): “Depending on the index, we can achieve reductions between 25% and 90% in overall PDF and a reduction of between 25% and 75% in PDF intensity. In addition, having a focus on biodiversity delivers side effects that are attractive to investors: for example, the strategy roughly halves the Scope 1 to 3 carbon intensity of the portfolio.” 

Figure 2 – ISS STOXX Developed World Biodiversity Focus SRI index results 

_{Source: STOXX. * Weighted Average Carbon Intensity = Sum[Wi * (Emissions Scope 1 + 2 + 3)i/ EVIC I]. Source: STOXX, as of December 2023.} 

Where do these ETFs fit in a typical investment allocation?

Olivier (Xtrackers): “These ETFs are part of our toolbox to help investors allocate capital in their core exposures, in compliance with their sustainability agenda. That is why we have three products that cover the core allocations of our institutional investors: Europe, the US and the developed world. We do not see these ETFs as being opportunity- or thematic-driven. On the contrary, they are primarily addressed towards our large institutional clients. As an example, a study we launched with CREATE-Research found that pension funds increasingly see it as their duty to contribute, on behalf of their pensioners, to mitigate the negative effects of past economic development on the environment, climate and biodiversity^[1]. In this context, we are looking at a core investment that benefits from global beta but that has reduced metrics with regards to environmental aspects such as carbon emissions and, now, the risk of biodiversity loss.” 

Some index constituents do not seem to have a clear biodiversity link. Why have they been selected?  

Hernando (ISS ESG): “The indices have been designed to deliver a diversified portfolio, so they exclude the highest-impact companies in every sector. As such, the methodology leaves companies that may not necessarily have a clear positive impact, but nonetheless this approach reduces the overall negative impact for investors and asset owners.
This step of the approach puts more focus on reducing harm than on supporting biodiversity-positive solutions. To address the positive aspect, the indices also include an important SDG overlay, seeking companies that have a positive impact on biodiversity-related SDGs.”

How do the indices correlate with the recently introduced TNFD recommendations? 

Antonio (STOXX): “That’s a very timely question. Last year’s TNFD recommendations set a roadmap to guide companies in integrating nature into their governance, strategy, risk and impact management, as well as metrics and targets. Importantly, the framework also supports financial institutions in portfolio construction and investment product development. It follows a broad action sequence (Avoid, Reduce, Restore, Regenerate, Transform) that is correlated to a high degree with the four-step index construction process at the core of the ISS STOXX Biodiversity indices framework (Avoid, Minimize, Enable, Decarbonize). So, to summarize, both STOXX and TNFD frameworks contemplate similar steps addressing the different degrees and types of biodiversity action.”   

Finally, Olivier, why did you choose ISS ESG and STOXX as partners in this project?

Olivier (Xtrackers): “We were very pleased to see that ISS ESG and STOXX were able to propose a comprehensive, institutional-grade assessment framework for biodiversity integration. And we were convinced by the quality of the PDF dataset, which had consistent outcomes and was broad enough in its coverage. We are also very familiar with the SDG-related datasets that are already in use in different portfolios at DWS. Biodiversity impact is an incredibly complex topic, and we needed the right expertise to tackle all aspects of it. The combination of STOXX and ISS ESG means you have established benchmarks with leading biodiversity datasets that you can apply as a core investment. This is something that the teams at STOXX and ISS ESG had been working on already, so it was a perfect fit for us. During the project, we also came to appreciate the constructive cooperation in developing our ETFs.”

^[1] DWS, “Study by DWS and CREATE-Research shows pension funds growing interest in impact investing,” September 1, 2022.