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Blog Posts — October 16, 2019

New to Market: ESG Options

The outstanding growth of responsible investing will reach a new milestone next week, when investors will be able to trade European options tracking environmental, social and governance (ESG) strategies for the first time. 

Options on the STOXX® Europe 600 ESG-X Index and STOXX® Europe ESG Leaders Select 30 EUR Index, the first contracts of their kind, will start trading on Oct. 21 on Eurex. Futures contracts on the latter will also be listed that day.

The derivatives are the latest chapter in a product roll-out that last February included the listing of the first European futures contracts on ESG benchmark indices: the STOXX Europe 600 ESG-X Index, STOXX® Europe Climate Impact Ex Global Compact Controversial Weapons & Tobacco Index.

ESG is moving from a tangential consideration to the core of portfolios. The introduction of new securities and investing instruments opens up possibilities in the asset-management world and has a multiplying effect on the sustainable revolution. To many investors, ESG indices will in a near future take over from traditional market-weighted-capitalization indices as benchmarks for the largest pools of money.

Hedging and management tools 

ESG futures offer investors a simple, cheap and efficient way to hedge, manage liquidity and leverage portfolios, while still abiding by sustainability mandates and principles. Options, on their part, take trading and portfolio-management possibilities to new levels. Among various uses, they help investors hedge directional risk, bet on volatility, take active positions, enhance yield and generate additional income out of existing holdings.

Futures off to strong start

Demand for the first sustainable derivatives has been strong. In particular, open interest for the STOXX EUROPE 600 ESG-X Index futures has topped notional value of 1.2 billion euros in less than ten months of life. More than 362,000 contracts of the futures have been traded since launch.

The STOXX Europe 600 ESG-X Index is a version of the widely followed STOXX® Europe 600 Index that excludes companies based on standard norm- and product-based screenings. The STOXX Europe ESG Leaders Select 30 EUR tracks companies that rank highest for their ESG score as assigned by Sustainalytics, and that additionally payhigh dividends and show a low volatility ratio.

Since last month, the STOXX Europe 600 ESG-X Index also underlies an exchange-traded fund managed by State Street Global Advisors (SSGA). 

An auspicious path

Not long ago, ESG investors had to resort to customized indices to execute their strategies and had no alternative but to use trading instruments that generated tracking error. The innovation witnessed in the last couple of years, with the introduction of ESG indices, ETFs and now futures and options, is a welcome development that benefits asset owners, investors and end clients.

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