By Willem Keogh, Senior Product Manager, STOXX Ltd.
The Principles for Responsible Investment (PRI), the UN-backed group that works to advance sustainability in the asset-management industry, announced earlier this year that it is establishing new minimum requirements for membership. This change was backed by the group’s signatories and is a positive step that reflects growing commitment on environmental, social and governance (ESG) principles.
Launched in 2006, the PRI now includes almost 2,000 signatories consisting of asset owners, investment managers and service providers. The group’s six principles¹ are designed to help members incorporate ESG issues into long-term investment decision-making.
STOXX has been a proud signatory since May 2012, a natural move for us that complemented our actions and goals on the path to a responsible financial landscape.
Our parent company, Deutsche Börse, is aware of its public service mandate as a financial meeting point of not only providing markets but actively shaping them as well. As such, it has initiated the Green and Sustainable Finance Cluster Germany with the aim of establishing future-proof structures for the financial industry. The initiative was launched in April 2018 together with the Hessian Ministry of Economics, and its focus is to promote sustainable development and to moderate its transformation process in the financial sector, both nationally and throughout Europe.
For STOXX, committing to the PRI’s goals and standards allows us to monitor our own progress in adhering to the principles and to continually enhance our performance on ESG matters.
New rules target progress reporting
The PRI rules, which were introduced earlier this year, aim to further increase accountability and transparency, foster members’ engagement, and provide a clearer picture of responsible investment trends. Under the PRI reporting and assessment framework, signatories will be required to report on their process in responsible-investing adoption annually. For example, asset owners will need to show a policy covering their responsible investment approach on more than 50% of total assets.
There will also be a public differentiation of signatories showing the various stages of the responsible investment process and transition, including delisting those members that do not comply.
A responsible footprint – from products to operations
Sustainable investing is already a key focus for STOXX in the scope of our index solutions, an area that is seeing tremendous growth in demand, but also in our operations as a company. We aim to have our executive management, employees, open architecture, business strategy and local presence guided by responsible principles.
Our commitment to responsible investing is an ongoing obligation to our employees, customers and investors, and to the wider society. Our company must remain sustainability-oriented for the long term, taking all our relevant stakeholder groups into account.
We work closely with clients, with whom we maintain constant dialogue, and provide support and education on their sustainable investments. Whether offering our established ESG/Sustainability and Low Carbon indices, or working together in designing new, customized strategies, we help the end investor make well-informed responsible choices.
Innovate2Invest, our annual flagship conference, has in recent years dedicated part of its program to panels and debates on the topic of sustainability in investments. We bring experts from leading companies to discuss solutions and ideas for a more sustainable, equal and just future.
We have partnered up with the best independent and objective data providers in the fields of sustainability criteria and climate change. This includes Sustainalytics, CDP and ISS ESG, whose data have allowed us to develop the most innovative and complete indices tracking the world’s ESG pioneers and outperformers. Among them are the EURO STOXX® 50 Low Carbon Index and the STOXX® Europe Climate Impact Ex Global Compact Controversial Weapons & Tobacco Index.
Wider ESG integration
The PRI’s guidelines come at a time when there is a wider move towards ESG integration in the asset-management industry and beyond. It is increasingly likely that there will be more legislation in this area. Governments have committed under the UN Framework Convention on Climate Change (known as the ‘Paris Agreement’) to a wide scope of carbon emission targets.
Further, the European Commission this year launched an Action Plan on sustainable finance targeting a “far-reaching reform” of the financial system, which aims at boosting the role of investors in pushing ESG principles in the corporate world.²
We are finding that investor sentiment is changing too. There is a move away from focusing on the negatives like incorporating specific exclusion criteria (such as tobacco or coal) or viewing ESG from a risk perspective, towards a positive integration of sustainable factors. As a consequence, many of our clients now see ESG as a real investment opportunity.
Returns with a positive impact
STOXX has been facilitating ESG investing since 2011. We develop indices that meet a range of sustainable investing criteria under the two big umbrellas of ESG/Sustainability and Low Carbon. All of them meet the highest standards of replicability, rules, transparency and regulatory approval.
While the awareness of ESG considerations and the highlighting of potential risks is a common thread among all those indices, they have also often shown significant outperformance. For example, the flagship STOXX® Global Climate Change Leaders Index has outperformed the STOXX® Global 1800 Index by 8 percentage points in the last three years, with respective after-tax returns of 45% and 37%.3
Increasing members’ accountability is but one of the many ways in which the PRI helps advance the responsible agenda: they also empower and support asset owners, showcase leadership and work to derive meaningful ESG data and enable real-world impact, among other things.
At STOXX, our mission is to innovate in the world of investing and a large part of that effort and resources is dedicated to building a sustainable future. We look forward to working closely with the PRI in ensuring that ESG and responsible investing remain at the heart of the asset management industry.
Featured indices
- STOXX® Global Climate Change Leaders Index
- STOXX® Global 18000 Index
- EURO STOXX® 50 Low Carbon Index
- STOXX® Europe Climate Impact Ex Global Compact Controversial Weapons & Tobacco Index
¹ For UN PRI, ‘The Six Principles,’ see https://www.unpri.org/pri/what-are-the-principles-for-responsible-investment.
² European Commission, ‘Financing a sustainable European economy’ Jan. 31, 2018.
3 Total returns in USD in the three years ending Oct. 9, 2018.