Last year, STOXX introduced the EURO STOXX 50® ESG Index, a second-generation environmental, social and governance (ESG) version of the iconic EURO STOXX 50® Index that follows standard investment exclusions and integrates companies’ ESG scores into stock selection.
The EURO STOXX 50 ESG Index works in a simple way: it excludes the least sustainable companies as well as controversial ones from the benchmark EURO STOXX 50 Index, in favor of more sustainable peers from their same supersector group.
The combination of ESG exclusions and integration in one systematic methodology is a step further from exclusions-based responsible-investing benchmarks. Readers can find out about the index’s methodology and profile in a research paper accessible here.
UBS Asset Management has licensed the EURO STOXX 50 ESG Index to underlie an exchange-traded fund (ETF). Pulse Online caught up with Clemens Reuter, Head Global UBS Passive & ETF Investment Specialist at UBS Asset Management, to hear why the firm is innovating in responsible-investing solutions and what’s driving investors to construct a core sustainable portfolio of Eurozone equities.
Clemens, how has UBS ETF positioned itself in the European ETF market when it comes to sustainable investing?
UBS started its journey in the sustainability ETF space in 2011, and we are now amongst the market leaders in Europe, with 8.9 billion dollars¹ in assets under management. UBS ETFs takes a ‘different shades of green’ approach in its offering. Some funds use a light-green screening that excludes only controversial activities and stocks which are deemed ESG laggards, while other products have a dark-green approach that selects only the highest-rated companies across key ESG metrics and excludes a broader list of controversial activities. Going forward, our expectation is that sustainable investing will become a ‘new core’ in many portfolios. For this reason, we have recently enhanced our value proposition in order to offer ETFs tracking flagship indices with an ESG variant, for example the newly launched UBS EURO STOXX 50 ESG ETF.
What were the key drivers for launching an ESG-based version of the EURO STOXX 50 Index?
The EURO STOXX 50 Index represents a key benchmark for investors looking to invest in the Eurozone equity space. It was launched in 1998 and has approximately 33 billion euros2 of ETF assets tracking it. This launch together with STOXX, of an ETF based on an ESG-screened version of such a flagship benchmark, represents another key milestone in our journey to introduce sustainable investing as a ‘new core.’
What methodology is applied, and how does it perform against the standard EURO STOXX 50 index?
The EURO STOXX 50 ESG Index can be seen as a ‘core replacement.’ It is designed to maintain the characteristics of the EURO STOXX 50 while also meeting relevant and meaningful ESG criteria. The standard index is modified through a three-stage filtering process. As a first step, 10% of its 50 constituents with the lowest ESG scores are excluded. In the second step, companies are screened for exceeding revenue thresholds from undesirable business activities such as the production and sale of controversial weapons (or holding voting rights in such companies), revenue from tobacco production or thermal-coal extraction and thermal-coal power generation. The screening also assesses companies’ compliance with the United Nations Global Compact principles’ four pillars: human rights, labor, environment and anti-corruption. Companies that fail to comply with any of the screening criteria are excluded from the index. Step three involves new inclusions to fill the allocation space left by the first two exclusion phases and maintains the final number of index constituents at 50. For each excluded company, a replacement is sourced from the universe within the same sector, and this selection is done in order to ensure that the replacement company has a higher ESG score than the constituent it replaces.
The result is a simple yet robust process for the creation of a new-generation ESG index. This exclusion process followed by enrichment enhances the ESG credentials of the index, and results in a minimal variation from the standard index, with a tracking error of 0.87% and daily return correlation of 0.999.³
What is the investor perception of the UBS EURO STOXX 50 ESG ETF?
ESG investing is becoming a ‘must-have’ rather than a ‘nice-to-have,’ and investors are increasingly demanding the integration of ESG principles across asset classes. The UBS EURO STOXX 50 ESG ETF can be seen as an efficient way to gain a ‘greener’ exposure to Eurozone blue-chip equities. Considering the low tracking error and daily return correlations exhibited by this variant to its standard index, many investors are considering switching a portion of their standard index positions into this product. We view European investors as quite advanced and, especially in the Nordic region and the Benelux, we are seeing a responsible investing process and integration into the asset allocation decision-making process.
What could the future of sustainable investing for ETFs and passive funds look like?
We see sustainable investing as a growing and stable investment trend, and not merely a temporary phenomenon. Our view of the future is that most major benchmarks may themselves be ESG-compliant as standard, and not as an exception. The integration of sustainable investing relies on the ability of sustainable investing to be widely understood and appreciated. For this reason, standardization in the criteria for defining ESG investment is required. UBS ETFs seeks to remain at the cutting edge of sustainable products development, and to remain pro-active in bringing new passive solutions that fit the wide variety of modern investor preferences.
1 UBS Asset Management. Data as of Oct. 31, 2019.
2 STOXX, Lipper. Data as of Sep. 30, 2019.
3 Bloomberg, UBS Asset Management. Daily backtested data from Apr. 31, 2012 to Oct. 31, 2019. Net total returns in euros.