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Sustainability pays off. Eurex is the first exchange to offer sustainable ESG futures.

Release date: 26 Feb 2019 | Eurex Exchange

Sustainability pays off. Eurex is the first exchange to offer sustainable ESG futures.

Environment Social Governance (ESG)

stands for three aspects of sustainability:

  • E is the acronym for "environment".
  • S stands for "social"
  • and G for governance.
 
The importance of so-called ESG (Environmental, Social, and Governance) information is constantly increasing, because sustainable investing is becoming more and more important and interesting for investors worldwide. The European market for sustainable indices is continuing to grow strongly. Globally, there were 22.89 Trillion USD of assets being professionally managed under responsible investment strategies in 2016, an increase of 25 percent since 2014. In relative terms, responsible investment now stands at 26 percent of all professionally managed assets globally. Clearly, sustainable investing constitutes a major force across global financial markets.

Therefore, it is only logical that in February 2019 Eurex listed futures on STOXX® ESG-X, Low Carbon and Climate Impact Indices, in response to increasing customer enquiries. The principle is simple: sustainable investing works best when there are instruments for the relevant portfolios that can be used to reduce ESG risks. The new products support asset management in particular. Eurex is the first derivatives exchange to consider sustainability criteria for a European benchmark. Of course, there are already many sustainability indices, but no futures yet.

ESG investing – long-term trend or just a temporary phenomenon?

Many studies have concluded that the share prices of particularly sustainable companies outperform those of their competitors. Eurex therefore believes this is a long-term trend that deserves support. In a survey conducted jointly with STOXX, the index subsidiary of Deutsche Börse, Eurex examined which indices were in particularly strong demand. Based on this, discussions were then held with institutional customers in the Nordic countries in particular.

Scandinavia shows great interest in sustainable investment

Scandinavian investors are very well versed and know how to enrich products they already know and use with a sustainability aspect. For example, Eurex has taken the benchmark future STOXX® Europe 600 and, by means of exclusion criteria, removed those constituents that do not comply with specific sustainability criteria.

What are these criteria and who created them?

STOXX cooperates with a renowned research institute that checks these criteria. For the index on which the future is based, a screening was carried out using the exclusion criteria applied by leading asset owners. These are the UN Global Compact Principles, which include compliance with human rights and working conditions. They also exclude companies involved in the production of controversial weapons, income from coal production and the cultivation and sale of tobacco and tobacco products. Otherwise, the ESG X Future essentially corresponds to the benchmark – only with 579 constituents at present and the performance is even slightly better.

Reducing carbon exposure with the EURO STOXX 50® Low Carbon Index

The other two futures focus on the climate. The EU is imposing very specific requirements, for example on insurance companies, to reduce their investments regarding carbon emissions over a certain period of time. The Low Carbon Index is based on the EURO STOXX 50 Index, the benchmark index for the euro zone. This index does not exclude any stock from the EURO STOXX 50, but over- or underweights companies depending on their carbon intensity. If, for example, insurance companies switch to this product, they can simultaneously reduce their carbon exposure – the index has a CO2 footprint reduced by approximately 60 percent.

The Climate Impact Index Future combines several elements of a sustainable investment strategy. It takes the STOXX Europe 600, excludes certain stocks on the basis of screenings and then assesses the companies according to their active management of climate risks. After that, 258 stocks remain in the index and are weighted according to their carbon intensity.

Are further products planned?

Sustainability is a big trend, so we intend to expand the segment to other regions and other index providers.

With STOXX, Eurex is strong in Europe, but there is certainly still considerable potential to offer futures on other sustainability indices. For example, the selection of companies that are leading in terms of ESG criteria compared to their competitors. In further discussions with customers, Eurex will find out more precisely what further demand exists. 

 

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