Investment data and index provider Qontigo has introduced a sustainable alternative to the DAX, providing exposure to a selection of liquid large- and mid-cap German equities with robust environmental, social, and governance (ESG) characteristics.
Stephan Flägel, Global Head of Indices & Benchmarks at Qontigo.
The DAX 50 ESG Index belongs to the DAX family of indices which are followed as key barometers of German stock market performance.
Stephan Flägel, Global Head of Indices & Benchmarks at Qontigo, commented, “The demand for sustainable indices among investors has been growing for years. That is why we have decided to launch an ESG-DAX index that meets the same high standards as its name sponsor.
“The index reflects ESG criteria to which institutional and private investors today are equally committed. We are convinced: DAX 50 ESG will be the standard for ESG investments in Germany.”
Kristina Jeromin, Head of Group Sustainability at Deutsche Börse, added, “As part of our Group-wide commitment to sustainable finance, transparency and the availability of sustainability data play a crucial role. ESG aspects allow a more holistic and, above all, future-oriented assessment of a company’s value. This is because climate and environmental risks, social factors, and aspects of corporate governance will play an essential role for the financial sector in risk assessment.”
Methodology
The index selects its constituents from the HDAX universe which groups all equities that belong to either the large-cap DAX, the mid-cap MDAX, or the technology-focused TecDAX indices. The HDAX Index currently consists of 99 components.
The methodology harnesses insights from ESG analytics firm Sustainalytics to exclude companies that are involved with controversial weapons, tobacco, thermal coal, nuclear power, and military contracts, as well as those that are in violation of UN Global Compact Principles.
The remaining constituents are then assigned an ESG score that incorporates over 70 core and industry-specific indicators.
The assessment is structured within four dimensions: preparedness, an assessment of company management systems and policies designed to manage material ESG risks; disclosure, an assessment of whether company reporting meets international best practice standards and is transparent with respect to most material ESG issues; quantitative performance, an assessment of company ESG performance based on quantitative metrics such as carbon intensity; and qualitative performance, an assessment of company ESG performance based on the analysis of controversial incidents that the company may be involved in.
The rating also uses a “best-of-sector” analysis to compare companies within a given sector to industry best practices. Underlying each industry group template is a customized weight matrix designed to further highlight the key ESG issues faced by each sector.
Securities are ranked according to a combined score across three parameters: their ESG score, order book volume, and free-float market capitalization. The 50 top-ranked companies are selected for inclusion and weighted by free-float market capitalization subject to a single stock cap of 7%.
The index is reconstituted and rebalanced on a quarterly basis. DAX fast-exit and fast-entry rules apply including any sustainability breaches.
Its back-tested performance is broadly in line with that of the conventional DAX.
Source: Qontigo.
The ESG index overweights the consumer, telecommunications, industrial, media, and retail sectors relative to the DAX. It has, on the other hand, a smaller representation of software and automobile stocks. Unlike the DAX, the ESG index includes no utility companies.
Source: Qontigo.