Solactive has launched a new European equity index that provides exposure to dividend-paying stocks with low market risk and strong environmental, social, and governance (ESG) characteristics.
The index provides exposure to 30 European high dividend stocks that have been screened by ESG and market risk characteristics.
The Solactive ARC ESG Big Data Europe Index is available for licensing and is suitable to underlie new investment products, including potentially ETFs.
The index selects its constituents from a universe of European developed market stocks with average daily trading values of at least €8 million.
The methodology first applies an ethical screen based on data from ESG analytical firms ARC Responsible Investment and OWL Analytics. Constituents with significant business involvement in controversial sectors such as weapons, tobacco, alcohol, and fossil fuels are removed.
Additionally, each constituent is assigned an ESG rating based on established norms such as the United Nations Global Compact principles. The 200 stocks with the highest scores pass through to the next round.
The methodology then turns to income and market risk factors. Firstly, the 100 stocks with the highest quarterly realized dividend yield over the past twelve months are selected.
From this remaining pool, each stock is assigned a ‘Risk Score’ derived from their maximum drawdown, volatility, and beta over the past year. The 30 stocks with the lowest Risk Scores are selected for index inclusion while limiting the number of stocks from a particular sector to six and the number of UK-listed stocks to nine.
Constituents are equally weighted and the index is reconstituted and rebalanced quarterly.
Timo Pfeiffer, Head of Research at Solactive, commented, “This project exemplifies Solactive’s flexibility in tailoring indices to meet clients’ needs. We are incorporating cutting-edge ESG metrics derived from a big data approach, thereby excluding non-compliant activities and sectors as well as polluting companies, which allows our clients to access the latest innovations in ESG.”
Xavier Ducros, Founding Partner at ARC Responsible Investment, added, “The index allows investors to benefit from an innovative and smart ESG approach while reducing the overall risk of the portfolio, achieved thanks to various risk factors.”
Benjamin Webster, CEO at OWL Analytics, said, “We are delighted to be part of this new generation ESG index by integrating our proprietary technology ESG strategy that reduces subjectivity in ESG scoring, providing the best-of-the-best ESG consensus.”