Germany-based index provider Solactive has introduced the Solactive Global Ethical Low Volatility AR EUR Index, tracking the performance of global companies with strong environmental, social and governance (ESG) standards and low volatility characteristics.
Using back-tested data, the Solactive Global Ethical Low Volatility AR EUR Index is up 7.3% year-to-date and 76.6% since its inception in July 2011.
Powered by ratings from Sustainalytics, a leading global analytics firm covering the ESG sector, the index has been designed to serve as the basis for future investable products such as exchange-traded funds.
Simon MacMahon, Head of Research at Sustainalytics, said: “Solactive continues to take significant strides to expand the range of ESG products available to investors. We are delighted Solactive chose our research and ratings to power this index.”
Ethically minded investments are gaining increasing popularity with investors, driven by global initiatives such as the UN-backed Principles for Responsible Investment, as well as the evolving global regulatory landscape.
As the world becomes increasingly synchronized on ESG-related standards and objectives, those companies involved in unethical business practices may see fewer capital resources channelled to their firms due to official regulatory mandates. This may also serve to promote the widespread adoption of ESG practices among global firms.
Henning Kahre, Head of Research at Solactive, commented: “Using ESG screens on a broad equity universe reduces exposure to companies that carry relatively high ESG-related risk. That risk is becoming increasingly relevant as companies face new regulation in that space. In addition, companies also need to adapt as several institutional investors are prohibited from investing in certain subsectors altogether due to their investment guidelines. With the Solactive Global Ethical Low Volatility AR EUR Index, we offer an appealing solution for investors seeking global ESG-compliant exposure combined with a low volatility approach.”
Additionally, an increasing body of research suggests that the long-term risk/return profile of portfolios may be enhanced through ethical investing – high scoring companies tend to enjoy positive externalities such as greater brand recognition, increased customer loyalty, improved shareholder trust, and positive social reputations, all of which serve to boost their bottom lines.
As an initial screen, the index excludes companies involved in unethical activities, fossil fuel-related operations, or who are currently embroiled in controversies surrounding ESG principles.
Sustainalytics’ research methodology further analyses remaining companies based on ESG issues across 42 global sectors, incorporating over 70 core and industry-specific indicators. The assessment of a company’s ESG performance 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 methodology 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.
In order to avoid concentration, the selection screening limits sectoral representation to 12 companies per sector and sectoral weight is capped at 25% of total weight.
Denominated in euros, the index components are weighted according to inverse historical volatility. Low volatility strategies seek to offer an attractive combination of upside participation and potential downside protection by limiting losses in volatile markets. This strategy may appeal to those who are less concerned about short-term tracking error relative to the broad market and more focused on lower risk and drawdown characteristics.
As of 5 September 2016, the index had significant country exposure to the US (36.2%), Canada (17.1%), Australia (10.7%) and Switzerland (9.5%). The largest constituent is BCE with a 3.3% weighting in the index.
The index is up 7.3% year-to-date and 76.6% since its inception in July 2011 (using back-tested data). Since inception the volatility of the index is 11.9% per annum.
German investment bank and asset manager Commerzbank has licensed the index, which they say will be for the creation of a wide range of investment products.
Jaime Uribe, Head of Financial Institutions Marketing Commerzbank, London, said: “At Commerzbank, we always look to partner with experts in the field when producing innovative investment solutions which meet the demand of our clients: Solactive for their indexing capabilities and Sustainalytics for their renowned qualitative and quantitative approach seemed like the obvious choice. Licensing this index, we are responding to our client’s demands for a robust way to provide exposure to companies who adhere to the highest possible ethical standards, whilst remaining diversified geographically and reducing risk.”
A SEK-hedged edition has also been created for the Swedish market and Solactive remains open to the creation of further currency-hedged versions as demand dictates.