Solactive, a Germany-based provider of financial market indices, has launched a sustainable bond index, its second index launch this month. The Solactive Euro IG Sustainable Bond Index is designed for fixed-income investors seeking exposure to companies with strong sustainability profiles.
Powered by ratings from Sustainalytics, a leading global analytics firm covering the environmental, social and governance (ESG) sector, the index has been designed to serve as the basis for future investable products such as exchange-traded funds.
The index is built from Sustainalytics’ research methodology, which focuses on ESG issues across 42 global sectors and incorporates over 70 core and industry-specific indicators.
The concept of incorporating ESG factors into investment decisions is gaining increasing attention within the investment community. As of April 2015, the United Nations-backed Principles for Responsible Investment had more than 1,300 signatory firms, with a total of almost $60tn in managed assets.
Despite increasing momentum behind ESG-focused investing, the majority of investment products launched thus far have revolved around equity-based offerings. Solactive is actively seeking to close this gap, having previously launched a low-carbon bond index earlier this month in collaboration with South Pole Group, a leading provider of carbon-reduction solutions. Solactive’s latest launch harnesses Sustainalytics’ ESG Research, which covers more than 4500 companies globally and its Controversies Research, which highlights ESG risk across a worldwide universe of more than 10,000 companies.
Steffen Scheuble, CEO, Solactive, commented: “We are proud to be one of the first providers in the market that has incorporated ESG criteria into fixed-income indices and thus provides safety-oriented investors access to a broad sustainable bond benchmark in addition to the other SRI-themed indices, like the Solactive low carbon index family, which are already part of our innovative product offering.”
The index, which follows the launch of Solactive’s low carbon fixed income earlier this month, combines a two-stage approach.
Firstly, the index targets the companies in the highest ESG ratings’ decile per industry of the underlying Solactive Euro IG Corporate Bond Index Benchmark. This “best-in-class” approach accounts for different businesses that vary with regard to their track record of compliance with ESG standards and exposure to ESG-related risks, ensuring a balanced index composition over industries.
Secondly, the index excludes companies that do not meet a minimum level of ESG standards. By including both the ESG score and the decile approach, only the top 10% of companies with the best ESG criteria related to management practices compared to their industry peers are taken into account. Constituents are weighted by market value with a single issuer cap of 5%.
Sustainalytics’ research methodology focuses on ESG issues across 42 global sectors and incorporates 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.
Using back-tested data from March 2012 to February 2016, Solactive finds that the new index provided a slightly superior risk-adjusted return profile compared to the Solactive Euro IG Corporate Index. The Solactive Euro IG Sustainable Bond Index had a per annum (p.a.) return and volatility of 5.33% and 2.16% respectively. Over the same period the Solactive Euro IG Corporate Index returned 5.05% p.a. with volatility of 2.10% p.a.
Michael Jantzi, CEO of Sustainalytics, added: “We are delighted that Solactive chose Sustainalytics’ ESG Research and Ratings to develop this progressive Index, particularly since it expands the range of sustainable investment products and services. The backtesting results of the Index are encouraging as they show there is value in integrating ESG factors into corporate bond analysis. We applaud Solactive’s efforts to address investors’ needs for an appropriate benchmark for their ESG fixed income strategies.”