Zurich-based index provider Stoxx has launched the Stoxx Europe 600 ESG-X Index, a sustainability-focused version of the Stoxx Europe 600, one of its core European equity benchmarks.

Inderpal Gujral, Head of Product at Stoxx.

The Stoxx Europe 600 index tracks 600 of the most liquid, large-, mid- and small-cap companies across 17 generally developed market countries. (The Czech Republic, which some investors treat as an emerging market, is included.)

Harnessing insights from ESG (environmental, social, governance) analytics firm Sustainalytics, the new index screens the parent universe to exclude firms involved in controversial weapons, tobacco and thermal coal.

“Sustainalytics’s screens for UN Global Compact, controversial weapons and tobacco have been used by our institutional clients for many years,” said Shila Wattamwar, Director of Index Partnerships at Sustainalytics. “However, we are seeing increasing demand for our screens on thermal coal mining and the generating capacity of coal-fired power plants as investors look more closely at their climate-related risks.”

Companies deriving any revenue from controversial weapons or tobacco are excluded as are companies that derive more than 25% of their revenue from thermal coal extraction or power generation related to thermal coal.

Companies that Sustainalytics considers to be non-compliant with the UN’s Global Compact Principles – a set of core values in the areas of human rights, labour standards, the environment, and anti-corruption – are also excluded.

The remaining constituents are weighted by free float-adjusted market capitalization subject to a 20% cap per security. Reconstitution and rebalancing occur quarterly.

According to Stoxx, the new index shows a risk-return profile similar to its parent index while offering investors a European benchmark that is aligned with responsible investment policies.

Inderpal Gujral, Head of Product at Stoxx, commented, “In the past, exclusions have been applied via customized indices. Discussions with market participants showed a strong interest from asset owners for liquid, low-cost benchmarks with standardized exclusions aligned with their responsible-investing policy.

“The ESG-X version of Stoxx Europe 600 uses free-float market cap weighting similar to Europe’s most traded benchmark index. It is easy to implement as a benchmark for asset owners and well-suited to serve as an underlying for ETFs, derivatives or structured products.”

ESG has proved to be a fertile area of product development for ETF issuers of late.

BlackRock recently unveiled a range of six ‘Core’ ESG ETFs offering global, US, Japan, European, eurozone, and emerging markets exposure, and earlier in the year Lyxor introduced a range of ESG ‘Trend Leaders’ ETFs which invest in companies that have a robust ESG profile, as well as a positive trend in improving that profile.

Both suites track indices created by MSCI, which has carved out a market leading franchise in the ESG space.

The Stoxx Europe 600, however, is a well-established and widely followed benchmark for European equities and is the underlying reference for four €1 billion+ ETFs, the largest being the €5.0bn iShares Stoxx Europe 600 UCITS ETF. It seems very likely, therefore, that the newly launched ESG version will ultimately find a place within ETF investors’ toolkits.