Frankfurt-based Solactive writes that investors have been increasingly considering aligning investment decisions with ESG values.
The firm writes that in 2021, this focus increased as the entire world watched heads of states’ debates on effective actions against climate change at the UN Climate Change Conference (COP26) in Glasgow, Scotland. Taking one step further to consolidate its leading role in the Paris-aligned (PAB) fixed-income indexing, Solactive writes that it launches now two Paris-aligned high-yield indices as well as a CTB-version (Climate Transition Benchmark) and expands the PAB index family.
The Solactive USD Corporate HY PAB Index, the Solactive Euro Corporate HY PAB Index, and the Solactive Euro Corporate HY CTB Index follow the successfully launched Investment Grade (IG) PAB index series, which has been live for nearly two years already. Solactive’s PAB index universe is the most extensive one in the whole fixed-income industry. It includes already the IG PAB indices in USD, EUR, and GBP; the Global Corporate Index; and the Paris Aware indices (Solactive Paris Aware Global Aggregate Index and Solactive Paris Aware Global Government Index).
Solactive used an index methodology for their benchmarks with stricter criteria than the PAB regulation requires. The German index provider makes sure that the gross emissions are reduced by 50 per cent at inception and by at least 7 per cent Year-Over-Year, according to the Paris recommendation. Solactive goes beyond that and measures Scopes 1, 2, and 3 emissions as well as the carbon intensity based on the book values for debt and equity of companies, which makes the criteria stricter for two reasons:
1. Scope 3 emissions are already respected instead of using the phase in approach granted by the regulation;
2. Aligning the indices by intensities reduces the gross emissions even further and makes sure the impact of the companies is measured on an equal basis.
To make the criteria more effective, the intensity must be reduced by 50 per cent compared to the parent index. Companies that do not meet specific ESG requisites, for example, those that generate more than 10 per cent of their revenue from production, exploration, distribution and services related to fossil fuels, are excluded.
Despite the strict criteria, Solactive writes that it keeps the PAB screened indices aligned to their benchmark in terms of risk/return characteristics, as there are constraints regarding how much the Paris-aligned index may differ from the parent index.
The German index provider recently ran a calculation comparing each benchmark index to its Paris-aligned version regarding performance, correlation and annualised tracking error in the range of one, three and five years. It demonstrated an average correlation of 99.4 per cent between the four IG benchmark indices and their PAB versions.
The results showed that ESG screening brought outperformance to most indices, the firm says. The EUR HY PAB, the US IG PAB, and the US HY PAB indices outperformed their parent indices by more than 1 per cent since their launch. In three and five years, five of the six PAB indices outperformed their respective benchmark.
Timo Pfeiffer, Chief Markets Officer at Solactive, says: “Climate change is one of the biggest challenges of our time, which translates into a surge in demand for climate investment strategies. As part of the overall path to a greener planet, Solactive is committed to increasingly develop more sustainable investment solutions. We have been successfully doing that in the active investments space, where we are most prominent and present. Now we are moving towards the next stage of evolution in the fixed-income space with the recently launched Paris-aligned high-yield indices, which solidifies our lead role in climate investment strategies.