ESG investing – no longer the exception but the rule
By Philippa Aylmer – With the new European Union Climate Benchmarks standards published into law earlier this year, Rodolphe Bocquet, Global Head of Sustainable Investment at Qontigo talks about the role of ESG investing going forward and how Qontigo is developing the next generation of indices.
“We are convinced that ESG indices are going to become the new normal,” says Bocquet. “The latest climate benchmarks published by the EU Commission are creating a regulatory revolution and they will be key to supporting the tremendous growth that we see in sustainable investment.”
The EU benchmarks provide a set of minimum requirements for two benchmark types – the EU Climate Transition (CTB) and the EU Paris-aligned Benchmarks (PAB). The CTBs are specifically targeted toward a decarbonisation trajectory, while the PABs have even stricter requirements around fossil fuels that coincide with the long-term global warming target of the Paris Climate Agreement.
In line with this, the firm has recently launched two new families of climate indices: the STOXX Paris-Aligned Benchmark (PAB) Indices and the STOXX Climate Transition Benchmark (CTB) Indices.
“Essentially, the EU’s latest benchmarks are looking at the carbon intensity of business models and about the risk of a transition to decarbonisation,” says Bocquet.
The framework has been designed to increase transparency, prevent greenwashing and ensure that sustainable investment solutions not only match minimum standards but are genuine.
Low carbon indices looking to use the CTB and PAB labels need to demonstrate an initial significant reduction in overall greenhouse gas (GHG) emission intensity relative to an underlying investment universe or parent index (-30 per cent and -50 per cent respectively).
Indices also need to be sufficiently exposed to sectors with high impact on climate change and should be able to reduce their own GHG emission intensity by at least 7 per cent on average every year.
Until now, one of the ways to decarbonise was to shift away from the GHG sector. However, the EU climate benchmarks require that minimum exposure to sectors highly exposed to climate change issues should be at least equal to equity market benchmark value. This means that “you are not shifting away from the sector itself but picking up the companies that are overperforming in their given sector so you can reach the decarbonisation,” says Bocquet.
Both benchmarks exclude companies involved in controversial weapons and tobacco production, although the PAB is even more ambitious on the exclusion side: companies with revenues which account for more than one per cent in coal, 10 per cent in fossil fuels and 50 per cent in natural gas are excluded.
With STOXX’s long history of climate-related and low carbon indices – the first of these indices was launched in 2001 – the latest set of STOXX indices far exceed the minimum CTB and PAB requirements.
To start with, the STOXX PAB Indices aim for 60 per cent GHG intensity reduction, rather than the EU standard of 50 per cent, and the STOXX CTB Indices aim for 40 per cent GHG intensity reduction, rather than the EU standard’s 30 per cent.
Notwithstanding the stringent EU requirements, Qontigo has added other criteria, such as rewarding companies that seize opportunities arising from the transitions to low-carbon economies and using Scope 3 data for direct and indirect emissions from inception, rather than as stipulated by the European Commission’s Technical Expert Group that Scope 3 is phased-in over a four-year time frame.
Furthermore, continues Bocquet: “We have made the commitment to overweight in the index any companies that have set climate performance targets alongside the science-based targets (SBT) initiative. Not only do we see this as a genuine commitment, but it is an interesting forward-looking indicator of the companies’ strategies to be climate focused.”
The STOXX CTB and PAB indices were launched in July 2020, although the concept has been tested since March 2018. During that time, they have experienced lower volatility and outperformed the underlying STOXX index by almost 3 per cent a year.
As of 30 October 2020, the STOXX Europe 600 Climate Benchmark Indices had outperformed the STOXX Europe 600. The STOXX Europe 600 was down -15.7 per cent while the STOXX Europe 600 CTB and STOXX Europe 600 PAB were down -13.2 per cent and -11.6 per cent respectively.
Qontigo is also in the process of rolling out other ESG versions of its current benchmarks. “Our objective is to offer our clients sustainability-filtered and sustainability-enhanced alternatives to our existing benchmarks,” says Bocquet, to respectively answer their “risk and values” and “accompany transition” ESG strategies.
“We also look into developing standalone sustainability-powered indices. They will be built around sustainability megatrends, such as food and agriculture, digital empowerment and the circular economy. They will answer investors’ needs to lead the transition to more sustainable development pathways and demonstrate positive impact.”
Qontigo has recently partnered with SDI Asset Owner Platform. The SDI-AOP advises on the challenges facing investors in achieving their sustainable development goals. In June 2020, Qontigo, in partnership with Amundi won the Objectif Climat mandate in a competitive process involving 12 pioneering firms that – for the first time – will lead an investment into a European Union PAB index solution.
And in July this year, Qontigo licensed the STOXX Europe 600 PAB Index to Franklin Templeton as an underlying for an ETF.
“Climate change is fast becoming a systemic risk for the investment community: many believe that it is one of the largest issues that we collectively have to face,” says Bocquet.
“The Climate Transition Benchmarks and Paris-Aligned Benchmarks are integral to this and I believe the work we are doing now is paving the way for a new breed of indices.”
Global Head of ESG, Qontigo
Rodolphe Bocquet leads Qontigo’s expansion of indexing and analytics in the ESG space as Global Head of ESG. A pioneer and innovator in ESG investing, Rodolphe most recently served as an independent sustainability consultant working with a range of clients, including the World Bank and the Inter-American Development Bank. In 2014, he co-founded and served as Chief Executive Officer of Beyond Ratings, a startup created to better integrate long-term sustainability drivers and their impact on investments. Beyond Ratings was acquired by the London Stock Exchange Group in May 2019.
Bocquet began his career in trading and risk management at Société Générale, but shifted his focus in 2001 to energy, climate and sustainability, holding positions with Carbone 4, AFTER, Agence Française de Développement, Conseil Régional d’Aquitaine, ADEME (Environment and Energy Management Agency), Eco-Carbone and other organisations.
Bocquet earned an MBA from HEC Paris, which included studies at the Stern Business School of New York University. He also holds a master’s degree in Environmental Engineering from Mines ParisTech ISIGE.