Collaboration with clients lies behind Qontigo’s successful partnerships
When it comes to sustainable investing, the approach from Qontigo’s STOXX indices is one of collaboration and customisation.
“Being an open-architecture firm gives us the ability to partner with different data providers based on their suitability for each use case and client preferences,” says Saumya Mehrotra, associate principal for sustainable investment at Qontigo.
Having this flexibility is key to producing a wide range of sustainable solutions at a time when asset owners and investors have very varied ambitions and show diverse progress in their ESG journey.
“We have a range of indices tracking various ESG integration approaches – from the standard off-the-shelf ESG indices with exclusionary screens and ESG integration strategies, to more progressive climate and impact indices,” says Mehrotra. “Either with standard or more customized indices, the availability of ever-more-sophisticated data and robust, transparent methodologies, allows investors to implement the right strategy for their needs.”
There are several examples this year where this flexible approach to index-building has allowed STOXX to work with clients and partners to produce innovative solutions.
One of them was a recent collaboration with Dutch pension provider APG, which led to the development of the iSTOXX APG World Responsible Investment Indices. This innovative suite incrementally ‘layers in’ screens for ESG exclusions, low carbon, ESG leaders and contribution to the United Nations’ Sustainable Development Goals (SDGs), with each index employing Qontigo’s line of Axioma portfolio optimisation tools to minimise tracking error, maximise the various sustainability objectives, and avoid unintended sector, regional and factor exposures.
The indices were built using APG’s data sets, including one derived from the Sustainable Development Investments Asset Owner Platform (SDI AOP). The platform aims to accelerate investments aligned with the SDGs by providing common definitions, taxonomy and high-quality data sources. It was the first time that the SDI AOP data were used to build investable indices.
The iSTOXX APG World Responsible Investment Indices allow investors to assess what the impact is of adding each sustainability element. APG Asset Management, with EUR613 billion under management, is one of the world’s largest pension providers and administrator of the retirement pot for one in four Dutch employees.
“Qontigo understands us and speaks the same language as us in terms of flexibility, customisation and risk control benefits,” Ronald van Dijk, Deputy CIO at APG Asset Management, said in a recent article. “If you are going to work on very bespoke, dedicated solutions for asset owners, you need this type of relationship.”
The APG project was in fact a three-way collaboration where BlackRock will oversee a portfolio with an initial investment of approximately EUR1 billion tracking the indices.
An innovative take on transition risk
Another example of a successful partnership is the one between Willis Towers Watson and Qontigo, who have jointly created the STOXX Willis Towers Watson Climate Transition Indices (CTIs) to meet growing demand for transparent and systematic climate-oriented investment solutions. The indices employ a unique and proprietary Climate Transition Value at Risk (CTVaR) methodology that quantifies the anticipated impact of an economic transition on equity valuations.
The CTIs enable a more sophisticated way of managing climate transition risk, one that looks beyond carbon emissions and makes a forward-looking, bottom-up evaluation of asset repricing risks in a decarbonization pathway. Specifically, the indices use the CTVaR measure that analyses the impact on projected company cashflows of moving from a ‘business-as-usual’ scenario to a world consistent with the goals of the Paris Agreement, using today’s prices. By using these CTVaR projections, the indices tilt towards companies that are expected to fare well and away from companies that are expected to experience meaningful losses in value as the economy transitions.
At the index launch, Craig Baker, Willis Towers Watson’s Global Chief Investment Office said, “climate change is a systemic and urgent global challenge and also one that will significantly disrupt capital allocations and returns. Investors need a robust framework that can quantify and incorporate the financial impact of climate risk, but this is something that just hasn’t been widely available until now.”
Willis Towers Watson’s defined contribution master trust is investing nearly USD1 billion in the STOXX Willis Towers Watson World Climate Transition Index.
EU Climate Benchmarks regulation
Investors can also resort to off-the-shelf index solutions, such as the STOXX Paris-Aligned Benchmarks (PABs), retro-engineered to reach net zero by 2050: with an initial 60 per cent decrease in carbon intensity and a 7 per cent year-on-year decrease going forward. One of these indices underlies a pioneer fund complying with the European Union’s Climate benchmarks regulation, and managed by Amundi.
The STOXX Climate Benchmarks were introduced last year and are constructed to follow the ‘EU Climate Transition Benchmark’ (CTB) and ‘EU Paris-aligned Benchmark’ (PAB) requirements, embedded in the European Benchmark Regulation legal framework. The STOXX indices exceed the requirements laid out in the European regulation.
According to Qontigo’s market intelligence, climate indices have seen higher growth this year than any other ESG sub-sector. This is likely to be a persistent trend, given the nearly USD70 trillion pledged by asset owners and money managers during the recent COP26 to meet decarbonization targets.
Mehrotra says that the financial impact of the transition to a net-zero world through regulatory, technological, and demographic shifts can be expected to grow exponentially over time. It is hence important for investors to adopt future-proofed portfolios that incorporate a forward-looking perspective on the underlying constituents, she says.
The surge in ESG uptake has been accompanied by a sophistication of investment strategies. As investors move beyond traditional ESG exclusions or integration strategies, they are also focusing on topics such as risk and exposure management, and real-world outcomes, all while seeking to comply with evolving regulation and striving to work with the best available data.
“When it comes to sustainability, you definitely cannot have a one-size-fits-all mentality,” says Mehrotra. “The role of the index provider is to select the best data and right investment strategy for each case, and to combine them into a quantitative methodology that is rules-based and transparent. Working alongside the client in each step is vital to achieve a successful outcome.”