Case study by SD-M
STOXX and SD-M developed the EURO iSTOXX 50 SD-KPI, iSTOXX Europe 50 SD-KPI and iSTOXX Europe 600 SDKPI Indices for institutional investors to track their passive portfolios against and/or benchmark their active portfolios against. It is designed to better complement investment strategy and policy than other ESG indexes, in particular where the strategy/policy favours ESG integration rather than screening.
The iSTOXX Europe 600 SD-KPI is based on the mainstream STOXX Europe 600 index. The methodology entails an incremental change approach with a small tracking error and liquid derivatives available. All 600 components of the parent index are included, but are over- and under-weighted according to Sustainable Development Key Performance Indicators (SD-KPIs). This reduces the large-cap bias associated with mainstream indices and other ESG indices.
The SD-KPIs are selected according to what we believe to be the three most relevant ESG indicators to business performance for 68 different sectors defined by investors and analysts in the SD-KPI Standard 2010-2015 as well as in the SD-KPI Standard 2016-2021. Each stock is allocated a SD-KPIntegration score between 0 and 100, based on the stock’s performance on the sector-relevant SD-KPIs.
|SD-KPIntegration score||Component weights|
The SD-KPIntegration score in practice
Before the Deepwater Horizon explosion on 20 April 2010, BP was often best-in-class in broad sustainability ratings, but not in a focused SD-KPI evaluation.
The three SD-KPIs for the oil and gas industry were published in January 2010.
- SD-KPI 1 “greenhouse gas emissions of production” had a weight of 41% and in January 2010 BP reached 75 out of 100 points.
- SD-KPI 2 “greenhouse gas emissions of products” was weighted 38%, and BP scored 0 points.
- SD-KPI 3 “emission of hazardous waste and toxic materials/oil spills” had a weight of 21%. BP scored only 10 points due to a bad track record of operations incidents even before the Deepwater Horizon explosion.
The result was an accumulated SD-KPIntegration Score of 32.85, meaning that in the iSTOXX Europe 600 SD-KPI Index, BP’s weight was 25% lower than in the STOXX Europe 600.
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A practical guide to ESG integration for equity investing