Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
The latest trends in ESG investing have been promising with
investors increasingly wanting to incorporate ESG based criteria to
their portfolios. By September 2019, assets in ESG equity and fixed
income funds had reached over $700 billion, according to the IMF.
2019 also saw record inflows into ETFs and index funds with ESG
mandates with AUM exceeding $220 billion as of March 2020. Even in
the face of the current pandemic, sustainable funds saw inflows of
$14.8 billion in the first quarter of 2020.
Following these developments in the ESG space, there has been
significant interest from market participants for a CDS index which
would allow investors to gain exposure to (or hedge) ESG screened
European corporate credit risk.
IHS Markit is well placed to offer such an index given its
expertise as an index provider, and the ESG offering is a natural
expansion of our franchise involving the highly liquid iTraxx and
CDX indices. In March 2020, IHS Markit launched the iTraxx MSCI
ESG Screened Europe Index, which is a broad European corporate
CDS index derived with ESG criteria. The index will be available
for trading from 22nd June 2020 onward.
Index overview
The index is constructed using the forthcoming iTraxx Europe
index series as the starting point, and thus, the iTraxx MSCI ESG
Screened Europe index also tracks the most liquid segments of the
European CDS market, but with entities not qualifying stringent ESG
criteria screened out.
The index follows a three-step screening methodology based on
MSCI ESG Research:
Value-based screen
Value-based screening results in exclusion of entities breaching
specific revenue thresholds due to their involvement in the below
activities:
Controversy-based screen
Controversy-based screening is applied to identify companies
based on how well they adhere to international norms and principles
such as the UN Global Compact and ILO Core Conventions.
The MSCI ESG Controversy scores are provided on a scale of 0-10
with 0 being the entities involved in most severe controversies.
The iTraxx MSCI ESG Screened Europe index excludes entities with
MSCI ESG Controversy scores of 0.
ESG Ratings-based screen
MSCI ESG Ratings aim to measure the key ESG risks and
opportunities faced by a company and how well those risks are
managed with respect to its industry peers.
The iTraxx MSCI ESG Screened Europe index excludes entities with
MSCI ESG Rating of BBB and below.
Potential use cases
Being a broad sector-diversified index, iTraxx MSCI ESG Screened
Europe index can be used as a macro instrument to gain exposure to
or hedge broad ESG European corporate risk. Due to the similarities
in the ESG screening methodology applied to the iBoxx bond indices,
the iTraxx MSCI ESG Screened Europe index could also be an
effective hedging instrument to bond portfolios tracking
forthcoming iBoxx MSCI ESG indices.
The index liquidity may also be significantly driven by buyside
demand with asset managers, insurance companies and hedge funds
wanting to gain long exposure (protection seller position) to ESG
companies. The similarities and high correlation of the index with
the overall iTraxx Europe index allows sell-side trading
counterparties to use the iTraxx Europe index to hedge their
protection buyer positions.
Similarities to iTraxx Europe
Below is a depiction of the sector and ratings comparison,
spread and total return comparison to highlight the similarities
between the iTraxx MSCI ESG Screened Europe index and iTraxx Europe
index. The iTraxx Europe has 125 constituents. For Series 33, the
iTraxx MSCI ESG Screened Europe index has 81 constituents.
Since the index is not available for trading yet, there is no
composite spread data on this index as of now. However, below is a
comparison of on-the-run theoretical spreads of the ESG index
versus those of the iTraxx Europe index. The theoretical spread is
constructed using the quoted spreads of the underlying single name
CDS in the index. Once the index starts trading IHS Markit Pricing
Service will publish composite pricing for the iTraxx MSCI ESG
Screened Europe index based on contributed data.
The iTraxx MSCI ESG Screened Europe index rulebook and index
composition of Series 33 are available for download on the iTraxx
documentation page. The index will be available for trading from
22nd June 2020 onward at the 5Y tenor with a fixed coupon of 100
basis points.
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
