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Eurex

Eurex to launch next generation of ESG derivatives

The international derivatives exchange Eurex is supporting the strong global trend towards responsible investing by expanding its ESG segment. With futures and options on the EURO STOXX 50 ESG Index, Eurex will add another European benchmark to its offering. In addition, derivatives on the DAX 50 ESG Index will cover the German market for the first time. The new contracts will be launched on 9 November.

ESG derivatives are playing an important role in the transition towards a more sustainable economy as they help to more effectively align investment exposures to environmental, governance and social risk factors. And with these new contracts, Eurex is going one step further in terms of methodology. For the first time, these derivatives will be based on indexes incorporating ESG scores. This means, in combination with screening out undesirable securities, ESG rankings are also considered as part of the selection process. (Source: Eurex)

 

Further information:

 

Photo: Deutsche Börse AG

Leon Saunders Calvert: Sustainable Finance – The challenges of scoring and ranking

The challenges and pitfalls of scoring and ranking

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DVFA Statement on the EU Renewed Sustainable Finance Strategy

The DVFA Sustainable Investing Commission participated in the recent consultation on the EU Renewed Sustainable Finance Strategy. Additional incremental measures in targeted areas are necessary to implement the Action Plan successfully, but the DVFA Sustainable Investing Commission believes that many significant developments have already been made. The DVFA Commission has identified a number of priority areas.

  • In order to achieve the objectives of the EU Sustainable Finance Strategy rapidly, the DVFA Commission believes that a two-handed approach is needed. First, rewarding the shift of private capital to more sustainable investments and/or at the same time discouraging it from benefiting from potentially damaging activities. Next, providing the proper regulatory framework for pricing (i.e. the carbon price) and the appropriate taxation mechanisms will be essential prerequisites.
  • The DVFA Commission believes that a data room for corporate ESG data could ease the implementation of the EU Action Plan, by improving access to data by financial market participants. The data presented should not suggest a qualitative or forward-looking assessment. A data interface should not replace ESG research houses but should increase the level of integrity and comparability of the required and standardised ESG data.

The DVFA Commission believes that ESG data is now more comparable and standardised than its reputation. The Commission took a position on this matter in the consultation and elsewhere (Take a look at: Guest distribution of Henrik Pontzen and Gunnar Friede). However, the expert, critical handling of multiple ESG ratings and the qualitative, conclusive overall assessment by the analyst remain indispensable for sustainable investing and underline the strength of the asset manager.

Ambiguities and occasional low data quality do not call into question the concept of sustainable investing, but rather are a mandate to investors to support the diversity of rating agencies. At the same time, investors should demand better measurement methods and, through dialogue with companies, sufficiently reliable and up-to-date data. It can also be a mandate to policymakers to better standardise data on key ESG indicators.

Nevertheless, the DVFA Commission is in favour of stronger regulation of sustainability reporting. As long as the disclosure of ESG data remains voluntary, the data disclosed by companies can potentially be positively biased. To date, hardly any jurisdiction holds companies and executives liable for false or misleading extra-financial data disclosed outside of regulated traditional financial reporting. As a result, most investors and analysts tend to discount reported ESG data and have less confidence in the quality of the ESG information provided. In addition, the infrequent and delayed disclosure of ESG reports compared to a company’s traditional financial reporting reduces usability. These issues need to be addressed.

 

The full statement can be found on the website of the DVFA Sustainable Investing Commision or here as PDF-file.

Bloomberg Launches Proprietary ESG Scores

Scores will provide transparent, data driven insights into company performance

Bloomberg recently announced the launch of proprietary ESG scores. This initial offering includes Environmental and Social (ES) scores for 252 companies in the Oil & Gas sector, and Board Composition scores for more than 4,300 companies across multiple industries.

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Deutsche Bank Research: Global headwinds make continental value chains more attractive

The German export sector has had to cope with numerous challenges over the last few years. Not only the automotive sector, but also the shift of US trade policy and the increasingly important issue of climate change implied massive changes. That is why the long-term trend in many manufacturing sectors appeared unclear even ahead of the coronavirus pandemic. Now, COVID-19 has compounded already existing uncertainties. However, a number of developments support the thesis of Deutsche Bank Research that continental value chains are likely to gain importance.

ESG considerations raise questions about whether global supply chains really make sense.

Attention is shifting towards humanitarian, social and ecological issues. There is a broad social consensus that climate protection should play a major role in the recent stimulus packages. Even though we are currently experiencing the deepest recession since the Second World War, consumers are increasingly rethinking their consumption patterns. The fact that the German government is currently discussing a new “supply chain law” underlines that this is a relevant topic for society as a whole.

Geopolitical tensions make global supply chains less attractive.

Geopolitical trends and the growing importance of ESG issues already suggested before the COVID-19 outbreak that major changes in the supply chains might be necessary in the long run. The virus-related supply shortages have led to a considerable increase in the desire for security. There are, therefore, significant incentives to scale back the global supply chains, which were established for maximum efficiency, and return to more regional supply patterns.

The full comment can be found at: Deutsche Bank Research – Global headwinds make continental value chains more attractive


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ESG ratings are better standardised than one might think (DVFA Guest contribution in Börsen-Zeitung)

Authors: Henrik Pontzen and Gunnar Friede, both Heads of the DVFA Commission Sustainable Investing

 

Imagine one analyst rates a security as a buy, while another deems it a sell. Scandalous? Not at all. Isn’t it quite normal that two equally well-trained and recognized experts could reach opposite conclusions after a thorough fundamental analysis of the same company? Then, why do we hear repeated complaints about ESG (environment, social and governance) ratings, deriding them because they too can have differing conclusions?

The demand that rating agencies come to a unanimous judgement when assessing ESG standards arises from false expectations. In terms of complexity, a company’s ESG rating can hardly be seriously compared with a credit rating. The latter evaluates only one facet: what is the probability of default on the coupon and repayment of a bond?

In assessing ESG, both the observation horizon and the number of criteria taken into account are disproportionately greater, and not only quantitative but also qualitative weighting is required. In this respect, a higher spread of results is to be expected per se.

However, the variance is not only due to the complexity of the subject. It also lies in the nature of the subject. For example, the answer to the question of whether electromobility is sustainable may vary depending on the rating agency’s assessment. On the one hand, e-mobility is compatible with the goal of climate neutrality; on the other hand, rare earths are used in the production of batteries, the extraction of which is sometimes questionable from a social and environmental point of view.

The answer to whether a car manufacturer, for example, is a company that operates sustainably can, therefore, be quite different, with good reasons. Which business activities are sustainable and which are not will only be decided in the future. The divergent ratings reflect this openness of decision and give room for different assessments.

Therefore, differing results are not an argument against ESG ratings or against the goal of investing sustainably. Even the fundamental analysis of a company’s stock does not always provide clear results about its actual performance. The fact that different analysts, in good faith and with the best of intentions, arrive at different results – one advises to buy, another to sell – is generally not seen as a sufficient reason to altogether do away with these analyses. ESG ratings should be handled in a similarly relaxed manner, but with a constant desire to conduct better analysis.

Furthermore, the assertion that ESG ratings do not agree to any extent on how to measure a company’s sustainability risk must be questioned. While the argument for a low correlation between individual stocks may be justified, it is not true for the average of companies and ESG rating agencies. This is demonstrated, among others, by a recently conducted study by MIT Sloan. The study’s authors Florian Berg, Julian Koelbel and Roberto Rigobon examine the ESG ratings by leading ratings agencies Asset4, RobecoSam, Sustainalytics and Vigeo Eiris for a universe of more than 800 of the world’s largest companies and found an average paired correlation of 0.7.

E- and S-ratings consistent

The consistency of the ratings is particularly high in the E-areas and for the most part in the S-areas. However, there are larger deviations in the G-areas and when the ratings from KLD/MSCI are added. By way of comparison, the leading bond ratings show a paired correlation of about 0.9 for the MSCI AC World between Moody’s, S&P and Fitch. In other words, the dispersion of the correlation between the providers of ESG ratings is quite acceptable on average, which is all the more surprising as the providers use different rating philosophies and take into account between 38 and 238 indicators in their measurements, i.e. they differ greatly in their methodology in quantitative terms alone. The major providers of bond ratings indeed achieve higher levels of agreement in their ratings. But the correlation in ESG ratings is surprisingly high when considering their complexity.

Assessments of companies according to ESG criteria are already better standardised than their reputation. However, the informed, critical use of multiple ESG ratings and the qualitative, conclusive overall assessment by the analyst remains indispensable for sustainable investing and highlight the strength of the asset manager. Ambiguities and sometimes poor data quality do not fundamentally call into question the concept of sustainable investing. The DVFA Commission on Sustainable Investing sees these findings rather as a mandate to investors to support diversity in rating agencies and at the same time to demand better measurement methods and, in dialogue with the companies, data that is sufficiently reliable and up-to-date.


Links:

DVFA Commission Sustainable Investing: https://www.dvfa.de/der-berufsverband/kommissionen/sustainable-investing.html