Qontigo’s ISS STOXX Biodiversity indexes uses four-step stock selection process to minimise negative impact.
The ISS STOXX Biodiversity Index Suite, launched this week, aims to take a more holistic approach to biodiversity than existing market offerings, Antonio Celeste, Director for Sustainability Product Management at index, analytics and risk solutions provider Qontigo, told ESG Investor.
Qontigo, which developed the ISS STOXX Biodiversity indexes using data from ISS ESG, said its overall objective is to allocate capital to companies that minimise their biodiversity footprint and support the world’s natural capital.
Celeste said existing products tend to target one or two particular aspects of biodiversity rather offering a “comprehensive framework”.
The ISS STOXX Biodiversity indexes are built using a four-step stock selection process based on four key pillars: avoid, minimise, enable and decarbonise.
The indexes exclude companies involved in activities causing harm to biodiversity, select securities with a less negative impact on ecosystems and those enabling exposure to relevant UN Sustainable Development Goals (SDGs), and which also reduce the portfolio’s carbon emissions. The overall objective of the indexes is to allocate capital to companies that minimise their negative impact on biodiversity.
Committed to biodiversity
Celeste said that the investor community has moved rapidly to address biodiversity.
“We have conversations with investors and asset managers who are really committed to learn how to address biodiversity with the right solutions,” he added. “An ESG-minded investor knows that at least 50% of global GDP depends on biodiversity.”
Because of the complexity of the biodiversity impacts on individual stocks, a robust methodology is needed to provide a thorough assessment, he said, underlining also the importance of data to support index methodology.
He added that ISS ESG’s data takes account of a company’s entire supply chain, including consideration of products and lifecycle analysis.
The index suite consists of two categories: the ISS STOXX Biodiversity Indexes and the ISS STOXX Biodiversity Leaders. The two branches have more than 16 indexes split between them.
The ISS STOXX Biodiversity index is a broad market index for firms that are Article 8 SFDR-compliant, while the Biodiversity Leaders indices is for Article 9 funds. All funds are screened through its four-pillar methodology.
The indexes exclude companies involved in thermal coal, or controversial weapons. Firms involved in specific biodiversity-related products and activities including palm oil, hazardous pesticides, or fur and exotic leather production are also excluded.
The indexes ‘minimise’ biodiversity impact by utilising ISS ESG’s Biodiversity Impact Assessment Tool metric. The measure quantifies each company’s impact on biodiversity in detail through a Potentially Disappeared Fraction (PDF) of species ratio. PDF represents – from a total preservation ratio of 0% to full destruction at 100% – the potential decline in species richness in an area over a period due to unfavourable conditions associated with environmental pressures.
PDF is then divided by each company’s Enterprise Value Including Cash (EVIC) to get a more accurate and comparable picture of the biodiversity impact of corporates. The indexes select the top 80% companies in each Industry Classification Benchmark (ICB) sector by PDF/EVIC.
This approach offers a more accurate and comparable picture of a company’s “real biodiversity impact”, said Celeste.
In the ‘enable’ screening step, the indexes select companies with the highest exposure to SDGs chosen for their impact on biodiversity and climate. Here, the methodology differentiates between the ‘baseline’ and Biodiversity Leaders indexes. In the former, Qontigo calculates each company’s total SDG exposure score among seven SDGs and selects the top 80% into the index. For the latter, a more stringent approach is taken, with companies only with high revenues (between 25% and 50%) in eight biodiversity- and climate-related SDGs activities qualifying.
This screen creates a more focused SDG exposure for the Leaders indexes. As such, the Biodiversity Leaders family consists solely of companies deriving at least 20% of their revenues from activities that are deemed to make a positive net contribution to the SDGs, including preservation of marine ecosystems and sustainable agriculture and forestry.
The ‘decarbonise’ screening step requires a company’s portfolio to achieve a 30% carbon footprint reduction relative to the starting universe to qualify for the index, with companies excluded by descending order of carbon intensity until that target is met.
Celeste said Qontigo was clear on the need to include decarbonisation in its biodiversity solution.
“This biodiversity index is a valuable tool not only to accurately allocate capital and meet biodiversity objectives, but to see companies that are lagging behind their peers and engage with those, to positively impact their contribution,” he added.
ISS and Qontigo are both owned by Deutsche Boerse Group.