Qontigo has launched socially responsible versions of STOXX factor indices constructed using Axioma equity risk models.
The indices provide targeted factor exposures while screening out firms with poor ESG profiles.
The STOXX ESG-X Factor Indices target similar levels of factor exposure to the STOXX Factor Indices it unveiled in January while also screening constituents according to environmental, social, and governance (ESG) characteristics.
Similar to the existing indices, the new ESG-X suite consists of 30 indices covering six factors (value, momentum, size, low risk, quality, and a multi-factor strategy) across five developed market equity universes – global, global ex-US, US, Europe, and Asia Pacific.
The primary difference between the two offerings is in the benchmark universe.
The STOXX Factor Indices are derived from five broad market parent indices covering the different equity regions: the STOXX Global 1800 Index, STOXX Global 1800 ex USA Index, STOXX USA 900 Index, STOXX Europe 600 Index, and STOXX Asia/Pacific 600 Index.
The STOXX ESG-X Factor Indices use filtered versions of these broad market benchmarks which have been screened using ESG data from Sustainalytics.
Firms involved with controversial weapons, tobacco, and thermal coal are removed, as well as those in breach of the UN’s Global Compact Principles, the Organisation for Economic Co-operation and Development’s Guidelines for Multinational Enterprises, or the UN’s Guiding Principles on Business and Human Rights.
The indices then apply the same factor methodology as the STOXX Factor Indices using the institutionally tested analytics of Axioma Factor Risk Models.
Each index aims to provide long-term outperformance compared to its market-cap-weighted universe by capturing risk premia related to its underlying factor strategy in a systematic and transparent process.
Each constituent of the indices is assigned a factor score based on an analysis of the firm’s characteristics provided by Axioma’s equity risk models.
The value factor is derived from earnings yield, the momentum factor from medium-term stock price momentum, the quality factor from a blend of profitability and leverage, the size factor from market capitalization, the low-risk factor from a blend of beta and price volatility, and the multifactor strategy uses an equal weight of the above five factors.
Each index uses an optimization process to maximize exposure to the target factor while constraining exposure to non-targeted factors, controlling for country and industry diversification, managing liquidity and turnover, and reducing tracking error relative to its universe. The indices are reconstituted and rebalanced on a quarterly basis.
Holger Wohlenberg, Chief Business Officer of Qontigo, commented, “Built with our institutional factor expertise and ESG-screened index construction rules, these indices offer a new tool to help factor investors achieve their sustainable investing strategies.
“We are pleased to offer these alongside the recently launched STOXX Factor Indices as two parallel families with the highest precision factor exposures for benchmarking and investment management.”