An unnamed continental European corporate pension plan has driven the creation of an index that delivers exposure to better ESG performance than existing offerings from established index providers, but without more tracking error.
Developed by Impact Cubed using the firm’s ESG multi-factor optimisation methodology, ‘Smart ESG’, the global equity index was developed for the pension plan of a “top European financial institution” that was looking to replace a benchmark from one of the major providers.
According to Impact Cubed, the ESG screened index the pension plan had adopted previously was not sufficiently ambitious with regards to climate considerations, with the pension fund also seeking improvements in governance performance and revenue alignment with the UN Sustainable Development Goals (SDGs).
The pension fund is understood to have considered a Paris-aligned index from a major provider and found it lacking. One of the targets that the ‘Impact Cubed SmartESG Global Sustainability Index’ was designed to meet is a 90% reduction in Scopes 1 and 2 carbon intensity; the MSCI Paris-Aligned equivalent delivers a 73% Scope 1 and 2 carbon intensity reduction.
With regard to SDG revenue alignment, around 23% of the holding revenues in the new index are allocated to environmental solutions defined by the SDGs, compared with some 18% for the MSCI World Paris Aligned Index.
The pension plan wanted these extra sustainability-related benefits with a tracking error no higher than that provided by off-the-shelf products, and so the tracking error is around 1.5%.
Aston Chan, head of investment solutions at Impact Cubed, said the firm was seeing more demand from pension plans for tailored products.
“Asset owners are much more sophisticated now in terms of their ESG and sustainability demands and they are finding it difficult to get a satisfactory set of exposures and outcomes through one-size-fits-all off-the-shelf products,” he told IPE.
“We’re trying to fill a gap in the market where pension funds are getting frustrated with major index providers and we think this index really shows our portfolio capabilities in action.”
Third parties can explore the impact of the index on an Impact Cubed demo site.