Euronext launches ESG spin-off to French CAC 40 index

France
On the 03/24/21 at 7:55AM

by

Fabrice Anselmi

The environmental, social and governance methodology is subject to annual revision to integrate new European standards.

The pan-European stock exchange operator Euronext on Monday launched the CAC 40 ESG. The new index will select the 40 companies from the French CAC Large 60 index with the best environmental, social and governance (ESG) records. In response to growing demand from investors for sustainable investment tools, this is the first domestic ESG index and the first in the CAC 40 family. Euronext had previously created reweighted indices for exchange traded fund (ETF) providers, for example, the Low Carbon 100 for BNP Paribas AM. Others will probably follow, particularly in this climate dimension.

“This launch is an important step in accelerating the transition towards a sustainable economy,” said Stéphane Boujnah, chairman and CEO of Euronext, mentioning a “broad consultation” with the financial community, public authorities and regulators. In its first version, the index’s composition will be weighted by free float market cap of its component companies and will be revised quarterly by an independent scientific committee. It will exclude nine CAC 40 stocks: Airbus, Alstom, ArcelorMittal, Dassault-Systèmes, EssilorLuxottica, Hermès, Saint-Gobain, Thales and Total. They will be replaced by nine listed companies from the CAC Large 60: Accor, Arkema, EDF, Gecina, Klépierre, Sodexo, Solvay, Suez and Valeo.

Based on what criteria? The index, which is based on a universe of highly liquid stocks, sticks closely to the ESG criteria of the French Finance Ministry’s socially responsible investment (SRI) label, in coordination with United Nations principles, after an ESG review of the companies by Vigeo Eiris, a Moody’s subsidiary. In accordance with the SRI label, a negative screening excludes companies implicated in coal-related businesses, controversial weapons and tobacco, and at least 20% of the benchmark universe (12 companies in this case) before a “best in class” ranking of 40 of the remaining 48 companies on the basis of their Vigeo Eiris ESG rating and two more precise environmental criteria. These are namely carbon footprint (Scopes 1 and 2, then Scope 3 as soon as it is more standardised) weighted in the index; and a green/brown environmental ratio defined as the “weighted aggregation” at the level of the company (such as evaluated by Vigeo Eiris) of the percentage of its revenues linked to green products and services divided by the weighted aggregation at the level of the company of the percentage of revenues linked to brown products and services.

Euronext pointed out that the carbon footprint of the initial CAC 40 ESG is almost 50% lower than the CAC 40’s. It added that “the methodology will evolve at least once per year in order to integrate new European standards in sustainable finance, particularly those linked to the taxonomy, once it has been decided.”

Questioned by Agefi, some excluded companies, such as Saint-Gobain, were unaware of the selection criteria in advance and planned to find out more from Euronext and Vigeo Eiris. The stakes are easy to understand, given the heavy demand from ETF providers, such as Amundi, BNP Paribas AM and Lyxor, which have already confirmed their interest for the new index. As to whether it could ultimately replace the CAC 40, “No, the goal is to offer a turnkey tool to asset managers to invest in French equities from the ESG angle, but as an alternative to complement the existing CAC 40,” Euronext said, while stressing an annual total return (dividends reinvested) of the CAC 40 ESG that more than 20% to 30% higher than its benchmark universe over more than 10 years.

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