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Negative Exclusions: An Efficient Base for ESG Portfolios

Negative Exclusions: An Efficient Base for ESG Portfolios

Jun. 30, 2020

Jun. 30, 2020

Photo: Shutterstock.

Negative or exclusionary screening is the most popular among all sustainability investment approaches covered by the Global Sustainable Investment Alliance (GSIA). As of the start of 2018, nearly 20 trillion dollars were invested globally following such strategies.1

Their popularity is borne out of their straightforward approach and relatively easy implementation. Secondly, negative exclusions do not involve as high an active investment risk as do other ESG strategies. Investors here are more concerned with detaching their portfolios from specific business activities than with enhancing returns. In fact, staying close to the market-capitalization-weighted benchmark is a commonly cited objective of exclusionary strategies.

ESG-X: the right place to start
Qontigo's STOXX ESG-X indices were introduced in 2018 and implement negative exclusions on flagship benchmarks. They were created to help meet the standard responsible-investing criteria of leading investors, for whom traditional market-cap-weighted benchmarks were no longer fit for purpose. They form the first of three main categories of indices at the heart of Qontigo’s ESG ecosystem, each reflecting different strategies and degrees of ESG penetration and impact. Visit here our recent article exploring the ESG ecosystem. 


Qontigo’s ESG Ecosystem





Sustainable Responsible Investment

80 indices covering regional, country, blue-chip and facor-based strategies




Coming up


The ESG-X process
The ESG-X family includes 80 indices that are versions of established benchmarks and offer country, regional, size, blue-chip and factor strategies. Beyond the exclusions, the indices share similar rules and sector composition, and an equal selection methodology, of their respective benchmarks (broad indices comprising the largest and most frequently traded equities). They include the STOXX® Europe 600 ESG-X IndexSTOXX® USA 500 ESG-X IndexSTOXX® Global 1800 ESG-X Index and EURO STOXX 50® ESG-X Index.

The latest expansion of the family introduced the STOXX® ESG-X Factor Indices, which combine the ESG-X exclusionary screens on portfolios weighted by risk-premia considerations.

The norm- and product-based exclusionary screenings of the ESG-X solutions are based on standard policies of leading asset owners and allow portfolios to keep a similar financial risk and return profile to benchmarks, while reducing market and reputational risks. The filters exclude companies that are non-compliant with Sustainalytics’ Global Standards Screening,2 or are involved in controversial weapons, tobacco production, or thermal coal.3

With the ESG-X indices, investors can construct highly liquid portfolios accessible through exchange-traded derivatives.4 The availability of a futures market for indices such as the STOXX Europe 600 ESG-X Index helps to efficiently manage ESG portfolios and lower the cost of associated trading, with instruments that do not break with sustainability rules. 

Comparative returns
Figure 1 shows the risk and returns of five STOXX ESG-X indices (larger marker) and of their underlying benchmarks (smaller marker). 


Figure 1 - Comparative analysis

Source: Axioma Analytics. Annualized returns and volatility based on monthly gross returns in dollars except for STOXX Europe 600 Index, which is in euros. Mar 2012 – May 2020.


Figure 1 shows that the ESG-X Indices don’t diverge in a significant way from their benchmarks. In the six instances showed in the chart, the ESG-X versions posted slightly higher returns than benchmarks in the period analyzed. In all cases, volatility was only marginally higher. 

Table 1 takes a closer look at the risk and return profile of the STOXX Europe 600 ESG-X Index and STOXX USA 500 ESG-X Index against their respective benchmarks in the five years through May 2020. The data show there is no material difference between the ESG-X indices and their benchmarks.  


Table 1 – Risk and return

Source: STOXX index data, gross returns in dollars for the STOXX USA 500 Index and in euros for the STOXX Europe 600 Index, May. 29, 2015 – May 29, 2020.


Effects of exclusions
In examining the effect of individual exclusions on a portfolio such as the STOXX Europe 600 ESG-X Index in the last eight years, the comparative analysis shows that all exclusions were accretive to returns, with the exception of the removal of securities involved in controversial weapons (Figure 2). 


Figure 2 – Cumulative impact of exclusions on the STOXX Europe 600 total returns

Source: STOXX index data, Mar. 19, 2012 – Mar. 31, 2020.


Two recent reports from our Index Product Management team provide a more complete analysis on the performance of individual exclusions. One looks at the STOXX USA 500 ESG-X Index while the other one examines the STOXX Europe 600 ESG-X Index.  

Exclusions by reason
Staying with the STOXX Europe 600 ESG-X Index, a look at index composition shows that the various exclusions have resulted in an average of 18 securities — or 3% of the total — being removed from the benchmark since 2012. These accounted for an average weight of 6.1% of the benchmark.


Figure 3 – STOXX Europe 600 excluded securities’ weight by reason for exclusion

Source: STOXX Ltd. Data Mar. 2012- Mar. 2020. 


In terms of industry composition, Figure 4 shows that tobacco-related exclusions have resulted in an underweight to the Personal & Household Goods ICB supersector. Similarly, the removal of stocks linked to controversial weapons has reduced the weight of the Industrial Goods & Services supersector, while the thermal coal exclusions have reduced the exposure to Utilities. 

Health Care, Financial Services and Technology are among supersectors that are overweighted as a result of exclusions.


Figure 4 – ICB supersector weights

Source: STOXX index data as of Jun. 12, 2020.


Fast exit for quick reaction
In order to limit investor risk, the ESG-X indices have a built-in clause that triggers the fast exit rule. In case a company in the ESG-X Indices increases its ESG Controversy Rating to Category 5 and becomes non-complaint based on the Global Standards Screening assessment, the company is deleted from the indices on the third dissemination day. Such a quick reaction occurred in 2015, when German automaker Volkswagen admitted to have lied about its cars’ nitrogen oxide emissions. STOXX was the first index provider to remove Volkswagen’s shares from its ESG indices.

Covering all objectives and market uptakes
In summary, the ESG-X family implements standard exclusions based on market feedback and customary industry practices and offer an efficient way to target a sustainability approach without incurring significant tracking error. 

The indices are guided by the same key design criteria that govern all of STOXX ESG indices: transparency and simplicity, liquidity and tradability, state-of-the-art data quality, and ongoing alignment with changing investor preferences. They are suitable for benchmark mandates and as underlying for exchange-traded funds, listed derivatives, structured products and certificates.

Visit us in the coming weeks as we review the other two categories of ESG indices within the STOXX world: ESG Integration and Sustainable Responsible Investment. Together, our indices cover all corners of investors’ objectives and market uptake in the transition to a more sustainable investment landscape. 


Featured indices

STOXX® Europe 600 ESG-X Index

STOXX® USA 500 ESG-X Index

STOXX® Global 1800 ESG-X Index

STOXX® Asia/Pacific 600 ESG-X Index

STOXX® Japan 600 ESG-X Index



1 Global assets according to Global Sustainable Investment Alliance (GSIA) data at the end of 2017.
 The Global Sustainability Screening identifies companies that violate, or are at risk of violating, commonly accepted international norms and standards, enshrined in the United Nations Global Compact (UNGC) Principles, the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises, the UN Guiding Principles on Business and Human Rights (UNGPs), and their underlying conventions.
3 Companies that generate at least 25% of revenue from thermal coal mining and exploration and those that have at least 25% thermal coal-based power generation capacity are excluded. 
4 There are currently options and futures on the STOXX Europe 600 ESG-X Index, and futures on the STOXX USA 500 ESG-X Index, listed on Eurex.

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