BNP Paribas has licensed the Euronext Benelux ESG Leaders 20 Index, the latest in a long list of environmental, social and governance (ESG) indices adopted by the French bank. The index, which has been live since July, will be used in structured products targeted at retail investors in Belgium. The first product - SecurAsset (LU) Benelux ESG Leaders 10/2023 is distributed via Bpost Bank while another product will be made available via the BNP Paribas Fortis network in October.
The Euronext Benelux ESG Leaders 20 is a European equity index composed of 20 listed companies from the Benelux that are selected based on their ESG score provided by Vigeo Eiris, an independent ESG rating agency. The score evaluates each company on 38 criteria, divided in three categories: the environment, social responsibility and corporate governance.
"We start with a universe of 55 stocks," said Jonathan Chekroun (pictured), senior sales, cross-asset structured solutions, Belgium, BNP Paribas Corporate & Institutional Banking (CIB). "The 25 stocks from the AEX, the main Dutch index, the 20 stocks from the Bel 20, the main Belgian index, and the 10 biggest stocks by market capitalisation of the Luxembourg Stock Exchange."
After applying two exclusion filters - companies with low environmental standards and companies with a major involvement in alcohol, gambling, tobacco and other disputable activities are removed - a liquidity filter is applied: "We only include stocks that have an average daily volume of €5m, because for trading purposes we need to have stocks that are quite liquid," said Chekroun.
Once the stocks are ranked by ESG score, the 20 highest scores are taken. "What follows is that we then look at the historical volatility of the 20 remaining stocks over the last six months and we will weigh the stocks inversely to their historical volatility," said Chekroun, noting that the stocks with higher volatility will have a lower weight and the stocks with lower volatility will have a higher weight. "On each individual stock we put a 10% cap on the weight to maintain a good diversification in the portfolio."
Out of this, two indices are created: a price return index, which does not take dividends into account, and a synthetic dividend index which reinvests all the dividends that are paid by the 20 stocks of the index. "Those net dividends are reinvested in the index and a 4.5% p.a. synthetic dividend is deducted, on a daily basis, from the performance," said Chekroun.
The price return index, according to Chekroun, is more suitable for products, which are 90% capital protected while the synthetic dividend version is more suitable for products which are 100% capital protected.
ESG is an important theme for BNP Paribas. In 2013, the French bank launched its first product linked to the Ethical Europe Equity Index, which has assets of €1bn in Belgium alone (from 47 structured products), according to SRP data, while the Ethical Europe Climate Care and Solactive Sustainable Goals Europe indices are also exclusively licensed to BNP Paribas.
"We have launched quite a few ESG indexes," said Chekroun. "We have several indices on different geographies like the Eurozone, France, and sometimes with a sub-theme within ESG, such as human capital (Solactive Human Capital World MV index)."
Chekroun also pointed that the ESG theme was found to be quite popular in the Benelux region among distributors of retail structured products. However, the bank did not have any local ESG index and that's why it decided to develop the Euronext Benelux ESG Leaders 20.
"The message here is: 'Invest locally and responsibly'," said Chekroun, adding that historically the Belgian market was more skewed on indices with low volatility and high dividend filters only.
"Synthetic dividend indices are very common in France. In Belgium they are less popular, but there are some, and we see more and more [synthetic dividend indices]. Those 'high div/low vol' indices tend to select often the same stocks, so synthetic dividend indices offer a good diversification to distributors."
Click the link to view the index rulebook for the Euronext Benelux ESG Leaders 20.
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