- ESG Focus: Screens out companies with negative ESG impacts (e.g., fossil fuels, controversial weapons).
- Enhanced ESG Performance: Offers similar risk/return characteristics to the FTSE MIB but with improved ESG metrics.
- Broad Market Coverage: Uses fixed tilt strengths to maintain alignment with the original index and broad market investability.
Blank sheet or new take on an old idea?
Using a blank sheet of paper approach, one type of sustainable investment index sets constituent weights according to a specific goal.
For example, this could be a wish to account for the risks and opportunities associated with the transition to a low-carbon economy.
Such blank-sheet sustainable indices are increasingly popular across asset classes. But many investors interested in sustainability are already using brand-name indices as benchmarks or as performance targets in index funds and ETFs.
While wanting to make their portfolio more ESG-friendly, they usually prefer not to depart too radically from the starting index weights at the same time.
Here, the FTSE ESG Risk-Adjusted index series can help. It includes ESG versions of well-known national equity market indices: the FTSE 100 ESG Risk-Adjusted index and the Russell 1000 ESG Risk-Adjusted index are examples.
In November 2024 we are extending this index family with the launch of an ESG version of the popular FTSE MIB index. The FTSE MIB, which contains 40 large-cap stocks and represents around 80% by weight of the whole Italian equity market, celebrated its 15th anniversary this year.
We believe the new FTSE MIB ESG Risk-Adjusted index stands out from its competitors through a sophisticated but intuitive methodology that is designed to enhance ESG and carbon performance vis-à-vis the parent index..
Building the FTSE MIB ESG Risk-Adjusted index
It screens out undesirable products, services and conduct
Starting with the 40-stock FTSE MIB, we screen out companies involved in controversial weapons, tobacco, thermal coal (extraction and energy generation), oil sands, shale energy and Arctic exploration.
We also exclude companies that are deemed to be non-compliant with the United Nations Global Compact principles (which cover human rights, labour, the environment and anti-corruption).
It tilts the parent index’s weights to reflect ESG and carbon risks
Tilting the parent index’s constituent weights towards desired ESG and carbon performance (and away from undesirable performance) is a powerful, mathematically robust and flexible methodology in sustainable investment index design.
In the FTSE MIB ESG Risk-Adjusted index we apply three tilts simultaneously:
- A tilt away from fossil fuel reserves by comparison with the parent index;
- A tilt away from carbon emissions intensity by comparison with the parent index;
- A tilt towards an ESG score uplift by comparison with the benchmark.
FTSE Russell’s ESG scores and data model allows investors to understand a company’s exposure to (and management of) ESG issues in multiple dimensions.
In aggregate, these tilts incentivise improvements at the company level in both ESG and carbon performance. In turn, this should result in improved ESG and carbon performance at the index level as well over time.
Competing Italian ESG equity indices often use a less sophisticated rank-and-select approach or a screening approach to select their constituents.
It is constructed to ensure broad market coverage
We use fixed, rather than variable tilt strengths, together with industry and stock weight constraints, to ensure that the FTSE MIB ESG Risk-Adjusted index remains broad and investible.
(Many factor indices, including other indices within the FTSE ESG Risk-Adjusted index series, are constructed using variable tilt strengths, which in turn generate a particular target level of factor exposure.
However, given the limited size of the starting equity universe—the 40 stocks in the FTSE MIB—our pre-launch research indicated that a fixed tilt approach was the better choice for this particular index’s design, since it ensured broader market coverage.)
It has similar risk/return characteristics to the parent index
A recent back-test showed that the FTSE MIB ESG Risk-Adjusted index has broadly similar overall risk and return characteristics to those of the parent index (in fact, the back-test showed an improvement in past returns and slightly higher volatility for the ESG Risk-Adjusted index, with a tracking error of 2.26% versus the capitalization-weighted FTSE MIB).
| Index | Return p.a. (%) | Volatility p.a. (%) | Tracking Error (%) |
|---|---|---|---|
| FTSE MIB | 12.97 | 20.13 | - |
| FTSE MIB ESG Risk-Adjusted | 15.06 | 21 | 2.26 |
Source: FTSE Russell, data from 30 June 2016 to 30 June 2024. Past performance is not a reliable guide to future returns. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched.
Why use the FTSE MIB ESG Risk-Adjusted index?
Increasingly investors want to incorporate sustainable investment considerations within a broad market portfolio without impacting the risk and return characteristics of that mainstream benchmark.
Our clients, especially those in Italy, have long been requesting a MIB market index that retains the look and feel of the underlying FTSE benchmark, but which is weighted with ESG considerations in mind.
The FTSE MIB ESG Risk-Adjusted can be used by market participants to benchmark the performance of Italian equity funds, in the creation of ETFs, structured products and index-based derivatives, and as an ESG alternative for market capitalisation-weighted Italian passive equity mandates and model portfolios.
Disclaimer
© 2024 London Stock Exchange Group plc and its applicable group undertakings (“LSEG”). LSEG includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) FTSE Fixed Income Europe Limited (“FTSE FI Europe”), (5) FTSE Fixed Income LLC (“FTSE FI”), (6) FTSE (Beijing) Consulting Limited (“WOFE”) (7) Refinitiv Benchmark Services (UK) Limited (“RBSL”), (8) Refinitiv Limited (“RL”) and (9) Beyond Ratings S.A.S. (“BR”). All rights reserved.
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