esg trend leaders - esg... · scoring explained. 1. combined esg score: using the msci world...

This document is for the exclusive use of investors acting on their own account and categorised either as “eligible counterparties” or “professional clients” within the meaning of markets in financial instruments directive 2004/39/ce

Lyxor's ESG Trend Leaders ETFs

ESG Trend Leaders

Embrace ESG August 2018

Leaders, not followers

Our ESG investment platform is founded on two pillars. The first – unique to Lyxor - is made up of four thematic funds designed for investors seeking to make a tangible and specific impact. The second is made up of four newly-launched ESG Trend Leaders, developed by MSCI.

We chose MSCI because their expertise in ESG data gathering and scoring is second to none. They’ve been collecting, cleaning and standardising data on ESG policies, programmes and performance for over 40 years. Using over 1,000 data points from a wide range of public sources, their dedicated ESG team covers approximately 6,400 companies, giving each their own rating.

Why MSCI? A step furtherUsing this data, MSCI built broad ESG indices capable of isolating the best-in-class stocks in each sector. This approach selects companies with the highest scores. Our Trend Leaders go one better by identifying companies with the right ESG profile and then taking into account how that rating changes over time. Those companies striving to improve their ratings are awarded higher scores, meaning they are more likely to be selected.

We know investors are concerned about the kinds of companies they hold in their portfolio, so these indices automatically exclude companies involved in activities with a high potential for negative social and/or environmental impact, including Alcohol, Tobacco, Gambling, Nuclear power and weapons manufacturers. They also exclude companies involved in severe controversies and companies having the lowest ESG rating.

Passive ActivismThe way the indices are composed means we are effectively making positive and active stock picks, which should motivate companies under consideration to improve their ESG ratings and attract investment. The portfolios do differ from their parent indices as the World Trend Leaders example later shows, albeit the top 10 holdings still include familiar names like Microsoft and Total. They are also much more diverse than their conventional MSCI SRI counterparts, with each of the indices holding at least twice the stocks (as at end February 2018).

And this form of passive activism works – MSCI data shows rewarding ESG momentum can potentially improve company performance more than excluding or just tilting weightings towards those companies with the best score.*

In summary, we: ► Select the ESG leaders striving to stay ahead

► Exclude negative ESG companies

► Are twice as diverse as conventional SRI indices

ESG experts

+40yrs experience

~6,400 companies

+1,000 data points

All data: Lyxor International Asset Management, MSCI, as at 30 March 2018.*Source: Lyxor International Asset Management, MSCI, Bloomberg. Data as at 30 April 2018. Past performance is not a reliable indicator of future results.

All data: Lyxor International Asset Management & MSCI, 30 January 2018.

ESG Trend Leaders – Leaders, not followers

Scoring explained1. Combined ESG score:

Using the MSCI World example, each company in the Index is assigned a combined ESG score, which is calculated by taking into account its ESG rating (on a scale from “AAA” to “CCC”) and the Trend of that rating – the change witnessed from one period of assessment to another.

The ESG rating score assesses a company’s ability to reduce its contributions to an external ‘key issue’ in its industry or environment, and its ability to internalise the associated costs.

Each company’s rating is reviewed under 5-8 Industry specific ‘key issues’ as defined by MSCI. They cover three pillars (Environment, Social & Governance) and are scored from 0 to 10 (10 being best in class).

3 pillars 10 themes 37 ESG Key Issues

Environment

Climate ChangeCarbon Emissions

Product Carbon Footprint

Financing Environmental Impact

Climate Change Vulnerability

Natural ResourcesWater Stress

Biodiversity & Land Use

Raw Material Sourcing

Pollution & WasteToxic Emissions & Waste

Packaging, Materials & Waste

Electronic Waste

Environmental OpportunitiesOpportunities in Clean Tech

Opportunities in Green Building

Opportunities in Renewable Energy

Social

Human CapitalLabour Management

Health & Safety

Human Capital Development

Supply Chain Labour Standards

Product Liability

Product Safety & Quality

Chemical Safety

Financial Product Safety

Privacy & Data Security

Responsible Investment

Health & Demographic Risk

Stakeholder Opposition Controversial Sourcing

Social OpportunitiesAccess to Communications

Access to Finance

Access to Health Care

Opportunities in Nutrition & Health

Governance

Corporate Governance Board Ownership

Corporate Behaviour

Pay

Business Ethics

Anti-Competitive Practices

Tax Transparency

Accounting

Corruption & Instability

Financial System Instability

Index construction: From eligibility to selection

An “eligible” universe is constructed by first excluding some companies from an “applicable” universe like the 1,600 stocks in the MSCI World Index. Certain companies are automatically ineligible because their activities – alcohol, gambling or weapons manufacture for example – could have negative social and/or environmental effects.

What’s left is then filtered to exclude companies which fail to achieve a high enough ESG score and those which have the worst ratings on norm-based ESG controversies including labour or human rights, environmental impact and governance.

All data: Lyxor International Asset Management, MSCI, as at 30 March 2018.

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A company’s trend score increases when its rating is upgraded, falls when its score is downgraded and won’t move if there is no change. Securities with a score of less than 0.75 are excluded (unless they are an existing index constituent, where the limit is 0.625). The table below explains how ESG and trend scores are calculated:

Ratings

Rating group Rating Category Rating score

1 AAA 2

2 AA 2

3 A 1

4 BBB 1

5 BB 1

6 B 0.5

7 CCC 0.5

Trends

Trend group 1 2 3

Trend Upgrade Neutral Downgrade

Trend score 1.25 1 0.75

2. ESG controversy scores

Eligible companies are scored for their exposures to “norm-based” controversies as defined by the UN Declaration of Human rights and the Global Compact among others. Each company receives a score between 0 and 10 based on the scale of its exposures to these controversies (“very severe” to “minor”, “non-structural” or “structural”) and whether these exposures are still ongoing or concluded. Securities with an ESG controversy score of less than 2 are excluded (0 if the security is an existing constituent of the index).

3. Industry-relative ESG score

Where two companies in the same sector achieve the same combined ESG score, the company with the better industry-relative score is given preference.

Leaders

Neutral

Laggards

This is next generation ESG investing for those wanting to make a broader, positive contribution to society

Francois Millet, Head of ETF & Index Product Development


Building an IndexTo reduce biases, the MSCI World select ESG Rating and Trend Leaders indices are an aggregate of regional developed markets indices.

For each sector and regional market, eligible constituents are ranked and selected until a sector market coverage target of 50% of the parent index is reached; the minimum coverage target is 45%. The process follows a set order:

► Securities in the top 35% ► Securities in the top 50% having a combined ESG score

of 2 or 1.5 ► Current index constituents in the top 65% ► Remaining securities in the eligible universe.

For each sector, eligible securities in the parent index are first ranked based on their combined ESG scores and then by decreasing free-float market capitalisation. A 15% cap is applied on security weights. In the case of our World product, this leads to a portfolio of around 880 stocks.

2. How index constituents compare1

APAC

2.29%

Europe North America Other

0.82%

(3.45)%

0.33%

Index Characteristics

MSCI World Select ESG Rating & Trend Leaders

MSCI World

Number of Constituents

883 1,648

Weight (%)

Largest 3.86 2.21

Smallest 0.01 0.00

Average 0.11 0.06

Median 0.06 0.03

Top 10 constituents for MSCI World ESG Trend Leaders vs parent index weighting

CountryIndex

Wt. (%)Parent Index

Wt. (%) Sector

Microsoft Corp. US 3.86 1.71 Info Tech

Facebook A US 2.31 1.02 Info Tech

Alphabet C US 1.8 0.8 Info Tech

Intel Corp US 1.36 0.6 Info Tech

Procter & Gamble Co

US 1.03 0.46 Cons Staples

Coca Cola (The) US 0.98 0.44 Cons Staples

Toyota Motor Corp JP 0.96 0.43 Cons Disc

Abbvie US 0.87 0.38 Health Care

Total FR 0.86 0.38 Energy

Pepsico US 0.81 0.36 Cons Staples

Total 14.84 6.58

1Source: Lyxor International AM, MSCI, Bloomberg. Data as at 30 March 2018

1. How regional exposures compare1

MSCI World ESG Trend Leaders vs. parent index

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Case study: Index eligibility and inclusion assessment

In the selection process companies are ranked from highest to lowest combined score until 50% cumulative market cap is reached.

Company A Company B

Fresenius BMW

ESG Rating BBB A

ESG Rating Score (a) 1 (Neutral) 1 (Neutral)

Trend Score (b) 1.25 (Upgrade) 0.75 (Downgrade)

Combined Score (a) * (b) 1.25 0.75

Index Inclusion

MSCI ESG Trend leaders Yes No

MSCI ESG leaders No Yes

CommentUpgrade on Trend &

in the industry’s top 50% Downgrade on Trend,

not in the industry’s top 50%

Source: Lyxor International AM, MSCI, for illustrative purposes only.


Portfolio construction

Starting universe1,600 stocks in

MSCI World

Starting universe

Selection Process

Final Portfolio

Selection Process

ESG rating

Ranking stocks by specific key

issues scores

Combined ESG score

Business-based exclusions

No weapons, alcohol, tobacco, gambling nor

nuclear power

ESG controversies-

based exclusions

How wellcompanies adhere to

internationalnorms

ESG rating trend score

Rewarding the companies striving

to do better

Final Portfolio

Top 50% ranked by combined ESG score per sectorAnnual

selectionQuarterly eligibility

review

c. 880 stocks

Industry-relative ESG score

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Does it work?

Similar performance and a positive contribution to society

Net Total Return at April 30th, 2018 1yr 5yr (annualised)

MSCI ESG Trend Leaders World 14.02% 9.35%

MSCI World 13.22% 9.27%

MSCI World SRI 14.92% 9.16%

MSCI World SRI 5% Capped 14.72% 9.12%

MSCI ESG Trend Leaders EM 22.70% 7.55%

MSCI EM 21.71% 4.74%

MSCI EM SRI 18.63% 5.68%

MSCI EM SRI 5% Capped 18.14% 5.00% (GTR)*

MSCI ESG Trend Leaders EMU 5.31% 10.84%

MSCI EMU 4.66% 10.76%

MSCI EMU SRI 7.97% 11.84%

MSCI EMU SRI 5% Capped 7.89% 12.10%

MSCI ESG Trend Leaders USA 12.79% 11.69%

MSCI USA 12.61% 12.18%

MSCI USA SRI 16.46% 11.86%

MSCI USA SRI 5% Capped 15.13% 11.64%

MSCI World Select ESG Rating and Trend Leaders relative performance to MSCI World

Source: Lyxor International AM, MSCI, Bloomberg, Data as at 30 April 2018.Past performance is not a reliable indicator of future results. *Extrapolated NTR is 4.57%.

(1.50)%Mar-2015 Oct-2015 May-2016 Mar-2018Aug-2017Jan-2017

(1.00)%

(0.50)%

0.50%

0.00%

1.00%

1.50%

Base 100 = 27-Feb-2015

MSCI World Select ESG Rating and Trend Leaders - MSCI World performance


A look under the hood

So how does a Trend Leader index compare to its parent in practise? Again using the World product as an example, you can see some differences emerging, albeit the discrepancies aren’t too significant:

1Source: Lyxor International AM, MSCI, Bloomberg, Data as at 30 April 2018.Past results are not a reliable indicator of future results.

1. How ESG ratings compare From leaders to laggards – MSCI World ESG Trend Leaders vs. parent index1

2. How sector exposures look MSCI World ESG Trend Leaders vs. parent index

LEADER AVERAGE LAGGARD

17%

24%

ESG rating breakdown (% of total universe)

24%21%

15%

9%

16%

24%22%

19%

8%

3%

AAA AA A BBB BB B CCCMSCI World ESG Trend Leaders MSCI World

AAA A BBB BB B CCCAA

ConsumerDiscretionary

(0.62)%

ConsumerStaples

Energy Financials HealthCare

Industrials InformationTechnology

Materials Telecom.Services

UtilitiesRealEstate

(0.70)%

(1.98)%

2.30%

(2.08)%

1.35%

2.80%

0.83%

(0.74)%

0.26%

(0.69)%

Both MSCI ESG Trend leaders and MSCI ESG Leaders indices are based on a top 50% best-in-class selection. However, ESG Leaders only takes the ESG rating into account, while the ESG Trend Leaders indices take both ratings and trends into account. Therefore, stocks can be:

► excluded from ESG Trend Leaders indices due to negative trend score ► added to ESG Trend Leaders because of a positive ESG Trend

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Source: Lyxor International AM, MSCI. Data as at 19 June 2018

MSCI ESG Trend Leaders vs. MSCI ESG Leaders: Overlap and differences

EMU

MSCI EMU ESG Trend Leaders

# stocks 141

# stocks not part of ESG Leaders 45

% stocks not part of ESG Leaders 31.9%

Weight of stocks not part of ESG Leaders 19.2%

Overlap 73.5%

Overweights 7.4%

100.0%

USA

MSCI USA ESG Trend Leaders

# stocks 352




Overlap 81.5%

Overweights 12.0%

100.0%

World

MSCI WORLD ESG Trend Leaders

# stocks 901




Overlap 77.8%

Overweights 8.6%

100.0%

MSCI EMU ESG Leaders

# stocks 120

# stocks not part of ESG Trend Leaders 24

% stocks not part of ESG Trend Leaders 20.0%

Weight of stocks not part of ESG Trend Leaders 26.5%

Overlap 73.5%

Overweights –

100.0%

MSCI USA ESG Leaders

# stocks 349




Overlap 81.5%

Overweights 0.1%

100.0%

MSCI WORLD ESG Leaders

# stocks 846




Overlap 77.8%

Overweights 0.2%

100.0%


How ESG metrics compare1

1Data as at 29 Dec 2017. Source: Lyxor International AM, MSCI.Past results are not a reliable indicator of future results.

MSCI World IndexMSCI World Select ESG Rating and

Trend Leaders Index

Key Integration Metrics

ESG Score 5.7 6.7

ESG Leaders (AAA-AA) (%) 24.1 39.0

ESG Laggards (B-CCC) (%) 12.4 0.3

ESG Trend Positive (%) 17.9 20.7

ESG Trend Negative (%) 7.4 3.6

ESG Pillars

Environmental Score 5.5 6.0

Social Score 4.6 5.1

Governance Score 4.8 5.2

Key Governance Metrics

Lack of Independent Board Majority (%) 10.2 11.4

Deviation from One Share One Vote (%) 22.8 20.7

No Female Directors (%) 5.5 5.9

Values

Tobacco Producers (%) 1.3 0.0

Ties to Controversial Weapons (%) 0.8 0.0

Global Compact Compliance Violation or Watch List (%) 13.3 0.0

Red Flag Controversies (%) 3.4 0.0

Orange Flag Controversies (%) 27.6 1.7

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Take a stand with our ESG Trend Leaders

Why choose Lyxor?

1Source: Lyxor International Asset Management, TERs as at 10 May 2018

UCITS ETF Replication type Main BBG ticker Available trading currencies TER

Lyxor MSCI EMU ESG Trend Leaders (DR) Physical LESE, EESG EUR 0.20%

Lyxor MSCI USA ESG Trend Leaders (DR) Physical LESU, EESG USD 0.25%

Lyxor MSCI World ESG Trend Leaders (DR) Physical LESW, EESG USD 0.30%

Lyxor MSCI EM ESG Trend Leaders Synthetic LESG, MESG USD 0.30%

Investing in ESG standard setters

Far reaching World, EMU, US and Emerging exposures available

CommittedWe have been a signatory of the Principles for Responsible Investment (PRI) since December 2014

DependableStock selection based on MSCI’s 40+ years of ESG expertise

ActiveWe vote frequently on corporate governance issues and engage in direct dialogue with companies

UniqueFirst ESG ETFs in the market to include ESG trend scores

UniqueWe are the only provider in Europe offering ETFs on four of the UN’s Sustainable Development Goals

ESG friendly Companies from sectors with a negative ESG impact excluded

TransparentWe publish the estimated carbon footprint of all our equity ETFs on our website

+40yrs

All data: Lyxor International Asset Management & MSCI, 30 January 2018.


Knowing your risk

It is important for potential investors to evaluate the general risks described below and in the fund prospectus on our website www.lyxoretf.com

Capital at risk ETFs are tracking instruments: Their risk profile is similar to a direct investment in the Underlying index. Investors’ capital is fully at risk and investors may not get back the amount originally invested.

Replication riskThe fund objectives might not be reached due to unexpected events on the underlying markets which will impact the index calculation and the efficient fund replication.

Counterparty riskWith synthetic ETFs, investors are exposed to risks resulting from the use of an OTC swap with Société Générale. In-line with UCITS guidelines, the exposure to Société Générale cannot exceed 10% of the total fund assets. Physically replicated ETFs may have counterparty risk if they use a securities lending programme.

Underlying riskThe Underlying index of a Lyxor ETF may be complex and volatile. For example, when investing in commodities, the Underlying index is calculated with reference to commodity futures contracts exposing the investor to a liquidity risk linked to costs such as cost of carry and transportation. ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks.

Currency riskETFs may be exposed to currency risk if the ETF is denominated in a currency different to that of the Underlying index they are tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns.

Liquidity risk Liquidity is provided by registered market-makers on the respective stock exchange where the ETF is listed, including Société Générale. On exchange, liquidity may be limited as a result of a suspension in the underlying market represented by the Underlying index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, or other market-maker systems; or an abnormal trading situation or event.


Important information This communication is exclusively directed and available to Institutional Investors as defined by the 2004/39/EC Directive on markets in financial instruments acting for their own account and categorised as eligible counterparties or professional clients. This communication is not directed at retail clients.

This document is issued by Lyxor International Asset Management (LIAM), a French management company authorized by the Autorité des marchés financiers and placed under the regulations of the UCITS (2009/65/EC) and AIFM (2011/61/EU) Directives. Société Générale is a French credit institution (bank) authorised by the Autorité de contrôle prudentiel et de résolution (the French Prudential Control Authority).

Some of the funds described in this brochure are investment companies with Variable Capital (SICAV) incorporated under Luxembourg Law, listed on the official list of Undertakings for Collective Investment, authorised under Part I of the Luxembourg Law of 17th December 2010 (the “2010 Law”) on Undertakings for Collective Investment in accordance with provisions of the Directive 2009/65/EC (the “2009 Directive”) and subject to the supervision of the Commission de Surveillance du Secteur Financier (CSSF).

These funds are sub-funds of either Multi Units Luxembourg or Lyxor Index Fund and have been approved by the CSSF.

Alternatively, some of the funds described in this document are sub-funds of Multi Units France a French SICAV incorporated under the French Law and approved by the French Autorité des marchés financiers. Each fund complies with the UCITS Directive (2009/65/CE), and has been approved by the French Autorité des marchés financiers.

Société Générale and Lyxor AM recommend that investors read carefully the “risk factors” section of the product’s prospectus and Key Investor Information Document (KIID). The prospectus and the KIID are available in French on the website of the AMF (www.amf-france.org). The prospectus in English and the KIID in the relevant local language (for all the countries referred to, in this document as a country in which a public offer of the product is authorised) are available free of charge on lyxoretf.com or upon request to [email protected]

The products are the object of market-making contracts, the purpose of which is to ensure the liquidity of the products on NYSE Euronext Paris, Deutsche Boerse (Xetra) and the London Stock Exchange, assuming normal market conditions and normally functioning computer systems. Units of a specific UCITS ETF managed by an asset manager and purchased on the secondary market cannot usually be sold directly back to the asset manager itself. Investors must buy and sell units on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units and may receive less than the current net asset value when selling them.

Updated composition of the product’s investment portfolio is available on www. lyxoretf.com. In addition, the indicative net asset value is published on the Reuters and Bloomberg pages of the product, and might also be mentioned on the websites of the stock exchanges where the product is listed.

Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice. It is each investor’s responsibility to ascertain that it is authorised to subscribe, or invest into this product.

This document together with the prospectus and/or more generally any information or documents with respect to or in connection with the Fund does not constitute an offer for sale or solicitation of an offer for sale in any jurisdiction (i) in which such offer or solicitation is not authorized, (ii) in which the person making such offer or solicitation is not qualified to do so, or (iii) to any person to whom it is unlawful to make such offer or solicitation. In addition, the shares are not registered under the U.S Securities Act of 1933 and may not be directly or indirectly offered or sold in the United States (including its territories or possessions) or to or for the benefit of a U.S Person (being a “United State Person” within the meaning of Regulation S under the Securities Act of 1933 of the United States, as amended, and/or any person not included in the definition of “Non-United States Person” within the meaning of Section 4.7 (a) (1) (iv) of the rules of the U.S. Commodity Futures Trading Commission). No U.S federal or state securities commission has reviewed or approved this document and more generally any documents with respect to or in connection with the fund. Any representation to the contrary is a criminal offence.

This document is of a commercial nature and not of a regulatory nature. This document does not constitute an offer, or an invitation to make an offer, from Société Générale, Lyxor Asset Management (together with its affiliates, Lyxor AM) or any of their respective subsidiaries to purchase or sell the product referred to herein.

These funds include a risk of capital loss. The redemption value of this fund may be less than the amount initially invested. The value of this fund can go down as well as up and the return upon the investment will therefore necessarily be variable. In a worst case scenario, investors could sustain the loss of their entire investment.

This document is confidential and may be neither communicated to any third party (with the exception of external advisors on the condition that they themselves respect this confidentiality undertaking) nor copied in whole or in part, without the prior written consent of Lyxor AM or Société Générale. The obtaining of the tax advantages or treatments defined in this document (as the case may be) depends on each investor’s particular tax status, the jurisdiction from which it invests as well as applicable laws. This tax treatment can be modified at any time. We recommend to investors who wish to obtain further information on their tax status that they seek assistance from their tax advisor. The attention of the investor is drawn to the fact that the net asset value stated in this document (as the case may be) cannot be used as a basis for subscriptions and/or redemptions.

The market information displayed in this document is based on data at a given moment and may change from time to time.

Authorizations: Lyxor International Asset Management (Lyxor AM) is a French management company authorized by the Autorité des marchés financiers and placed under the regulations of the UCITS (2009/65/EC) and AIFM (2011/61/EU) Directives.

Société Générale is a French credit institution (bank) authorised by the Autorité de contrôle prudentiel et de résolution (the French Prudential Control Authority.

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esg trend leaders - esg... · scoring explained. 1. combined esg score: using the msci world...

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