Consultation CAC 40 ESG

Background

Euronext would like to consult on proposed changes to the methodology of the CAC 40 ESG. The proposed changes cover the following elements of the methodology: 

• the Index Universe 
• The eligibility screening 
• The  ‘verification of the impact objectives’ 

The aim of the changes is to ensure that the Index Methodology aligns with: 

• the latest version of the Label ISR 
• the guidelines established by ESMA for use of ESG and sustainability terms in fund names 

Proposed change to the Index Universe of the CAC 40 ESG:

In order to have a wider Index Universe and to reinforce the selection principle of the Index it is proposed to change the Index Universe of the CAC 40 ESG to the SBF 120.

Current Rule: 

The Index Universe consists of the Companies included in the CAC Large 60 index; at reviews this means included after the Review Effective Date.

Proposed new Rule: 

The Index Universe consists of the Companies included in the SBF 120 index; at reviews this means included after the Review Effective Date.

Proposed changes to the eligibility screening of the CAC 40 ESG

Euronext proposes the following modifications to the eligibility screenings: 

• The selectivity of the eligibility screening step on ESG score is increased from 20% to 30%
• The threshold for the exclusion of Tobacco distribution is lowered from 10% to 5% of revenues
• A new exclusion filter on Fossil fuel upstream activities is added
• A new exclusion filter on the Carbon intensity of power generation is added, order to align with PAB exclusions.

Proposed updated activity exclusions table (new elements highlighted in yellow) : 

ESG assessment/score

• are ranked in decreasing order by ESG score, as evaluated by Moody’s ESG Solutions, i.e. Companies with better ESG score will be preferred. Note that companies not covered by Moody’s ESG Solutions are ranked lowest. 
• In case of equal ESG score, the Company with the higher Free Float Market Capitalization will rank higher.
• The bottom 30% of the Companies included in the Index Universe based on this rank are not eligible.

Proposed changes to the step ‘verification of the impact objectives’ of the CAC 40 ESG 

In order to take into account the requirements of the Label ISR on High climate impact sectors and on indicators to improve, Euronext proposes to change the step verification of the impact objectives such that the Index Composition aligns with the following 2 objectives: 

• 35% of companies (computed in number of companies) that are selected in the initial composition and included in the High Climate Impact sectors need to have a Temperature alignment score, as determined by Moody’s ESG, below or equal 2° (Paris-Aligned Companies). 
• The CAC 40 ESG aims at improving the Percentage of Paris-Aligned companies as well as the Weighted Average Carbon Footprint compared to the Index Universe. Both criteria are evaluated by Moody’s ESG Solutions Percentage of Paris Aligned companies is defined as percentage of companies in the index selection that have a temperature alignment score equal or below 2° (as evaluated by Moody’s ESG Solutions). It refers to the following Principal Adverse Impact indicator defined by SFDR: Companies without carbon emissions reduction initiatives aimed at aligning with the Paris Agreement. Weighted average Carbon Footprint is defined as Company-level Scope 1+2emission weighted by each Company’s weight in the index and then aggregated by summing.

In order to achieve the objectives the following two steps are proposed to be introduced: 

As a first step, the below new filter will be implemented: 

• Proposal: Should the percentage of Paris-Aligned companies in High Climate impact sectors be lower than 35%, companies with a temperature score higher than 2° will be ranked by ESG score. The companies with the worst ESG score will be replaced by Companies outside of the index selection with the best ESG score, that have a Temperature score below or equal to 2° and that are part of the High Climate Impact sectors. The number of companies to be replaced is computed such that at least 35% of companies in High Climate sectors have a temperature alignment below or equal to 2°.

As a second step, the below filter will be implemented : 

• Proposal: Should, either or both of the indicators be left unimproved compared to the Index Universe, the place of the worst ESG scored Company within the non-High Climate impact sectors will be vacated temporarily from the initial selection and put together with the other eligible stocks currently not in the index selection. The index selection will thus temporarily include one vacated place. This vacated place will be iteratively filled with the stocks from outside of the index selection, that is not included in a High climate impact sectors and that is eligible for inclusion, in order of ESG ranking (higher ESG ranking preferred, higher FFMC preferred in case of ESG score tie). These iterations will give rise to new versions of the index that will be checked in turn for the compliance with both impact objectives. This process is reiterated until the CAC 40 ESG index obtains a better result on both indicators. In case the iterations with one vacated place in the index are not sufficient, the worst 2 ESG scored Companies in the original selection will be vacated temporarily and put together with the other eligible stocks currently not in the index selection. The iteration will then consists of selecting a combination of 2 Companies out of a pool of 2 + number of stocks eligible outside the index. Same ESG and FFMC preference applies and process is iterative until the CAC ESG index meets the impact objectives.

Timelines:

Stakeholders will have till the 28th of June to react to the consultation. The new rules, if validated by Index Design and the Independent Supervisor of the Indices, will be implemented as of the September 2024 Review of the indices.