Euronext would like to consult on proposed changes to the methodology of the CAC 40 ESG.
In light of strategic developments at Moody’s ESG, Euronext is analysing the option of updating the methodology of the Index to use data provided by ISS-ESG.
In addition there are further changes proposed in order to align the Index methodology with the ESMA guidelines on funds’ names using ESG or sustainability-related terms. Specifically int concerns the following two changes:
Furthermore in order to simplify the weighting methodology it is proposed to change towards an optimization method instead of the current iterative approach.
If approved by the Independent Supervisor the changes to the methodology will become effective as of the March Review of the Index.
The following rule changes are proposed to be made to the CAC 40 ESG in order to transition to ISS-ESG as a data provider. The proposal aims at replacing the current step in the methodology with the corresponding data point by ISS-ESG. It concerns changes to the:
The following change is proposed to the continuous eligibility screening:
Current Rule:
Companies with active critical controversies related to UNGC as determined by Moody’s ESG Solutions are not eligible for the index. Each critical controversy remains active for 2 years or until Moody’s ESG Solutions analysis flags it as inactive or downgrades the severity, whichever occurs first. A Company with an active critical controversy cannot be included in the index during this period. Reference date to assess the 2 years period corresponds to the first announcement date of the critical controversy identified by Moody’s ESG Solutions.
Proposed new Rule:
Companies flagged as 'RED' by ISS are excluded.
Each controversy monitored by ISS remains active as long as there are updates on significant developments. If there is no new information for 3 years, the controversy severity is downgraded to 'AMBER'.
The following changes are proposed to the eligibility screening at reviews.
ESG assessment/score
New proposed rule
Activity exclusions
The following changes are made to the activity exclusions following the change to ISS-ESG as the data provider. Updated points are highlighted in
Current rule:
Companies that breach any of the following thresholds are not eligible. Note that companies not covered by Moody’s ESG Solutions are not eligible as well.
Exclusion type
Description
Revenues
>0%
≥10%
≥5%
Proposed new rule:
Companies that breach any of the following thresholds are not eligible. Note that companies not covered by ISS-ESG are also not eligible.
Companies flagged as “RED” or “AMBER” as determined by ISS are excluded.
A ‘RED’ flag refers to a verified involvement in any of the following activities: Development, production, acquisition, stockpiling, retention, transfer of controversial weapons, assistance in any of these activities
A ‘AMBER’ flag refers to either:
Companies for which there is an imminent involvement, due to imminent Merger & Acquisition operations, or strong indications about an involvement in controversial weapons, key components or equipment enabling the use of controversial weapons
The filter on controversial weapons from ISS cover the following weapons:
biological weapons, chemical weapons, incendiary weapons, depleted uranium, white phosphorus, Anti-Personnel Landmines, cluster munitions.
The following change will be made to the selection ranking rule:
The eligible Companies are ranked by decreasing order on the ESG score as assigned by Moody’s ESG Solutions. In case of an equal score the Company that is already included in the index ranks better. In case of equal ranking, the Company with the highest free float market capitalization will rank higher.
Proposed Updated rule:
The eligible Companies are ranked by decreasing order on the ESG Performance score as assigned by ISS-ESG. In case of an equal score the Company that is already included in the index ranks better. In case of equal ranking, the Company with the highest free float market capitalization will rank higher.
In order to align the index to the fund naming criteria it is proposed to add two additional criteria to the eligibility screening at reviews based on ISS-ESG data:
The method for ensuring compliance with the impact objectives will be adjusted such that it is achieved with an optimization of the weighting method.
As a result the following rule is removed:
Final selection: verification of the impact objectives
The CAC 40 ESG aims at improving the Green-to-Brown ratio as well as the Weighted Average Carbon Footprint compared to the Index Universe. Both criteria are evaluated by Moody’s ESG Solutions.
Green-to-Brown ratio is defined as Company level weighted aggregation of Company revenue percentage related to green products and services (as evaluated by Moody’s ESG Solutions) divided by Company level weighted aggregation of Company revenue percentage related to brown products and services (as evaluated by Moody’s ESG Solutions). The weight is equal to the Company’s weight in the index.
Weighted average Carbon Footprint is defined as Company-level Scope 1+2 emission weighted by each Company’s weight in the index and then aggregated by summing.
Should, either or both of the indicators be left unimproved compared to the Index Universe, the place of the worst ESG scored Company 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 consists of 39 Companies and one vacated place. This vacated place will be iteratively filled with the stocks from outside of the index selection that are eligible for inclusion, in order of ESG ranking (higher ESG ranking preferred, higher FFMC preferred in case of ESG score tie). These iteration will give rise to new versions of the indices 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.
Example:
Initial CAC ESG index composed of 40 Companies, 4 other Companies are eligible but outside of the index due to initial ranking.
Iterations with vacating of 1 place and 2 places did not yield the impact objectives target, therefore iterations will now be done with 3 vacated places. The worst 3 ESG-ranked stocks in the initial 40 Companies in CAC ESG are put together with the 4 Companies that were initially eligible but outside of the index. The exercise will thus be to select a combination of 3 stocks out of 7 (3 + 4). Combinations with higher ESG scored-companies continue to be preferred.
It will be replaced by the following rule change on the Periodical weighting update:
Capping Factor
A Capping Factor is calculated based on the Review Weightings Announcement Date such that the Companies included in the index have a maximum weight of 10%.
A Capping Factor is calculated based on the Review Weightings Announcement Date such that the Companies included in the index have a maximum weight of 10%, and the Index complies with the impact objectives with the following methodology.
The CAC 40 ESG aims at improving the Green-to-Brown ratio as well as the Weighted Average Carbon Footprint compared to the Index Universe. Both criteria are evaluated by ISS-ESG Solutions.
Green-to-brown ratio is defined as Company level weighted aggregation of Company revenue percentage derived from products or services with significant or limited contribution to SDG 13 Climate Action, divided by Company level weighted aggregation of Company revenue percentage derived from products or services with significant or limited obstruction to SDG 13 Climate Action. The weight is equal to the Company’s weight in the index.
A capping factor is calculated using an optimization method that satisfies the following objective function:
With:
The constraints imposed are the following (unchanged compared to current methodology):
Stakeholders will have till 31 December 2024 to react to the consultation. The new rules, if validated by Index Design and the Independent Supervisor of the Index, will be implemented as of the March 2025 Review of the Index.
Please visit euronext.com/privacy-statement to learn how we collect and process your personal data and how can exercise your GDPR rights in accordance with the “Data Subject Rights Request Information Procedure".