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The DAX 50 ESG – part of the DAX¹ family of indices – tracks the performance of large and mid-cap German companies that score strongly in sustainability terms. Accessible as an investable solution via an index ETF², it offers an opportunity to combine the dynamism of this market with a pioneering ESG bias.
June 10, 2021
Since the launch of the world-famous DAX 30 on July 1, 1988, the DAX indices have established themselves as the leading indicators of stock market trends in Europe’s largest economy. In March 2020, Deutsche Börse launched an index for sustainable investing in Germany: the DAX 50 ESG. The new index is a manifestation of the exchange’s systematic focus on global standards as well as on a raft of environmental, social, and governance (ESG) criteria.
The new DAX 50 ESG consists exclusively of securities from the HDAX, which in turn comprises stocks from the classic DAX 30, the MDAX with 60 mid-caps, and the TecDAX index of the 30 leading tech firms. The HDAX – which replaced the DAX 100 in 2018 – represents an independent universe of medium-sized and large German companies.
The constituents of the DAX 50 ESG are chosen from the roughly 100-member HDAX 50 based on their market capitalization, trading volume, and ESG score. This is done through ESG exclusion criteria, whereby failure to comply with international norms or involvement in certain undesirable business areas can lead to exclusion (see table).
| Global standards | Companies are excluded for violations of global standards such as the United Nations Global Compact (UNGC) Principles, OECD3 guidelines for multinational enterprises, and UN Guiding Principles on Business and Human Rights (UNGPs). |
| Controversial weapons |
Companies that manufacture or sell controversial weapons are excluded. |
| Tobacco |
Companies that generate sales from tobacco manufacturing are excluded |
| Coal |
Companies that generate more than 5% of revenues from coal mining or coal-fired power stations are excluded. |
| Nuclear power |
Companies that generate more than 5% of total revenues from nuclear energy (nuclear power stations, construction of power stations, distribution) are excluded. |
| Weapons |
Companies that generate more than 5% of revenues from arms manufacturing of any kind are excluded. |
A ranking list is created from the remaining stocks and takes into account market capitalization, trading volume, and ESG scores calculated by Sustainalytics. This Morningstar subsidiary is a renowned, experienced global provider of research and data-driven ESG ratings. The final index composition of the DAX 50 ESG comprises the top 50 stocks in this ranking list. The weighting of individual securities is determined based on market capitalization and, in addition, is reset to a maximum of 7% on a regular basis.
Deutsche Börse’s aim was to create an index that meets the ESG criteria of institutional and private investors alike, and that would therefore become the leading index for the ESG-compliant segment of the German equity scene, as well as a benchmark for sustainable equity investments in Germany.
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Credit Suisse Asset Management has pursued sustainable investment strategies for a number of years now4, having launched its first sustainable index fund in 2017. Today, the Index Solutions area of Credit Suisse Asset Management already manages over EUR 17 bn in 25 index funds and ETFs in the sustainability space. To this end, Credit Suisse Asset Management follows a comprehensive ESG approach that is partly based on the trend toward greater potential earnings from sustainable investments. In a highly regarded 2015 study5, Friede, Busch, and Bassen examined approximately 2,200 scientific surveys on the issue of sustainability and financial performance. Around 90% of these studies concluded that sustainability has a neutral or positive impact on financial performance. In other words, there is no conflict between good performance and sustainable business actions.
ESG compatibility goes hand in hand with good corporate governance and a sustainable, long-term understanding of strategy. Not only do institutional and private investors demand environmental awareness, the responsible use of resources, and social responsibility, but these aspects are also increasingly prescribed at a regulatory level. Offering relevant investment products is therefore crucial to a forward-looking portfolio.
The ESG bias can lead to a better balance between risk and return for ESG securities. The effects tend to be more pronounced in emerging markets than in developed markets, the reason being that ESG-compliant securities are more clearly distinguishable from the mainstream in these markets. Yet, in the German equity market, too, the effect of an improved risk/return profile for ESG stocks is clear.
It is precisely these advantages that the new DAX 50 ESG exploits. Despite the planned expansion of the DAX 30 to 40 stocks as of September 2021, the new German ESG equity barometer tracks the total market more comprehensively and on a more diversified basis regardless of the ESG exclusion criteria applied.
Credit Suisse Asset Management is one of Europe’s leading providers of index funds. Efficient, precise index replication lies at the heart its successful formula – and has done so for over 25 years. The emphasis is on physical replication, with the aim of offering investors the most transparent, cost-effective investment opportunity possible.
Tobias Locher is Client Portfolio Manager for Index Solutions at Credit Suisse Asset Management. He studied financial mathematics and is a qualified Chartered Financial Analyst (CFA), Financial Risk Manager (FRM), and Chartered Alternative Investment Analyst (CAIA).
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1 The DAX family of indicies are published by the Börse Frankfurt (Frankfurt stock exchange)
2 Exchange-traded fund.
3 Organisation for Economic Cooperation and Development
4 Further information on ESG criteria is available at credit-suisse.com/am/esg
5 Meta-study from the University of Hamburg: Bassen, Alexander; Busch, Timo; and Friede, Gunnar (2015): ESG and financial performance: aggregated evidence from more than 2000 empirical studies.
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