Executive Summary
Sustainable development key performance indicators (SD-KPIs) are made up of various relevant environmental, social and governance (ESG) indicators. The SD-KPI standards define the most important SD-KPIs for 68 different industries. The SD-KPIs have been defined by SD-M GmbH since 2007, as mandated by the German federal government. The current SD-KPI Standard 2016-2021 is the first global standard for sector-specific and material ESG indicators and is supported by the U.S. Sustainability Accounting Standards Board (SASB). The SD-KPI Standard 2016-2021 has been included in the Federal Financial Supervisory Authority (BaFin) Guidance Notice on Dealing with Sustainability Risks for handling ESG-related risks as an external sustainability standard. Further, the SD-KPI Standard 2016-2021 has been recommended in the guidelines of the 2020 German Sustainability Code (DNK), which allows companies to demonstrate to investors and consumers their commitment to sustainability in a way that is transparent, comparable and thus clear.
The constituent weights of the established iBoxx € Corporates are adjusted based on the SD-KPIntegration® score to create the iBoxx SD-KPI EUR Corporates. The iBoxx SD-KPI EUR Corporates is designed to reflect the performance of EUR-denominated investment grade corporate debt. The index aims to offer a broad coverage of the EUR corporate bond universe with adjusted weights, by allocating higher weights to issuers with higher SD-KPIntegration scores and reducing weights for those with lower scores. The index aims to uphold minimum standards of investability and liquidity and showed a higher total return than the iBoxx € Corporates in the long term. The iBoxx SD-KPI EUR Corporates is further broken down into two subindices based on financial or non-financial corporate sectors. The iBoxx SD-KPI EUR Corporates had an improved risk-adjusted total return compared with the iBoxx € Corporates over the full index history.
Contextual Background
Investing sustainably and ESG integration need not be at odds with achieving an adequate risk/return ratio. While some may argue otherwise, sustainable investing and financial returns can be in harmony. However, there is still an ongoing debate on whether and to what extent the consideration of sustainability criteria affect investment performance. Nonetheless, it is important for asset owners, managers and financial advisors to apply relevant sustainability indicators, which can significantly affect the performance of financial investments, in compliance with EU regulations. Several macroeconomic factors such as persistent inflation, rising interest rates, a looming recession and political uncertainties are weighing on tactical allocation decisions for many stakeholders.
The COVID-19 crisis has shown a transition path to a circular, productivity-increasing, inclusive and clean economy that can be accelerated through a green economic recovery. This will be essential to create a more resilient economy and sustainable returns. Like investors, consumers are also demanding more corporate social responsibility in the current crisis. This underlines the growing importance of the three-pillar principle, the balance between social, ecological and economic goals. When it came to the publicly funded rescue packages to mitigate the economic impact of the COVID-19 crisis, sustainability was initially given little consideration globally. But there was increasing pressure on governments from different parties to combine stimulus packages with a green recovery. One example is the group of 178 investors who wrote a letter to the EU heads of state and government calling for sustainable reconstruction. In total, they manage over USD 103 trillion in assets. The fact that the demands of consumers and investors have been successful can be seen, for example, in companies such as Microsoft, BP and Shell, which are shifting directions to align themselves with the goals of the Paris Agreement. Politicians are also waking up to this trend. At the European level, the Green Deal was passed, and Germany and France passed low-carbon economic stimulus packages to tackle the COVID-19 crisis.
