February 2022

Client engagement | Client story

Investing sustainably
with a custom credit
index“Our investments and investment policies should align with the norms andvalues of our beneficiaries, while also reflecting their preferences. They should
also reflect our role as asset owner and a good steward of assets.”“The other main driver is our belief that responsible investment contributes tolong-term value creation. We believe by taking ESG-factors into account, we cancontribute to better investment results.”– Pensioenfonds Detailhandel, Responsible Investment Policy Statement, September 2021

About the client
ProfileObjectives

Solution

The client, Pensioenfonds Detailhandel,
wished to tilt its credit portfolio’s
investment policy towards the United
Nations’ Sustainable Development Goals(SDGs).

To align the credit portfolio with four
SDGs: decent work and economicgrowth; responsible consumption andproduction; climate action; peace,justice and strong institutions.

The FTSE EuroBIG ex-Sovereigns
SDG benchmark is a custom index ofcorporate, sub-sovereign and coveredbonds, designed to integrate thedesired SDGs.

Client engagement | Client story

Extending sustainable investment tocredit: an innovative approach to fixedincome indicesPensioenfonds Detailhandel is one of the Netherlands’ largest pension funds and asignatory to the Principles for Responsible Investment (PRI). In 2019, Detailhandelchose an innovative equity benchmark, the FTSE Custom Developed ex Korea
SDG Aligned index, to help align its developed equity portfolio with four of theUnited Nations’ (UN) Sustainable Development Goals (SDGs). In 2020,
Detailhandel extended this approach by investing in a new fund tracking a newFTSE Russell emerging market equity SDG index.

A custom credit index
Launched in 2021, the FTSE EuroBIG
ex-Sovereigns SDG benchmark is acustom index of corporate, subsovereign and covered bonds,
designed to integrate the desiredSDGs.

In 2021, Detailhandel went a step further by deciding to align its fixed income
assets, starting with the credit portfolio, with the same four SDGs. Detailhandel
engaged FTSE Russell (as its benchmark provider) to develop a way to implement
the policy within the pension fund’s overall investment strategy.
With the three launches, Detailhandel has now aligned almost 50% of its €32bn
investment portfolio to the three SDG funds tracking FTSE Russell indexes (correctas of Dec 2021).

Embedding SDGs in a credit index
In 2015, the UN’s General Assembly set 17 global goals, designed to be a
“blueprint to achieve a better and more sustainable future for all,” that are intended
to be achieved by 2030. Detailhandel identified the following four SDGs asparticularly relevant to its sustainable investment policy:––––

SDG 8 .– Decent work and economic growth
SDG 12 – Responsible consumption and production
SDG 13 – Climate action
SDG 16 – Peace, justice and strong institutions

Embedding the SDGs in a credit index required a new design approach fromFTSE Russell, when compared to the SDG-aligned FTSE equity benchmark usedby Detailhandel in 2019.
This is because the underlying credit benchmark—the FTSE EuroBIG exSovereigns index—consisted of corporate, sub-sovereign and collateralised
bonds, not all of which could be categorised using the existing SDG alignment
framework (that is used for equities).

Rewarding sustainable bond issuance
The FTSE EuroBIG excluding Sovereigns SDG benchmark is a custom index ofcorporate, sub-sovereign and collateralised bonds, designed to integrate thedesired SDGs.
The design of the index enabled Detailhandel to translate its responsible investment
priorities into a passive (index-tracking) bond portfolio. The index design also
incentivises the ownership of bonds issued by entities whose activities are alignedwith the SDGs.

FTSE Russell2

Client engagement | Client story

Index design overview
Corporates

SubSovereignsCollateralised

Privateissuers

Listedissuers

Currently outof scope

ESGscores

GreenRevenues
data

CoveredSecuritised

Carbondata

Currently outof scope

Supra

Listed Equity SDG Aligned
framework

Agencies

RegionalGovt

Country ESG scores

Fixed Income SDG Aligned
framework

Green & Social Impact Bond Overlay

The key elements of the index design are as follows:–––––Listed corporate bond issuers (c. 50% of benchmark) – the index follows theexisting SDG-aligned equity approach (using FTSE Russell’s sustainable
investment data inputs, covering ESG scores, green revenues and carbon),tilting constituent weights towards desired issuers and excluding certain
categories of bond (e.g., those issued by arms suppliers)
Sub-sovereign bond issuers (c. 28% of benchmark) – the index uses acustomised country-level scoring system, based on the alignment of a group ofindicators with each of the desired SDGs (for agency and supranational bonds,
GDP-weighted scores are used), then tilts towards the desired constituents
Collateralised bond issuers (c.17% of benchmark) – these were determined
to be out of scope for the index design.
Private corporate bonds and securitised debt (c.5% of benchmark) – these
are also out of scope for the index design
Green impact bond overlay – an additional SDG-aligned overlay rewards theissuers of green bonds by means of an additional tilt factor (with the option toadd further social/sustainability-linked tilts)

The new SDG credit index achieves a substantial improvement in sustainability: aNovember 2020 simulation of the index’s methodology showed a 62% reduction in
CO2 emissions, a 69% reduction in carbon intensity and a 64% reduction in carbon
reserves for the index’s corporate bonds, compared with the reference benchmark(the FTSE EuroBIG ex-Sovereigns index). It also doubled the starting index’s green
bond exposure.

Broadening sustainable investment
goals
In 2021, Pensioenfonds Detailhandel decided to extend its sustainable investment
policy to the fund’s credit portfolio, building on its past success in embedding UN
SDGs into a passively managed equity portfolio. Through a custom index solution,
the fund was able to target several objectives simultaneously:–––

Align credit investment policy with four selected SDGs
Help advance the SDGs through its efforts
Create longer-term value for fund beneficiaries

FTSE Russell

Additional information
For more information on the FTSE
ESG index series, click here
For more information on the FTSE
EMEA Fixed Income indexes,
click here
Further information on all our products
and services is available atlseg.com/ftse-russell

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