Disclosure - AMX UCITS CCF – STOXX Willis Towers Watson World Climate Transition Index
AMX UCITS CCF – STOXX Willis Towers Watson World Climate Transition Index (the “Sub-Fund”), a sub-fund of Asset Management Exchange UCITS CCF, does not have as its objective sustainable investment, but it has been categorised as meeting the provisions set out in Article 8 of SFDR for products which promote environmental and/or social characteristics, through its tracking of the STOXX Willis Towers Watson World Climate Transition Index (the “Index”).
The Index is constructed based on the iSTOXX World Index (the “Parent Index”) which is a market capitalisation weighted index composed of large and mid-capitalisation companies across developed markets. However, the Index will seek to account for the impact that Climate Transition would have on the relative valuation of the components of the Parent Index.
“Climate Transition” means changes in technology, consumer behaviour, policy and regulation aimed at reducing global greenhouse gas emissions and limiting the increase in greenhouse gas concentrations to levels consistent with the United Nations goal to limit the global temperature increase to 1.5C. It is expected that Climate Transition will lead to a series of changes to the supply, demand, revenues, costs, margins, and financing, for products, services, and commodities which are expected to affect company valuations and for the purposes of the Index, affect the valuation of the companies comprising the Parent Index.
The Index will calculate the value that each company in the Parent Index would have if markets were to change their future expectations to align with a successful Climate Transition, with any such change in valuation called the Climate-Transition Value at Risk (“CVaR”). The Index then seeks to reduce the negative impact on the portfolio from declining valuations of listed companies adversely exposed to Climate Transition by adjusting the relevant individual position sizes relative to the Parent Index to decrease the Index’s aggregate exposure to companies with negative CVaRs; while capturing upside exposure from those listed companies that are positioned to benefit from Climate Transition by increasing the Index’s aggregate exposure to companies with positive CVaRs. This process is expected to deliver a risk and return profile broadly in line with the Parent Index but with enhanced upside potential in the event of global economies adapting to lower carbon intensities.
The Index is constructed through a systematic assessment of the impact of Climate Transition on the cash flows (and therefore valuations) of businesses, beginning with an assessment of scenarios for how each commercial and industrial sector will evolve from current expectations under a Climate Transition. These scenarios are based on expert analysis, most often from publicly available research developed by international organizations, academic institutions, or other research institutions (“Sector Impact”). The next step is to apply and translate this Sector Impact to the specific businesses and assets of the companies that comprise the Parent Index in order to ascertain the potential impact on each of the companies’ cash flows, and in turn, their respective valuations. This assessment of each company takes into account the announced investment plans and strategy of the relevant companies. For example, an assessment will be conducted in respect of the ownership, contracts, or taxation of these companies and these elements may affect how much of the potential ‘sector’ change in cash flows impacts a particular company, while the competitiveness of a company’s assets and business may also impact the effect of Climate Transition on the company’s valuation (e.g., a low cost producer may experience only the changes in price and margin, while a high cost producer may become too expensive and need to close a business that no longer has a market). Finally, the expected change in net cash flows of each company needs to take into account the financial position of the company, particularly including financing and leverage. Free cash flows must first service the company’s debt, while the remaining cash flows can feed dividends and reinvestment, and thus comprise the value to equity holders.
The result of these assessments represents how much the change in current market expectations to a Climate Transition aligned set of scenarios would affect the valuation of each company. This change in valuation is called the Climate-Transition Value at Risk (CVaR).
The Index will comprise some, but not all, of the companies that form part of the Parent Index and CVaR is the basis for adjusting the weighting of each of these companies within the Index. Certain of the companies forming part of the Parent Index may not form part of the Index where (a) the result of a negative CVaR is such that the weighting to be applied to the relevant company is zero, and/or (b) where any such company is caught by the exclusion criteria detailed below. Companies that do not form part of the Parent Index will not be included in the Index.
The Index will also apply a series of rules and norms based screens to arrive at the investable universe by excluding companies. In this regard, the Index will exclude companies that:
- violate or are at risk of violating commonly accepted international norms and standards, enshrined in the United Nations Global Compact Principles, the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises, the UN Guiding Principles on Business and Human Rights (UNGPs), and their underlying conventions;
- are involved in controversial weapons activities, being anti-personnel mines, biological and chemical weapons, cluster weapons, depleted uranium and white phosphorus weapons; and
- derive greater than 25% of revenues from thermal coal extraction (including thermal coal mining and exploration), greater than 50% of revenues from power generation (coal-fired electricity, heat or steam generation/thermal coal electricity production (including utilities that own/operates coal-fired power plants)) and/or more than 25% of revenues from extracting oil sands.
Further details regarding exclusions can be found in the Index methodology document available on https://www.stoxx.com/index-details?symbol=SXWPWCT.
The Index is reviewed quarterly for any necessary changes to position weights.
Further details of the Index constituents, weightings and methodology can be viewed on the following link:
Accordingly, as detailed above, the Sub-Fund promotes, inter alia, Climate Transition, in addition to those characteristics detailed in the ‘exclusions’ section above. These environmental and social characteristics promoted by the Sub-Fund, including the methodologies used to assess, measure and monitor these environmental and social characteristics are reflected in the construction of the Index, noting in particular:
- the integration of CVaR (including the assessment of Sector Impact) as a fundamental element of the Index’s construction, with the Index overweighting companies with a positive CVaR, and underweighting and/or excluding companies with a negative CVaR; and
- the Index’s rules and norms based screens, thereby excluding companies from its investment universe that, for example, breach the UN Global Compact Principles or the UN Guiding Principles on Business and Human Rights, are involved in controversial weapon activities or derive significant revenue from thermal coal and oil sands.
It follows that sustainability risk is integrated into the Index construction and therefore, into the investment decision making processes employed in respect of the Sub-Fund. Sustainability risks, within the meaning of SFDR, are environmental, social and governance events or conditions whose occurrence could have an actual or potential material negative impact on the value of the Sub-Fund’s investments and in turn, the Net Asset Value of the Sub-Fund. To the extent that a sustainability risk occurs, there may be a sudden, material negative impact on the value of its investments, and hence the returns of the Sub-Fund. The impacts following the occurrence of a sustainability risk may be numerous and vary depending on the specific risk and asset class. In general, where a sustainability risk occurs in respect of an investment, this could result in a significant, or in extreme circumstances, an entire, loss of value of the relevant investment and may have an equivalent negative impact on the returns of the Sub-Fund.
A description of the extent to which environmental and social characteristics promoted by the Sub-Fund are met by the Fund will be available as part of the Sub-Fund’s periodic reports, as and when required.