In March 2021, the new Sustainable Finance Disclosure Regulation (SFDR) came into effect in the European Union. It forces asset managers to reveal the differing levels of sustainability of their funds according to Articles 6, 8, and 9. Blackrock just announced that their iShares ETFs on MSCI ESG Enhanced Focus Indexes have moved from Article 8 to 9; in other words, from light green to dark green. Reason enough to discuss with Eurex’s product designer Ralf Huesmann whether this new classification of sustainability should also apply to index futures based on these indexes.
What is meant by SFDR Article 6, 8 and 9 funds?
The goal of this regulation is to increase transparency about the integration of sustainability risks in financial products such as funds. Under SFDR, European fund managers need to classify their funds into three categories, according to Article 6, 8 or 9. While Article 6 funds do not have a dedicated ESG focus, Article 8 funds integrate certain ESG considerations. Article 9 funds, however, have a clear sustainable investment objective.
This classification, next to other regulatory improvements, is seen as a major step towards greater standardisation in the so-far often very customized field of ESG investments.
As index futures are replicating certain indexes, do Articles 8 and 9 also apply to futures?
The SFDR clearly targets asset management firms and the products they offer, and thus derivatives are out of the scope of the regulation. At the same time, the SFDR classification could potentially also be used to demonstrate the sustainability features of derivatives like index futures or options. As an increasing portion of global assets under management are invested passively, just following certain index rules, and as many market participants are using funds like ETFs and futures in parallel, this question turns into a market demand: Clients would like to know if a futures contract on an ESG index is more in alignment with the “light green” Article 8 or the “dark green” Article 9.
So far, index providers have been supporting asset managers in their classifications, providing the information necessary to appropriately classify their products, referencing those indexes according to the SFDR. Therefore, users of index derivatives may find indicators from the classifications of ETF issuers.
Blackrock recently announced that their iShares ETFs on the MSCI ESG Enhanced Focus Indexes have moved from Article 8 to 9 in December 2021. So, what has happened here?
Index providers are constantly reviewing whether their index methodologies are still in-line with the investment objectives. MSCI, as the leading benchmark provider globally, is also leading in terms of ESG assets and has performed a market consultation on further improvements of the ESG Enhanced Focus Index methodology. The outcome was that the market is generally in favour of even stricter screenings – for example, the exclusion of additional companies involved in weapon systems – and prefers the inclusion of an additional carbon reduction goal by incorporating the minimum requirements of the EU's Climate Transition Benchmark (CTB) designation. Those changes were implemented as part of the standard index review MSCI performed at the end of November 2021, also resulting in a name change of the index family, which is now called MSCI ESG Enhanced Focus CTB.
MSCI therefore made the index dark green instead of light green and the same applies to the ETFs, which exactly track the index composition.
What is the status of ESG derivatives at Eurex?
Eurex is already the leading exchange in ESG derivatives, based predominantly on volumes in ESG screened indexes from either Qontigo or MSCI. Since May this year, five regional MSCI ESG Enhanced Focus Futures are offered to move further towards higher ESG integration. But in general, the portion of ESG-related positions is still much lower in derivatives compared to ETFs. The success of ESG derivatives is more dependent on standardisation, but also on regulation: SFDR classifications don’t apply to derivatives at present, even though Eurex is convinced this should be changed to reflect the role that derivatives can play in the transition process towards a more ESG-compliant investment universe. If funds on a certain index are classified as Article 9, it seems fair to assume that a future on the same index is not different in its overall objectives.
The following table gives an overview of the main ESG indexes used by Eurex for derivatives and the categorisation given by the corresponding ETF provider:
SFDR according to ETF provider
STOXX EUROPE 600 ESG-X
Euro STOXX 50 ESG
MSCI ESG screened family
FMSF, FMSJ, FMSM, FMSS, FMSU, FMSW
ESG Enhanced focus CTB family
FMFE, FMFO, FMFJ, FMFU, FMFW
Art. 9 (as of Dec.21)
About MSCI ESG Enhanced Focus CTB
The MSCI ESG Enhanced Focus CTB Indexes are designed to maximize their exposure to positive ESG metrics while reducing exposure to carbon dioxide (CO2) and other greenhouse gases (GHG) as well as their exposure to potential emissions risk of fossil fuel reserves by thirty percent (30%).
To reach this goal, certain companies are excluded from the parent index by using sector-based exclusion criteria. But at the same time the index should stay close to the benchmark with a tracking error around 1%. This goal is reached via an optimisation process. By optimisation rather than an even wider exclusion of stocks, a high ESG score can be reached without making the investment universe too tight for institutional investors.
With the additional climate-related changes end of November 2021, the indexes will decarbonize at an annualized rate of at least 7 percent per year and the aggregate weight of companies that set credible emissions reduction targets will be at least 10 percent higher than in its respective Parent Index.
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