Cboe Global Markets has launched cash-settled options on the S&P 500 ESG index in an effort to increase the investment opportunities available to asset managers looking to manage sustainability risks within portfolios.
These options can be used as part of hedging, risk management, income enhancement and asset allocation strategies by professional investors.
The new options offer improved ESG representation combined with a risk/return profile similar to that of the underlying S&P 500 index, Cboe said.
In fact, the S&P 500 ESG index outperformed the wider S&P 500 index by nearly 2.4 percentage points over the past 12 months with a return of 12.8%, while doing so with a lower level of volatility.
The options, as well as the ESG index itself, exclude tobacco and controversial weapons, as well as companies with low ESG scores relative to their industry peers.
In a blog on the new product launch, Matt Moran, head of index insights at CBOE, explained that the new Cboe S&P 500 ESG Index options are “designed to give investors access to long or short positions and provide broad exposure to ESG equities without the burden of owning a portfolio of individual stocks”.
He quoted a 2020 study by Deloitte, which revealed that the total amount of professionally managed assets with an ESG tilt in the US has more than tripled in six years to 2018 to $12trn, and could reach $34.5trn by 2025.
He added that EU regulation has made ESG considerations a mandatory part of the investment process for financial firms, meaning demand for ESG solutions in Europe also continues to be on the rise.
According to Moran, the Cboe S&P 500 ESG Index Options are an efficient way to integrate ESG initiatives into portfolios to meet this demand. In addition, he noted that many EU fund managers have limits on how much they can invest in index funds, but not options, which may help satisfy their ESG mandates.
Moran also sought to reassure investors that the S&P 500 ESG index offers proper diversification for investors in a similar way to the underlying S&P 500 index, since it covers 75% of the underlying index’s market capitalization, industry by industry.
The ten largest stocks in the ESG index account for 37.1% of its total market capitalization, compared to the 29.2% made up by the top ten stocks in the S&P 500.