UnFortumate: iTraxx Main S35 vs ESG version

4 minute read

iTraxx Main in its MSCI ESG version (S35) has outperformed its standard equivalent in 2022, mainly due to non-ESG index exposure to a number of utilities, especially former low-beta credit Fortum. The indices started the year trading at a spread of 40/42bp and are now quoted at 54/74.

Here, we briefly analyse the source of this underperformance, namely through the ESG index exclusion of a number of European coal/gas-utilities such as Fortum (+193bps/407%)1, Engie (+47/132%), EDF (+55/103%) and E.ON (+36/94%), and some more Russia exposed companies (Carlsberg +47/185%, Louis Dreyfus +164/170%). Underweights in the ESG index that has capped outperformance is more of a mixed bag but notable are BAE (defence, -2/-3%), Shell (+7/20%) and BP (+20/40%), Glencore (+45, 38%) and a number of alcohol and luxury goods related names.

If we were to derive any correlation between this performance and what ESG factors have driven the outperformance, it would be that direct emitters of CO2 and hence price-takers in terms of increased fossil fuel prices have suffered creditwise, which makes sense not least out of a general inflation context.