In This List

360° of Climate – Indices for Every Objective

The S&P Global BMI: Providing Consistent Insights into Global Equity Markets since 1989

Sector Primer Series: Materials

Transition to a 1.5°C World with the S&P PACT™: S&P Paris-Aligned & Climate Transition Indices

Potential Advantages of a Lower Allocation to Energy: The S&P GSCI Light Energy

360° of Climate – Indices for Every Objective

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Jaspreet Duhra

Senior Director and Head of EMEA Environmental, Social, and Governance (ESG) Indices

SUMMARY

  • There is a pressing need for the world to reduce its greenhouse gas emissions to decrease the risks and impacts of climate change. Responsible action is required by all stakeholders, including investors.
  • S&P DJI is at the forefront of innovative climate index design, leveraging the strength of climate datasets created by Trucost, part of S&P Global.
  • S&P DJI’s climate change index offerings cater to a broad range of investor climate objectives, from divestment, decarbonization, and de-risking to holistic, science-based 1.5°C

WHY CREATE CLIMATE CHANGE INDICES?

The Scientific Facts

The Intergovernmental Panel on Climate Change (IPCC) has stated that “Human activities are estimated to have caused approximately 1.0°C of global warming above pre-industrial levels.” While current global climate policies aim to reduce baseline emissions, temperatures are still projected to rise by 3.0°C by 2100. The IPCC suggests limiting global temperature rise to 1.5°C from pre-industrial levels.

Impacts on natural and human systems from global warming have already been observed.  Some impacts may be long lasting or irreversible, such as the loss of ecosystems.

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The S&P Global BMI: Providing Consistent Insights into Global Equity Markets since 1989

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Michael Orzano

Senior Director, Global Equity Indices

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John Welling

Director, Equity Indices

Over the past few decades, best practices for global equity benchmark construction have converged on a few key principles.  First, a properly constructed global index series must fully capture the investable equity opportunity set.  In order to do so, it should include large-, mid-, and small-cap companies, incorporate minimum size and liquidity requirements, and be float adjusted so that it only includes shares available for purchase.  Second, it should utilize a modular, building block approach that allows the global opportunity set to be decomposed into subsets without gaps or overlaps.  Last but not least, it should apply a consistent methodology across markets and have continuity in its approach over time.  These principles are critical to ensuring a fair and robust benchmark that can be utilized by market participants to support key aspects of the investment process such as performance measurement, asset allocation, and index replication.

Established in 1989, the S&P Global BMI (Broad Market Index) Series pioneered these core benchmarking principles.  Ahead of its time in many respects, the S&P Global BMI lays claim to a number of important firsts in the global indexing industry; the most important of these being that it was the first to incorporate float adjustment and to include large-, mid-, and small-cap companies in a single modular global benchmark.  As a result, the S&P Global BMI is used by some of the world’s largest and most sophisticated asset managers and asset owners, who value it as a comprehensive and trusted data set.

In this paper, we will cover the following major points.

  • With more than 30 years of seamless history, the S&P Global BMI provides a consistent universe for historical market analysis and back-testing investment strategies.
  • Over the years, other major global equity indices have converged to follow the S&P Global BMI framework—in particular its float adjustment and modular inclusion of large-, mid-, and small-cap securities in a single index series.
  • The S&P Global BMI’s deep small-cap segment provides the most comprehensive measure of global small-cap securities.
  • Differing country classifications for South Korea among major index providers may lead to meaningfully different representations of the emerging market opportunity set.
  • Other competitors’ indices, such as MSCI EAFE, may inadvertently create a gap in coverage by excluding Canadian securities. An alternative, such as the S&P Developed ex-U.S. BMI, eliminates that gap.

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Sector Primer Series: Materials

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Sherifa Issifu

Analyst, Index Investment Strategy

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Hamish Preston

Associate Director, U.S. Equity Indices

The Global Industry Classification Standard® (GICS®) assigns a company to a single business classification according to its principal business activity. This assignment uses quantitative and qualitative factors, including revenues, earnings, and market perception. The sector is the first level of the four-tiered, hierarchical industry classification system that includes 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries.

Within the GICS framework, Materials companies include those that are primarily engaged in:

  • Producing and manufacturing chemical products, including industrial chemical products;
  • Manufacturing construction materials, containers, and packaging;
  • Mining metals and the production of related products; and
  • Manufacturing paper and forest products.

COMPOSITION

The S&P 500® Materials comprises all companies in the S&P 500 that are assigned to the Materials sector by GICS. Created in 1957, the S&P 500 was the first broad U.S. market-cap-weighted stock market index. Today, it is the basis of many listed and over-the-counter investment instruments.

The Materials sector is the smallest by capitalization of the 11 sectors in the S&P 500, representing 2.53% of the index as of May 29, 2020. This compares to 6.04% and 4.95% for the S&P MidCap 400® and S&P SmallCap 600®, respectively. Overall, the Materials sector accounts for 2.72% of (and 146 securities within) the S&P Total Market Index; only the Energy sector (2.70%) accounts for less, by index weight.

With a total float-adjusted market capitalization of USD 641.43 billion, the S&P 500 Materials sector comprised 28 companies as of May 29, 2020. The two largest companies in the sector were Linde plc (LIN) and Ecolab Inc (ECL), with float-adjusted market caps of USD 108.69 billion and USD 53.31 billion, respectively. There were no Materials companies in the top 10 of the S&P 500—Linde plc ranked as the 53rd largest stock, representing 0.43% of the index. The mean market cap of S&P 500 Materials stocks was USD 22.91 billion, the median market cap was USD 13.79 billion, and the lowest market cap was USD 4.23 billion.

The largest five constituents accounted for 48.64% of the weight of the Materials sector, placing it seventh in the S&P 500 in terms of concentration.

Within the S&P 500 Materials, Chemicals was by far the largest industry, accounting for 71.24% of the sector as of May 29, 2020. The remaining sector weight was distributed across the Containers and Packaging (13.13%), Metals and Mining (11.52%), and Construction Materials (4.11%) industries. There were no companies in the Paper and Forest Products industry as of May 29, 2020. The three largest sub-industries were Specialty Chemicals (30.70%), Industrial Gases (25.25%), and Paper Packaging (9.50%)—the first two belong to the Chemicals industry.

A key feature of GICS is that it can evolve: its structure is intended to reflect the current state of the equity investment universe. S&P Dow Jones Indices and MSCI conduct annual reviews to ensure that the structure remains fully representative of the current global market. Although there have been few significant changes to the Materials sector—Chemicals has always been the largest industry, for example—the Paper & Forest Products industry weight in the S&P 500 declined since 1999, from 20% to 0%.

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Transition to a 1.5°C World with the S&P PACT™: S&P Paris-Aligned & Climate Transition Indices

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Mona Naqvi

Senior Director, Head of ESG Product Strategy, North America

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Ben Leale-Green

Analyst, Research & Design ESG Indices

The landmark Paris Agreement marked a sea change in the global fight against climate change. Backed by empirical evidence from the UN Intergovernmental Panel on Climate Change (IPCC), ambition has since grown to limit global temperature rise to 1.5°C since pre-industrial levels.

To date, climate-conscious investors have largely focused on reducing relative portfolio carbon exposure, but divergent methodologies have made fertile ground for so-called “greenwashing.” While point-in-time analyses do not necessarily inform alignment with our needed transition to a low-carbon economy. However, a combination of groundbreaking new datasets and index innovation is emerging. Investors now have the choice to align with a scenario that may mitigate the most catastrophic impacts. The European Union (EU) is in the process of finalizing standards for defining a ClimateTransition Benchmark (CTB) and a Paris-aligned Benchmark (PAB), both of which use absolute measures to align with a 1.5°C trajectory rather than simply a relative carbon reduction. Our S&P PACTTM: Paris-Aligned & Climate Transition Indices offer a powerful set of investment solutions to meet the proposed standards, in addition to other climate objectives. This new breed of sustainable climate indices therefore provides a pathway for investors to:

  1. Go beyond the Paris Agreement and align investments with a 1.5°C trajectory toward achieving net-zero emissions by 2050;
  2. Adopt a strategy compliant with the proposed standards for the EU CTBs and PABs and recommendations from the TCFD—accounting for the physical risks, transition risks, and opportunities arising from climate change; and
  3. Address numerous climate objectives efficiently, while staying as close to the underlying index as possible with broad, diversified exposure.

This paper underscores how the S&P PACT Indices could help investors transition to a 1.5°C world and achieve other climate objectives

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Potential Advantages of a Lower Allocation to Energy: The S&P GSCI Light Energy

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Jim Wiederhold

Associate Director, Commodities and Real Assets

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Fiona Boal

Head of Commodities and Real Assets

S&P Dow Jones Indices (S&P DJI) offers a number of strategies that track various commodities markets.  The most widely recognized of these is the S&P GSCI, which is designed to measure the performance of a broadbased, production-weighted, investable representation of the global commodities market. Energy-related futures make up more than half of the index composition.

For a less-energy-intensive commodity market measure, there is the S&P GSCI Light Energy. It tracks the same designated contracts as the headline S&P GSCI, but it divides its contract production weights in the energy sector by four, increasing the relative weights of other S&P GSCI commodity components. Therefore, the index offers a commodity exposure that is more evenly weighted across the five major commodity sectors: energy, industrial metals, precious metals, agriculture, and livestock.

Exhibit 1 compares the methodologies of the S&P GSCI Light Energy and the Bloomberg Commodity Index (BCOM). These two indices are representations of a more equal-weighted view of commodities markets. Their performance is similar, and due to lower energy weights, each index has shown much less volatility than the headline S&P GSCI.

Potential Advantages of a Lower Allocation to Energy: The S&P GSCI Light Energy Exhibit 1

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