Investing in sectors has grown dramatically over recent years, as investors look to express a view on the broader economic conditions while maintaining diversification and mitigating single-stock risk. Additionally, there has been an increase in market participants looking to allocate strategically to sustainability. Many are starting to look for ways to integrate sustainability values into their investments through more precise tools such as sector allocation. S&P Dow Jones Indices (S&P DJI) has introduced a suite of sustainability sector indices, including the S&P ESG Enhanced Sector Indices and S&P Sustainability Enhanced Sector Indices, to meet this need. By utilizing S&P DJI ESG Scores, business activity exclusions, UN Global Compact (UNGC) exclusions, daily controversy monitoring and S&P Global Trucost carbon data, our sustainability sector indices have historically offered a meaningful improvement in ESG profile and carbon emissions profile against their non-ESG underlying index.
S&P DJI ESG Scores
The S&P DJI ESG Scores are derived from over 22 years of detailed sustainability data from the industry leading sustainability assessment, the S&P Global Corporate Sustainability Assessment (CSA). The CSA is an annual evaluation of companies’ sustainability practices. A key feature of the CSA is that, through optional active participation in the assessment, companies can disclose additional details to our analysts beyond what is publicly available. This engagement opportunity, coupled with the granularity of the CSA, enables S&P Global to provide a holistic and complete view of a company’s sustainability profile; differentiating the S&P DJI ESG Scores from other ESG scores that rely solely on data from public sources. A company’s active participation in the CSA allows S&P Global to collect between 600 and 1,000 data points per company, which feed into the S&P DJI ESG Scores (see Exhibit 2).
The CSA and the derived S&P DJI ESG Scores are driven by materiality analysis considering both financial materiality and how sustainability criteria present a significant impact on society or the environment. Material sustainability criteria have the potential to significantly influence an entity's business value drivers, including, for example, business operations, cash flows, legal or regulatory liabilities and access to capital. Furthermore, sustainability criteria have the capability to significantly improve or undermine an entity’s reputation and relationships with key stakeholders and society, including the environment. Therefore, companies are assessed according to the sustainability issues that are weighted according to the magnitude and likelihood of their impact on enterprise value creation and external stakeholders, including the economy, the environment and people. Collecting and scoring data according to these factors ensures that companies have been measured based on the sustainability issues that are most relevant to them. The examples in Exhibit 3 show how weights assigned to issues in different industries can vary greatly.