Over the past 10 years, total ETF assets tracking dividend-related strategies have increased eightfold, reaching USD 330 billion. Including mutual funds, we estimate that nearly USD 1.4 trillion of assets are tied to dividends (see Exhibit 1). This growth trajectory, which has coincided with the persistent low-rate environment since 2008, confirms that dividend strategies have remained a key part of income-seeking investor portfolios.
Environmental, social, and governance (ESG) is an area that continues to reshape the investment landscape, with an increasing number of asset owners, asset managers, and service providers committed to responsible investing, based on data from the United Nations Principles for Responsible Investment (UN PRI). As of year-end 2020, the UN PRI signatories had at least USD 100 trillion in assets under management, a multi-fold increase in signatories and associated assets from 10 years prior.
A pioneer of dividend indexing, S&P Dow Jones Indices (S&P DJI) has continued to create, innovate, and maintain some of the most recognized dividend strategies in the indexing space, including the S&P Dividend Aristocrats Indices. This series of dividend indices targets companies that have had consistent dividend growth over time. A measure of financial sustainability, this strategy aims to capture companies that have successful business operations and disciplined financial management.
In this next chapter, the S&P Dividend Aristocrats Series expands its scope beyond financial sustainability to include ESG considerations. Five indices have been launched as part of the newly created S&P ESG Dividend Aristocrats Series, offering access to multiple geographical regions including the U.S., global, and Europe (see Exhibit 2). These indices seek to track dividend growth stocks that simultaneously meet minimum ESG standards. In this paper, we explore S&P DJI’s innovative approach to incorporating ESG into the S&P Dividend Aristocrats Series.
Broadly, we see the following meaningful implications for both ESG and dividend investors.
- Low tracking error and comparable dividend yield: Compared to the S&P Dividend Aristocrats Indices, the equivalent ESG versions were found to have a relatively low tracking error to non-ESG counterparts and, on average, a minor reduction in dividend yield. Despite the additional ESG-related screens, these newly launched indices retained the key characteristics of dividend growth strategies.
- Additional layer of sustainability: Dividend growth, which underpins the S&P Dividend Aristocrats investment philosophy, is considered a well-established approach to investing in dividends. Augmenting ESG criteria serves to further ensure selection of dividend payers with sustainable and ethical business practices, a combination that could reinforce the principles of sustainable dividend investing.
- Enhancing diversification of ESG: ESG mandates are now presented with a range of new dividend indices for selection. With multiple geographical versions available (see Exhibit 2), ESG-focused investors have an opportunity to diversify from previously available ESG strategies and climate-related investments.