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Frequently Asked Questions
ESG Back-Testing: Backward Data Assumption Overview

The S&P/BMV Total Mexico ESG Index: A New Benchmark for Sustainability and Investment

TalkingPoints: Capturing ESG in Brazil: The S&P/B3 Brazil ESG Index

S&P Global ESG Data Primer

Physical versus Synthetic Gold: Know Your Gold Exposure

Frequently Asked Questions
ESG Back-Testing: Backward Data Assumption Overview

  1. What does “Backward Data Assumption” mean with respect to ESG data?  Typically, when S&P DJI creates back-tested index data, we use data from relevant databases, or actual live data.  Examples include constituent-level data such as historical price, market capitalization, and corporate action data.  As ESG investing is still in the early stages of development, certain data points used to calculate S&P DJI’s ESG indices may not be available for the entire desired period of back-tested history.  In such cases, S&P DJI may employ a process called “Backward Data Assumption (or pulling back) of ESG data for the calculation of back-tested historical performance.

    “Backward Data Assumption” is a process that applies the earliest actual live data point available for an index constituent company to all prior historical instances in the index universe.  For example, if an index methodology requires all eligible constituents to have product involvement data, and actual product involvement data is only available for a company from 2015 forward, then S&P DJI will use the 2015 product involvement data for that company for the purposes of calculating back-tested data for the years 2010 through 2014.

  1. Why is “Backward Data Assumption” for ESG data sometimes necessary?  Employing the Backward Data Assumption technique generally provides a more indicative depiction of index characteristics and risk/return profile than would be provided by limiting back-tests to actual live data. The Backward Data Assumption also allows the hypothetical back-test to be extended over more historical years than would be feasible using only actual live data.

    Many ESG data providers started with limited coverage and have been increasing their historical coverage over the past few years, so creating back-tests that use only actual historical live data would often lead to unrepresentative index constituent characteristics.  Without Backward Data Assumption of ESG data, far fewer companies would be eligible for or selected from the index universe in the back test compared with the same index’s more recent and on-going index universe of eligible and selected constituents.

    Therefore, S&P DJI may employ a Backward Data Assumption methodology to provide a longer and more representative back-test period.

  2. Are any live index rebalances affected by the practices of Backward Data Assumption?  Actual live data is used in the rebalance calculation of an index immediately prior to launch and in all rebalances after the launch of the index.  Backward Data Assumption may only affect the historical back-test prior to then.

  3. Which indices have back-tested history that uses Backward Data Assumption?  S&P DJI uses Backward Assumption Data with respect to Sustainalytics and Arabesque data, and sometimes uses it with respect to data from Trucost and SAM, both part of S&P Global.  Therefore, back-tested history for indices that use data from any of those sources may be affected by the Backward Data Assumption method.

    The methodology and factsheets of any index that uses Backward Assumption Data in back-tested history will explicitly state so.  The methodology will include a table setting forth the specific data points and relevant time period for which Backward Data Assumption was used.

  4. When do indices typically have back-tested history that uses Backward Data Assumption of ESG data?  For indices launched from 2020 onward, Backward Data Assumption is used in all indices that use exclusionary screens based on Sustainalytics’ product involvement data and Arabesque’s United Nations Global Compact (UNGC) data.

    For indices launched prior to 2020, Backward Data Assumption of ESG exclusionary screen data was limited only to Sustainalytics and Arabesque data for historical rebalances prior to 2013.

    S&P DJI may also employ Backward Data Assumption to S&P DJI’s ESG Scores and/or Trucost datapoints, if based on historical coverage it is determined that attaining the index objective would be severely restricted otherwise.  Historical coverage is assessed year-by-year, both in terms of the number of constituents and weight of those constituents in the underlying universe.

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The S&P/BMV Total Mexico ESG Index: A New Benchmark for Sustainability and Investment

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Cristopher Anguiano

Senior Analyst, U.S. Equity Indices

S&P Dow Jones Indices

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María Sánchez

Director, Sustainability Index Product Management, U.S. Equity Indices

S&P Dow Jones Indices

INTRODUCTION

Indices that integrate environmental, social, and governance (ESG) data are moving from the margins to the mainstream, as investors increasingly seek to align their values with their investments.  A new type of ESG index is emerging to facilitate this change in Mexico: the S&P/BMV Total Mexico ESG Index.  Jointly developed by S&P Dow Jones Indices (S&P DJI) and the Mexican stock exchange (Bolsa Mexicana de Valores [BMV]), this index not only highlights strong ESG companies—as ESG indices have traditionally done—but it also enables investors to allocate to such companies without requiring them to take on major risks relative to the market.

THE EVOLUTION OF ESG INDICES

In 1999, S&P DJI launched the first global ESG index, the Dow Jones SustainabilityTM World Index (DJSI World).  By including the top 10% of companies, industry by industry, according to their ESG performance, as determined by the Corporate Sustainability Assessment (CSA) conducted by SAM, part of S&P Global, this groundbreaking index encouraged companies to incorporate many ESG factors in their decisions, extending beyond short-term financial considerations.

In the years that followed, other indices, including regional versions of the DJSI World, and local indices, such as the S&P/BMV IPC Sustainable Index, were launched with this same philosophy in mind: to highlight best-in-class companies and thereby inspire companies to improve their ESG approaches in order to qualify for inclusion in these indices.

Though these indices have been successful and have indeed inspired companies to change in positive ways, aspects of their methodologies present challenges for many investors.  Some strategies can be too narrow for investors who want to remain broadly diversified.  Though many high-conviction investors use the narrow, best-in-class indices for investment, we saw a need from market participants for ESG indices with returns more in line with the broader market, while providing a more sustainable portfolio of companies.  An example of an index that launched in 2019 that typifies this investor-oriented methodology is the S&P 500® ESG Index.

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TalkingPoints: Capturing ESG in Brazil: The S&P/B3 Brazil ESG Index

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Silvia Kitchener

Director, Global Equity Indices, Latin America

S&P Dow Jones Indices

To address the need for a broad market ESG benchmark in Brazil, S&P DJI and B3 joined forces to launch the S&P/B3 Brazil ESG Index. S&P DJI’s Silvia Kitchener and Iuri Rapoport from BTG Pactual sat down to discuss how this innovative index captures a more complete picture of ESG in Brazil, and how it could be used to address the growing demand for ESG solutions in the region.

  1. We know that there are many types of environmental, social, and governance (ESG) indices. What is the objective of the S&P/B3 Brazil ESG Index?

    Silvia: Correct; there are various ESG indices with different objectives. Some indices use the “best-in-class” approach like the Dow Jones Sustainability MILA Pacific Alliance Index, which selects the top 30% of companies by sustainability score within each GICS® sector. The focus here is to feature the companies with the best ESG practices and policies. Then, we have the S&P ESG Indices, which are designed to provide improved ESG representation while maintaining similar overall industry group weights as their underlying indices as in the case of the S&P 500® ESG Index.


    The objective of the S&P/B3 Brazil ESG Index is to serve as a broad representative index of the Brazilian equity market with an improved ESG profile and maintain similar overall industry group weights as the S&P Brazil BMI. The index does not focus on selecting companies based on their ESG scores; however, the score determines their representation in the index. This means that companies with higher ESG scores have a higher weight in the index. Companies with lower scores are incentivized to improve their programs, practices, and policies to help increase their scores and possibly their index weight.

  2. What has demand for ESG looked like in recent years, and how important do you think ESG will be moving forward?

    Iuri: Several studies have shown that companies with better ESG practices enhance long-term returns. In general, these companies develop resilient and solid businesses, as they are more capable of dealing with externalities and adapting to new consumer behavior and regulatory demands.

    The capitalist model has changed, and nowadays companies need to add value to a diverse spectrum of stakeholders—shareholders, employees, suppliers, local community members, and society. The urgency of ESG is a global societal commitment, as defined by the UN Sustainable Development Goals and Paris Agreement, and each individual and company must play their role in helping achieve a better, more sustainable world.

    We believe companies with better ESG practices will be investors’ priority in the long run.

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S&P Global ESG Data Primer

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Mona Naqvi

Global Head of ESG Capital Markets Strategy

S&P Global Sustainable1

S&P DJI ESG SCORES (FOR MEASURING COMPOSITE ESG SCORE PERFORMANCE OF FUNDS)

S&P DJI ESG Scores robustly measure corporate sustainability performance with a focus on the most financially material issues within industries. Data is collected through the renowned SAM Corporate Sustainability Assessment (CSA) to engage companies directly for unparalleled access to private information. By going beyond simply collecting public disclosure, the CSA can bring to light emerging topics of growing interest to investors, often long before disclosure is widespread, for a cutting-edge view of corporate sustainability practices. Furthermore, this direct engagement allows us to assess how well companies actually perform on sustainability metrics, rather than simply rewarding corporate transparency and completeness, as is common with datasets that rely solely upon publicly reported information. All responses must be substantiated with internal documentation and real-life examples, audited by a third party where relevant in order to verify the accuracy of the information provided.

The CSA assesses 7,300 companies (representing approximately 95% of global market capitalization) through 61 industry assessments that cover the most relevant ESG issues.  Once a company’s assessment is complete, SAM calculates scores using a predefined scoring framework driven by the financial materiality of topics within specific industries.  The concept of materiality here is defined by both risk exposure and the relevance of financial outcomes—underpinned by more than two decades of investment performance data rather than an arbitrary or theoretical approach to identifying material issues.  Built upon a solid foundation of 600-1,000 data points per company, up to 120 question-level scores are then calculated for companies’ responses to each CSA question.  These scores are aggregated to as many as 27 industry-specific criteria, and the environmental (E score), social (S score), and governance (G score) dimensions before ultimately rolling up into the headline ESG score through a granular and bottom-up approach.

S&P Global ESG Data Primer: Exhibit 1

The CSA is an annual and resource-intensive endeavor that typically takes companies several hundred hours to complete. Once led by CSR professionals in a marketing function, today the CSA often pulls resources from across the organization for a firm-wide view of how sustainability topics influence the business operations and budgeting decisions from the c-suite. In addition to annual assessments, the methodology also incorporates the Media and Stakeholder Analysis (MSA), using daily reporting of real-time information to account for company controversies on an ongoing basis. By combining comprehensive data sources, sound methodology, and a sharp focus on material issues in this way, the CSA is recognized as the “highest quality” and most “useful” ESG assessment by global sustainability professionals and investors.

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Physical versus Synthetic Gold: Know Your Gold Exposure

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Fiona Boal

Managing Director, Global Head of Equities

S&P Dow Jones Indices

The S&P GSCI Gold was up 22% over the first 10 months of 2020.  There are a number of drivers behind its upward performance.  The global pandemic has persuaded investors that gold is a valuable addition to their portfolios as a hedge against equity returns, near zero interest rates, a depreciating U.S. dollar, and lagging economic growth.  Many institutional investors are also using gold as protection against possible deflation or conversely, against an uptick in inflation, the effect of massive fiscal, and monetary stimulus.

Investors have available to them a myriad of vehicles to invest in the performance of gold—from gold bars and mining equities to derivatives and financial products based on derivatives.  Two of the more popular gold investment instruments professional investors use are gold futures, including financial instruments based on gold futures, and exchange-traded products (ETPs) based on physical gold.  In many cases, both derivatives and ETPs are appropriate choices, but there are noteworthy differences in terms of price discovery, liquidity, leverage, cost structure, counterparty risk, and customization that warrant investigation before any investment decision is made.

Gold bugs may tout holding physical gold as offering protection from a true black swan event, such as the complete collapse of a fiat currency, but there are legitimate questions regarding how practical a few gold bars would be in the aftermath of such an event.  Nevertheless, the focus of this paper is to compare the advantages and disadvantages of investment instruments backed by physical gold versus those based on gold derivatives, not on holding physical gold bars and coins (see Exhibit 1).

Physical versus Synthetic Gold: Know Your Gold Exposure: Exhibit 1

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