In This List

FAQ: The S&P Sustainability Screened Indices

TalkingPoints: Charting a Course for the Continued Rise of Passive in India

TalkingPoints: ESG Access Continues to Evolve in Mexico – Get to Know the S&P/BMV Total Mexico ESG Index

Investing in Water for a Sustainable Future

Currency Hedging U.S. Equities: A Practical Tool for Global Investing

FAQ: The S&P Sustainability Screened Indices

COMPANY BACKGROUND

  1. Who is S&P Dow Jones Indices?  S&P Dow Jones Indices (S&P DJI) is home to iconic financial market indicators, such as the S&P 500® and the Dow Jones Industrial Average®.  The largest global resource for essential index-based market concepts, data, and research, it is a major investor resource to measure and trade the markets.

    S&P Dow Jones Indices has been a pioneer in environmental, social, and governance (ESG) indexing for over 20 years, starting with the 1999 launch of the Dow Jones Sustainability World Index.  Today, we offer an extensive range of indices to fit varying risk/return and ESG expectations, from core ESG and low-carbon climate approaches to thematic and fixed income ESG strategies.

S&P SUSTAINABILITY SCREENED INDICES

  1. What are the S&P Sustainability Screened Indices?  The S&P Sustainability Screened Indices seek to measure the performance of stocks in broad market indices, such as the S&P 500, S&P MidCap 400®, and S&P SmallCap 600®, while excluding companies involved in certain controversial business activities, companies not compliant with the United Nations Global Compact (UNGC), and companies involved in ESG controversies.
  2. What exclusions affect the calculation of the S&P Sustainability Screened Indices? As of each rebalancing reference date, companies with the following specific business activities are excluded from the eligible universe.
    • Thermal Coal: Companies are excluded that:
      • Extract thermal coal accounting for greater than 5% of their revenue; or
      • Generate electricity from thermal coal accounting for greater than 5% of their revenue.
    • Oil Sands: Companies are excluded that:
      • Extract oil sands accounting for greater than 5% of their revenue.
    • Shale Energy: Companies are excluded that:
      • Are involved in shale energy exploration and/or production accounting for greater than 5% of their revenue.
    • Tobacco: Companies are excluded that:
      • Produce tobacco;
      • Have tobacco sales accounting for greater than 10% of their revenue;
      • Have tobacco-related products and services accounting for greater than 10% of their revenue; or
      • Have an ownership stake of 25% or more in a company that has tobacco-related products and services accounting for greater than 10% of their revenue.
    • Controversial Weapons: Companies are excluded that either directly or via an ownership stake of 25% or more of another company are involved in the core weapon system, or components/services of the core weapon system that are, and are not, considered tailor-made and essential for the lethal use of the following weapons:
      • Cluster weapons;
      • Landmines (anti-personnel mines);
      • Biological or chemical weapons;
      • Depleted uranium weapons;
      • White phosphorus weapons; or
      • Nuclear weapons.
    • Small Arms: Companies are excluded that, at a 0% threshold of their revenue:
      • Manufacture and sell assault weapons and/or small arms (non-assault weapons) to civilian customers;
      • Manufacture and sell small arms to military/law enforcement customers;
      • Manufacture and sell key components of small arms; or
      • Sell and/or distribute assault weapons and/or small arms (non-assault weapons).

    In addition, companies are evaluated according to Sustainalytics’ Global Standards Screening (GSS), which is an assessment of a company’s impact on stakeholders and the extent to which a company causes, contributes to, or is linked to violations of international norms and standards.  The UNGC principles are the basis for the GSS.

    All companies classified as Non-compliant (companies that do not act in accordance with UNGC principles and associated standards, conventions, and treaties) are ineligible for the index.

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TalkingPoints: Charting a Course for the Continued Rise of Passive in India

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Tyler Carter

Associate Director, Global ETF Strategy

While India has taken to passive investing in a big way, there are still a few hurdles preventing serious growth. We sat down with Tyler Carter, Associate Director, Global ETF Strategy at S&P DJI, to explore how passive’s rise in other markets could help inform a path forward in India.

1. How large is the passive market in India today and what has its growth trajectory looked like in recent years?

Tyler: The passive exchange-traded fund (ETF) market in India reached USD 25 billion in 2020. While this is modest compared with more established markets, the growth trajectory has picked up significantly in recent years; the 10-year CAGR sits at 49%, which is over twice the annual growth rate of the global ETF market overall. As we have seen in more developed markets, the ETF sponsors that establish a footprint early on tend to remain at the forefront as the market grows.  

2. Some investors in India still prefer active management despite increased interest in and availability of passive strategies. What have been some of the influences of a shift to passive in other emerging markets?

Tyler: Passive is certainly making inroads. In just the past two years, passive ETFs have grown from 2% of the Indian mutual fund industry to over 9%. The driver of this appears to be the same driver that exists in other markets that have seen a similar shift: potential value. Passive investing has historically provided a cheaper alternative for gaining broad exposure to the markets than active management. Despite often lower costs, passive access to markets hasn’t necessarily come at the expense of returns. For example, our headline index in India, the S&P BSE 100, has outperformed over 82% of active funds over a five-year period. (Note, however, index performance is not the same as fund performance. Index performance does not account for management fees, transaction costs, or other expenses.) Typically, if investors start to see that type of outperformance, the shift to passive tends to occur naturally. Our biannual S&P Indices Versus Active Funds (SPIVA®) Scorecards show that, over the long-run, passive outperforms active. That evidence can be compelling for investors looking to limit costs while keeping long-term goals in reach.

3. Liquidity has been a big problem in India historically. Can you talk about the effectiveness of liquidity enhancement programs where secondary market transactions are persistently low? What have similar markets done to boost liquidity that we could also consider?

Tyler: ETF market makers exist to help create an efficient, liquid trading market. Liquidity enhancement programs exist globally and have historically proven effective in developing liquidity for new and lesser-known products. These programs are really only one piece of the liquidity puzzle though. Something as simple as analyst coverage and increased communication to the target investor base can usually go a long way in helping to build and sustain liquidity.

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TalkingPoints: ESG Access Continues to Evolve in Mexico – Get to Know the S&P/BMV Total Mexico ESG Index

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Silvia Kitchener

Director, Global Equity Indices, Latin America

To address the need for a broad market ESG benchmark in Mexico, S&P Dow Jones Indices (S&P DJI) and the Mexican Stock Exchange (BMV) joined forces to launch the S&P/BMV Total Mexico ESG Index. S&P DJI’s Silvia Kitchener and BMV’s Rubén Perera sat down to discuss how this innovative index captures a more complete picture of ESG in Mexico and how it could be used to address 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/BMV Total Mexico ESG Index?

    Silvia: That is 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. Then, we have the S&P ESG Indices, which are designed to provide improved ESG representation while offering a risk/return profile similar to that of the underlying benchmark, as in the case of the S&P 500® ESG Index vis-à-vis the S&P 500. In a way, the S&P/BMV Total Mexico ESG Index is a hybrid of the “best-in-class” approach and the S&P ESG Indices framework.

    In essence, the index seeks to represent the Mexican equity market, featuring companies with the highest sustainability scores within each GICS sector, while also seeking to improve its ESG profile and maintain a similar risk/return profile compared with the benchmark S&P/BMV Total Mexico Index.

  2. Why are you launching an ESG index in Mexico now?

    Silvia: We’ve found that in Mexico right now, there is great appetite for information on ESG. The concept of sustainable investing has been around for quite some time—our oldest ESG indices, the Dow Jones Sustainability Indices (DJSI), go back to 1999. Since then, there has been a growing interest in ESG, and it has especially picked up in the past few years. The BMV launched a sustainable index in 2011 that helped bring the concept of sustainability to the market, but now issuers, asset managers, asset owners, and regulators are actively participating in the process. Many are looking for ESG tools that are sharper than the first generation of ESG indices. Thanks to advancements in ESG data and continued innovations in indexing, we’re able to meet this demand with an index built on deeper datasets.

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

    Rubén: Demand has definitively increased in recent years. Global investors have integrated portfolios and investment strategies based around the three pillars of sustainability. Some of the largest firms have announced a series of initiatives to position sustainability at the center of their investment strategy, making it an integral piece in the construction of portfolios and risk management, so there is a change in the collective consciousness. Nowadays, not only are companies’ returns evaluated, but there is also a legitimate conscious effort to examine how companies gained their returns and the impact of their activities on our society and the environment. There is a genuine concern from companies to manage resources wisely, because that is what many investors are looking for.

    Specifically, at BMV, we have a full commitment to corporate responsibility. We are a benchmark within the Mexican financial market, and we have developed various ESG initiatives including: launching the S&P/BMV IPC Sustainable Index and green, social, and sustainable bonds, creating the first sustainability guide, strengthening the financial culture, and becoming members of the UN Global Compact and Sustainable Stock Exchanges Initiative.

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Investing in Water for a Sustainable Future

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Tianyin Cheng

Senior Director, Strategy Indices

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Claire Yi

Analyst, Strategy Indices

SUMMARY

  • The world is facing critical water shortages, and companies that focus on addressing the growing water crisis could represent key long-term growth opportunities.
  • Listed companies involved in water-related business activities, as represented by the S&P Global Water Index, have historically exhibited higher risk-adjusted returns than the broad global equity market.
  • Allocation to water can be systematically captured by rules-based, transparent index construction. Market participants could utilize index-linked water strategies to gain exposure to water, manage water risk, express their sustainability views, or allocate as part of a broader natural resource theme.

THE CASE FOR INVESTING IN WATER

Water is essential to the production and delivery of nearly all goods and services.  Many businesses are reliant on a sufficient flow of clean water to operate and realize their growth ambitions.  Overconsumption of water, water pollution, environmental degradation, and changing climatic conditions are making clean water an increasingly scarce resource. As the world population grows and competition for water resources between industry sectors intensifies, nations are set to experience a 40% shortfall in water by 2030.

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Currency Hedging U.S. Equities: A Practical Tool for Global Investing

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Tianyin Cheng

Senior Director, Strategy Indices

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Claire Yi

Analyst, Strategy Indices

When investing in the U.S. stock market, non-U.S. investors take on both equity risk and currency risk.  Adverse moves in exchange rates can dramatically affect investment outcomes.  Currency hedging is one technique that is designed to take currency risk out of the equation when investing in the U.S. market from overseas.

This paper examines the mechanics and the potential benefits of currency hedging, using the U.S. equity market as an example, from the perspective of international investors.  We explore the impact of currency risk on performance, the methodology of the S&P 500® Currency Hedged Indices, as well as key factors to consider when overlaying a currency hedge on a portfolio.

IMPACT OF CURRENCY RISK ON PERFORMANCE

Currency risk can threaten returns as a result of changes to foreign exchange rates.  In Exhibit 1, we compare the historical performance of the S&P 500 calculated in U.S. dollars with its counterpart in Japanese yen.  The only difference between these two return series is the reporting currencies, thereby representing the currency risk impact.  Please see the appendix for the performance of the S&P 500 denominated in other major Asian currencies.

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The impact of currency risk can be substantial depending on the magnitude of dislocation in the currency market.  Exhibits 1 and 2 show that returns of the S&P 500 in U.S. dollars versus the S&P 500 in yen differ noticeably between June 2007 and January 2012, and between September 2012 and July 2015.

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During the first period, the U.S. dollar depreciated significantly relative to yen, thus a yen-denominated investor would have received negative currency return, decreasing the gains that could have been derived from investing in S&P 500.  However, during the second period, the U.S. dollar appreciated against the yen, so a yen-based investor would have benefitted from positive currency returns, magnifying the expected investment outcomes.

A non-U.S. investor who wishes to avert divergence from investment objectives should carefully take currency risk into consideration.

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