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Indexology Magazine: Spring 2019

FAQ: S&P DJI ESG Index Series

Dividend Strategy With Quality Yields — The Dow Jones U.S. Dividend 100 Index

FAQ: S&P/Drucker Institute Corporate Effectiveness Index

TalkingPoints: The Fourth Industrial Revolution - Are We Ready?

Indexology Magazine: Spring 2019

The Fourth Industrial Revolution: Are We Ready?

Thirty-eight percent of American workers may need to change occupations by 2030, according to PwC.1 That means about 45 million people already in the workforce might need to be retrained over the next 11 years. In the same vein, McKinsey Global Institute has estimated that approximately 50% of the activities people are paid to do, representing USD 16 trillion in costs to the global economy, can be automated using currently available technology.2

Rapid developments in artificial intelligence (AI) and robotics— coupled with ubiquitous connectivity and vast, easily accessible processing power—are laying the groundwork for fundamental structural changes in the global economy. These mutually reinforcing catalysts are driving exponential innovation across a wide swathe of the economy, reshaping entire industries and creating new ones.

Interestingly, these catalysts are not new in and of themselves. For instance, the early work in modernday artificial intelligence began in the 1950s, even though progress was limited given the lack of necessary processing power; and, of course, robots have been commonplace in manufacturing for well over 30 years. What’s prompting this new era is the compounding effect of developments in each of these areas. For instance, massively powerful and easily accessible computing power has greatly accelerated developments across AI, robotics, and the internet of things. Similarly, rapid developments in AI have greatly enhanced the capabilities of robotics, complex network management, and our ability to make sense of the vast amount of data captured by an increasingly connected world.

It is not purely technical advancements that are facilitating this revolution: a cultural shift towards a more open, sharing economy has also lowered the barriers to entry for many innovative startups. The open source community has evolved to include valuable intellectual property and sophisticated foundational components made freely available by large companies, such as Amazon, Google, and Facebook, for use by third parties. Couple that with ondemand services, such as effectively limitless computing power, and it’s easy to see how many traditional barriers to entry have been lowered across many industries.

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FAQ: S&P DJI ESG Index Series

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.

ESG at S&P DJI

S&P Dow Jones Indices has been a pioneer in environmental, social, and governance (ESG) indexing for 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 Dow Jones Indices and SAM have a long history of collaboration, since joining forces to launch the world-renowned Dow Jones Sustainability World Index in 1999.

2. Who is SAM? SAM is a registered trademark of RobecoSAM, the Zurich-based asset management firm focused exclusively on sustainability investing since 1995. It offers in-house ESG-themed asset management, corporate sustainability assessment, and sustainability indices and benchmarking. The company was founded in 1995 and has been a partner of S&P Dow Jones Indices since 1999, when they worked together to launch the Dow Jones Sustainable Index (DJSI) Series.

S&P DJI ESG INDICES:

  1. What is the S&P ESG Index Series? The S&P ESG Index Series is a set of marketcapitalization-weighted indices, targeting securities that meet industry-specific sustainability criteria. The indices maintain similar overall industry group weights as their underlying indices to attain benchmark-like performance. ESG stands for environmental, social, and governance.
  2. Why was the S&P ESG Index Series created? The S&P ESG Index Series was launched to provide ESG-oriented and investable alternatives to leading market benchmarks, such as the S&P 500.
  3. What are the S&P DJI ESG Scores? S&P DJI ESG Scores are environmental, social, and governance scores that robustly measure ESG risk and performance factors for corporations, with a focus on financial materiality. The S&P DJI ESG Scores are used in the constituent selection process in the S&P ESG Index Series. They are a second set of ESG scores calculated by SAM, in addition to the SAM ESG Scores that are used to define the Dow Jones Sustainability Indices constituents.

The S&P DJI ESG Scores are the result of further scoring methodology refinements to the SAM ESG Scores that are the result of SAM’s annual Corporate Sustainability Assessment (CSA), a bottom-up research process that aggregates underlying company ESG data to score levels. The scores contain a total company-level ESG score for a financial year, comprising individual environmental (E), social (S), and governance (G) dimension scores, beneath which there are on average 21 industry-specific criteria scores that can be used as specific ESG signals (see Exhibit 1).1

A company’s total ESG score is the weighted average of all criteria scores and their respective weights. Each individual ESG dimension score (e.g., a company’s “E” score) is the weighted average of all criteria scores and weights within a specific ESG dimension. Total ESG scores range from 0-100, with 100 representing best performance.

For more information on the S&P DJI ESG Scores, please see the S&P DJI ESG Scores Frequently Asked Questions.

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Dividend Strategy With Quality Yields — The Dow Jones U.S. Dividend 100 Index

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Tianyin Cheng

Senior Director, Strategy Indices

Dividend-paying stocks have been in focus in recent years—many income seekers have turned away from low-yielding fixed income instruments and are looking to equity markets for an attractive level of income.  After the rise of interest rates at the end of 2018, a continuing search for yield is expected.  However, this search for yield will probably be guided by a focus on quality, and it likely will be against a backdrop of future rising rates.

Among different kinds of income-focused equity indices in the market, the Dow Jones U.S. Dividend 100 Index takes a unique approach.  The index not only seeks to track stocks with consistent dividend payouts, but it also applies quality assurance for the sustainability of yields.  It seeks to achieve “quality yields” by requiring stocks to have paid dividends for a minimum of 10 consecutive years, and by ranking stocks by a composite score calculated from the cash-flow-to-total-debt ratio, return on equity (ROE), dividend yield, and five-year dividend growth rate.

A focus on dividend growth in an environment where market participants are concerned about rising rates is important.  Typically, high-yield equity strategies are biased toward rate-sensitive sectors, which pay out high yields because of the leverage that they can take on (mainly because of mature business models, e.g., utilities).  Such entities are exposed when rates rise.  Selection based on dividend growth ensures that firms that can develop their business and increase their payouts are favored in the selection process.  Such businesses often tend to be well-managed companies, from both capital structure and operational perspectives.

Also differentiating the Dow Jones U.S. Dividend 100 Index from other dividend strategies are its strict size and liquidity screens and its weighting method, which is based on a modified market capitalization approach.  These attributes aim to increase tradability, reduce the influence of smaller and more-distressed stocks on the portfolio, and attain a certain degree of diversification by capping sector- and stock-level exposures at 25% and 4.5%, respectively.  A weighting method based on modified market capitalization also has the potential to lead to a lower turnover than alternatively weighted income indices that primarily weight based on yield or total dividends.

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FAQ: S&P/Drucker Institute Corporate Effectiveness Index

INDEX DESIGN

  1. What is the S&P/Drucker Institute Corporate Effectiveness Index? The S&P/Drucker Institute Corporate Effectiveness Index is designed to track stocks in the S&P 500® that consistently rank highly on proprietary management criteria. The best of these companies are published annually in a special section from the Wall Street Journal as the “Management Top 250.” These are companies that create value through excellence in employee engagement and development, customer satisfaction, social responsibility, innovation, and high-quality financial metrics, all of which may be leading indicators of both short- and long-term financial performance. Furthermore, companies that pursue success in one or two of these factors at the expense of the others may be taking on risk currently undervalued by the market. The S&P/Drucker Institute Corporate Effectiveness Index was thus constructed to identify companies that exhibit excellence and consistency in how they create and sustain value.

2. Why was the S&P/Drucker Institute Corporate Effectiveness Index created? While some investors obsess over short-term financial performance, they typically look right past crucial long-term factors that are difficult to measure—the reason these factors are often called “intangibles.” Yet a growing body of research shows that as much as 80% of a typical company’s value is driven by intangibles such as the strength of customer relationships, the engagement of the workforce, the ability to innovate, integrity in finances, and contributions to society. In collaboration with the Drucker Institute, S&P Dow Jones Indices created this index to give investors the whole picture: companies that effectively manage their intangibles with a holistic consistency that suggests they will continue to do so in the future.

3. What makes the S&P/Drucker Institute Corporate Effectiveness Index unique? The index combines two innovative measures—the Drucker Institute corporate effectiveness score and the S&P DJI quality score—into a single method that seeks to measure a company’s capacity for creating value while managing risk. The index uses an innovative construction that considers both financial and intangible management performance, and recognizes companies that stand out on the combined measure without resorting to a more risky unbalanced approach.

The objective of the S&P/Drucker Institute Corporate Effectiveness Index is to track firms that are managed effectively. This begins with the Drucker Institute’s rigorous and quantitative assessment of the managerial functions at the core of every enterprise: customer satisfaction, employee engagement and development, innovation, and social responsibility. Added to this is S&P DJI’s quality score as a recognized measure of financial strength. Together, these measures assess a firm’s ability to create, deliver, and sustain value for shareholders and stakeholders alike. Finally, in identifying companies that are not only effective on average but also well balanced, the index seeks a blend of short-term performance and long-term potential.

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TalkingPoints: The Fourth Industrial Revolution - Are We Ready?

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John van Moyland

Managing Director, Global Head of S&P Kensho Indices

Thirty-eight percent of American workers may need to change occupations by 2030, according to PwC. That means about 45 million people already in the workforce might need to be retrained over the next 11 years. In the same vein, McKinsey Global Institute has estimated that approximately 50% of the activities people are paid to do, representing USD 16 trillion in costs to the global economy, can be automated using currently available technology.

Rapid developments in artificial intelligence (AI) and robotics—coupled with ubiquitous connectivity and vast, easily accessible processing power—are laying the groundwork for fundamental structural changes in the global economy. These mutually reinforcing catalysts are driving exponential innovation across a wide swathe of the economy, reshaping entire industries and creating new ones.

Interestingly, these catalysts are not new in and of themselves. For instance, the early work in modern-day artificial intelligence began in the 1950s, even though progress was limited given the lack of necessary processing power; and, of course, robots have been commonplace in manufacturing for well over 30 years. What’s prompting this new era is the compounding effect of developments in each of these areas. For instance, massively powerful and easily accessible computing power has greatly accelerated developments across AI, robotics, and the internet of things. Similarly, rapid developments in AI have greatly enhanced the capabilities of robotics, complex network management, and our ability to make sense of the vast amount of data captured by an increasingly connected world.

It is not purely technical advancements that are facilitating this revolution: a cultural shift towards a more open, sharing economy has also lowered the barriers to entry for many innovative startups. The open source community has evolved to include valuable intellectual property and sophisticated foundational components made freely available by large companies, such as Amazon, Google, and Facebook, for use by third parties. Couple that with on-demand services, such as effectively limitless computing power, and it’s easy to see how many traditional barriers to entry have been lowered across many industries.

We now stand on the cusp of this new era, the so-called Fourth Industrial Revolution. A term coined by Klaus Schwab of the World Economic Forum (WEF), it refers to this period of pervasive change in which the characteristics of man and machine begin to merge, whereby human capabilities are enhanced by genetic engineering and wearable and implantable technology, and machines acquire human characteristics, including cognitive capabilities. The WEF uses the term cyber-physical systems to describe the symbiosis of man and machine.

Some have argued that the innovation and change underway today is simply an extension of the Third Industrial Revolution, which heralded the introduction of computers and the digital era in the late 1960s/early 1970s.3 However, the Fourth Industrial Revolution represents a step change both in terms of the rate of change and the nature of it. The digital era is transitioning from one largely involving the automation of rote tasks to one that now includes the advanced cognitive capabilities typically associated with humans. The rate and breadth of change anticipated over the next decade is also unprecedented, resulting in what is likely to be a very different-looking world.

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