In This List

InsuranceTalks: Participating and Protecting Using Dividends

TalkingPoints: The S&P New China Sectors Index: Accessing the Growth Drivers of the “New China” Economy

FAQ: S&P DJI’s Approach to the EU Low Carbon Benchmark Regulation Disclosure Requirements

FAQ: EU Low Carbon Benchmark Regulation

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

InsuranceTalks: Participating and Protecting Using Dividends

Insurance Talks is an interview series where insurance industry thinkers share their thoughts and perspectives on a variety of market trends and themes impacting indexing.

Joyana Pilquist, CFA is Vice President, Head of Derivatives at American Equity Investment Life Insurance Company.

S&P DJI: What is your role at American Equity, and how do you serve the insurance space?

Joyana: I am Vice President and Head of Derivatives at American Equity. My team and I hedge the embedded derivatives in our fixed index annuity liabilities for American Equity Investment Life Insurance Company and Eagle Life Insurance Company.

S&P DJI: What considerations are top of mind as you and your team are considering what index will be at the center of a fixed index annuity (FIA)?

Joyana: The most immediate consideration when contemplating a new index is whether we think the index design and objectives can help us potentially create higher risk-adjusted and stable returns for our policyholders over the long term, while still maintaining option costs. Renewal rate integrity is something that American Equity has always deemed an essential business philosophy, so stabilizing costs to hedge policyholder returns is important. It is also important to us that the index be reliable and understood with relative ease. It must fill a gap in the policyholders’ ability to potentially increase account values in different economic regimes.

S&P DJI: Earlier in 2020, we saw periods of extreme volatility and sharp declines in the market. How do you try to plan for and protect against these conditions as you’re developing new FIAs?

Joyana: Selecting the right type of index is an important part of our plan. We’ve found risk control indices to be an effective tool in mitigating the effects of extreme volatility and sharp market downturns in an investment portfolio. Volatility tends to increase as the market decreases. The risk control mechanism decreases the allocation to the underlying index as volatility increases and, therefore, mitigates its effects on the overall index. This, in turn, tends to lessen sharp declines in the risk control index compared to indices without the risk control mechanism.

S&P DJI: American Equity uses the S&P 500® Dividend Aristocrats® Daily Risk Control 5% Index within one of its FIAs. What characteristics did this index have that made it well suited for use within an FIA?

Joyana: We added the S&P 500 Dividend Aristocrats Daily Risk Control 5% Index to our index offerings back in 2014. The index was simple to understand with two components (equity and cash). We appreciated how the underlying index, the S&P 500 Dividend Aristocrats, which represents the equity component, was a proven index with a demonstrated track record for performance. The companies that make up the underlying index are all highly rated (investment grade), large (at least USD 3 billion market cap), diversified across market sectors, and have a long history (25 years minimum) of paying and increasing dividends. It was expected that, as more of the baby boom generation retires, demand for dividend-paying stocks would increase and, historically, those stocks have provided some downside protection in volatile markets. These reasons, along with the addition of the risk control mechanism, make the index attractive for our use.

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TalkingPoints: The S&P New China Sectors Index: Accessing the Growth Drivers of the “New China” Economy

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Michael Orzano

Senior Director, Global Equity Indices

Take a look at how the S&P New China Sectors Index helps market participants see China’s changing economy in a novel way.

  1. What is the rationale behind the construction of the index?

    Historically, China’s growth has been driven by companies in the banking, natural resources, and manufacturing sectors—many of which are state-owned enterprises. However, as China’s economy matures, consumption and service-related industries are becoming structurally more important. Because the country’s stock market continues to have significant exposure to these “old economy” sectors, many market participants are seeking alternative index solutions to participate more directly in China’s fastest growth areas. We believe the S&P New China Sectors Index meets this need in the marketplace, given its focus on companies operating in industries poised to benefit from China’s transition to a consumer- and service-oriented economy.

  1. How does the index work?

    Subject to meeting minimum size and liquidity requirements, all companies domiciled in China and Hong Kong are eligible, including A-shares and offshore listings in Hong Kong, the U.S., and Singapore. Companies classified within the Global Industry Classification Standard® (GICS®) sectors and industries listed in Exhibit 1 are then selected for inclusion.

    If more than 300 companies are selected, only the largest 300 by float-adjusted market cap are included. The index is weighted by float-adjusted market cap, subject to a single-stock cap of 10%, and it is rebalanced semiannually in June and December.

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FAQ: S&P DJI’s Approach to the EU Low Carbon Benchmark Regulation Disclosure Requirements

The EU Low Carbon Benchmark Regulation requires administrators of benchmarks (other than interest rate and FX) to comply with new requirements to disclose environmental, social, and governance (ESG) factors in their methodology documents and benchmark statements.  The delegated regulations ((EU) 2020/1816 and (EU) 2020/1817) for ESG disclosure (“Delegated Regulations”) are effective as of Dec. 23, 2020.

  1. What are the regulations, and what do they aim to achieve?  The EU Low Carbon Benchmark Regulation amends the EU Benchmark Regulation in two ways: first, it introduces two new benchmark classifications—EU Climate Transition Benchmarks (EU CTB) and EU Paris-Aligned Benchmarks (EU PAB)—and second, it requires administrators of ESG benchmarks to publish certain information.  Administrators of benchmarks that pursue ESG objectives must (i) publish an explanation of how key elements of the methodology reflect ESG factors; and (ii) explain in the benchmark statement how ESG factors are reflected for each benchmark or family of benchmarks.  The aims of the Delegated Regulations are to:
    • Create a common framework of requirements that promotes consistency, leading to greater comparability between benchmarks;
    • Clearly state if a benchmark pursues ESG objectives, helping investors to identify them; and
    • Generate greater transparency of a benchmark’s objectives to help investors understand them more easily.
  2. When did the requirements come into effect?  For EU benchmark administrators, the Delegated Regulations are effective as of Dec. 23, 2020.  For third-country (i.e., non-EU) benchmark administrators, the Delegated Regulations are effective as of Jan. 1, 2022.
  3. How does S&P DJI intend to meet the new EU ESG disclosure requirements?  S&P DJI has two benchmark administrators under the EU Benchmark Regulation (EU BMR): S&P DJI Netherlands B.V. (S&P DJI BV), an EU benchmark administrator based in Amsterdam and authorized by the Dutch Authority for Financial Markets; and S&P Dow Jones Indices LLC (S&P DJI), a corporation based in New York.  For the purposes of the EU BMR, S&P DJI is an administrator located in a third country.  Under the EU BMR, non-EU (third-country) benchmark administrators have an extended period of time to implement the requirements of the regulation. On the other hand, EU benchmark administrators must implement the EU ESG disclosure requirements starting from Dec. 23, 2020.  In view of the different timelines for EU and third-country administrators, we are prioritizing the EU ESG disclosures for those benchmarks administered by S&P DJI BV.  For more information on S&P DJI’s implementation of the EU Benchmark Regulation, please refer to the Regulatory Information page of the S&P DJI website.    

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FAQ: EU Low Carbon Benchmark Regulation

The EU Low Carbon Benchmark Regulation requires administrators of benchmarks (other than interest rate and FX) to comply with new requirements to disclose ESG factors in their methodology documents and benchmark statements.  The delegated regulations ((EU) 2020/1816 and (EU) 2020/1817) for ESG disclosure (“Delegated Regulations”) are effective as of Dec. 23, 2020.

EU LOW CARBON BENCHMARK REGULATION

  1. What are the regulations, and what do they aim to achieve? The EU Low Carbon Benchmark Regulation amends the EU Benchmark Regulation in two ways: first, it introduces two new benchmark classifications—EU Climate Transition Benchmarks (EU CTB) and EU Paris-Aligned Benchmarks (EU PAB)—and second, it requires administrators of ESG benchmarks to publish certain information.  Administrators of benchmarks that pursue ESG objectives must (i) publish an explanation of how key elements of the methodology reflect ESG factors; and (ii) explain in the benchmark statement how ESG factors are reflected for each benchmark or family of benchmarks.  The aims of the Delegated Regulations are to:
    • Create a common framework of requirements that promotes consistency, leading to greater comparability between benchmarks;
    • Clearly state if a benchmark pursues ESG objectives, helping investors to identify them; and
    • Generate greater transparency of a benchmark’s objectives to help investors understand them more easily.
  1. When did the Delegated Regulations come into effect? The Delegated Regulations are effective as of Dec. 23, 2020.
  2. Where does the EU Low Carbon Benchmark Regulation originate from? The European Commission published its action plan for financing EU sustainable growth in March 2018.[1]  A primary objective of the sustainable finance action plan is to channel private investment into the transition to a climate-neutral economy.  One of the initiatives that the EU has implemented to help achieve this goal is the amendment of the EU Benchmark Regulation.  This amendment enhances the ESG transparency of benchmark methodologies and specifies minimum methodology standards for low carbon benchmarks in the EU. 
  3. What are the disclosures required by the Delegated Regulations? The EU Low Carbon Benchmark Regulation requires benchmark administrators to make ESG disclosures in two separate documents: the benchmark methodology and the benchmark statement.  In addition, the Delegated Regulations mandate the use of specific disclosure templates.

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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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