Providing Index Solutions to EU SFDR Article 9 Requirements with the S&P Paris-Aligned Indices

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The iBoxx SD-KPI EUR Corporates Indices

Higher Conviction Sustainability: The S&P 500 ESG Elite Index

How Indexing Affects Shariah-Compliant Investing

FAQ: S&P 500 Dividend Points Index

Education - Jul 13, 2023

Kieran Trevor

Analyst, ESG Research & Design

S&P Dow Jones Indices

Barbara Velado

Senior Analyst, Research & Design ESG Indices

S&P Dow Jones Indices

Executive Summary

Guidance published by the European Supervisory Authorities (ESAs) in May 2023, has clarified the position for active and passive Article 9 financial products using an EU Paris-aligned Benchmark (PAB) or an EU Climate Transition Benchmark (CTB). The pertinent regulatory guidance in the Q&As relating to Article 9 financial products was twofold.

On Nov. 17, 2022, the ESAs clarified that when an Article 9 financial product has sustainable investment as its objective, the designated index that has been selected as a reference benchmark cannot be a broad market index. As of March 2023, there were nearly 900 Article 9 funds. If these funds are benchmarked against a broad market-cap-weighted index, they will need to take action and identify an “objective-aligned” benchmark (9.1) or a PAB (9.3), if they are to maintain their Article 9 status.

On May 17, 2023, the ESAs stated that passive financial products that track a PAB or CTB are deemed to have a sustainable investment objective; therefore, such financial products can be categorized as Article 9.

The S&P PACT^TM Indices (S&P Paris-Aligned & Climate Transition Indices) offer a broad, diversified, beta-like exposure. Importantly, the indices seek to eliminate exposure to significant fossil-fuel-based energy (as defined by the EU’s minimum standards for PABs in the Low Carbon Benchmark Regulation (LCBR)), overcoming the “tracking error lock” to fossil fuel energy and broad benchmarks if the broad market does not transition. In order to comply with the LCBR, the S&P Paris-Aligned Indices aim to incorporate the following climate objectives:

To underweight or remove the Energy sector;
To have defined net zero pathways;
To reduce forward-looking transition and physical risks; and
To address climate objectives and get ahead of emerging sustainability trends.

A similar framework is also utilized in our iBoxx EUR Corporates Net Zero 2050 Paris-Aligned ESG Index, with appropriate features for fixed income indices.

This paper provides an overview of the Article 9 fund market as it stands, insight into how the S&P Paris-Aligned Indices work and the exposures they exhibit from both climate and more traditional risk factor perspectives.

Article 9: Defined Inflows and Organic Growth

“Dark green” Article 9 funds have fared well relative to their “light green” Article 8 counterparts with respect to assets under management and growth. In 2022, Article 8 funds saw net outflows over the year, while Article 9 funds saw consistent inflows for each quarter, with EUR 5.1 billion of inflows in Q4 alone. When considering growth of flows relative to assets, Article 9 funds have seen greater growth compared with Article 8 funds month-over-month since the introduction of the Sustainable Finance Disclosure Regulation (SFDR) in March 2021. Combined, these seem to evidence investor preference for the dark green Article 9 products over their Article 8 counterparts.

As of March 2023, there were 887 European Article 9 funds (3.6% of all funds by count), down from 1,080 in September 2022, largely due to the number of downgrades to Article 8 observed in Q4 2022.

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Education - Jun 22, 2023

The iBoxx SD-KPI EUR Corporates Indices

Florian Guth

Associate Director, Fixed Income Indices

S&P Dow Jones Indices

Sebastian Meyer

Director, Fixed Income Product Management

S&P Dow Jones Indices

Executive Summary

Sustainable development key performance indicators (SD-KPIs) are made up of various relevant environmental, social and governance (ESG) indicators. The SD-KPI standards define the most important SD-KPIs for 68 different industries. The SD-KPIs have been defined by SD-M GmbH since 2007, as mandated by the German federal government. The current SD-KPI Standard 2016-2021 is the first global standard for sector-specific and material ESG indicators and is supported by the U.S. Sustainability Accounting Standards Board (SASB). The SD-KPI Standard 2016-2021 has been included in the Federal Financial Supervisory Authority (BaFin) Guidance Notice on Dealing with Sustainability Risks for handling ESG-related risks as an external sustainability standard. Further, the SD-KPI Standard 2016-2021 has been recommended in the guidelines of the 2020 German Sustainability Code (DNK), which allows companies to demonstrate to investors and consumers their commitment to sustainability in a way that is transparent, comparable and thus clear.

The constituent weights of the established iBoxx € Corporates are adjusted based on the SD-KPIntegration^® score to create the iBoxx SD-KPI EUR Corporates. The iBoxx SD-KPI EUR Corporates is designed to reflect the performance of EUR-denominated investment grade corporate debt. The index aims to offer a broad coverage of the EUR corporate bond universe with adjusted weights, by allocating higher weights to issuers with higher SD-KPIntegration scores and reducing weights for those with lower scores. The index aims to uphold minimum standards of investability and liquidity and showed a higher total return than the iBoxx € Corporates in the long term. The iBoxx SD-KPI EUR Corporates is further broken down into two subindices based on financial or non-financial corporate sectors. The iBoxx SD-KPI EUR Corporates had an improved risk-adjusted total return compared with the iBoxx € Corporates over the full index history.

Contextual Background

Investing sustainably and ESG integration need not be at odds with achieving an adequate risk/return ratio. While some may argue otherwise, sustainable investing and financial returns can be in harmony. However, there is still an ongoing debate on whether and to what extent the consideration of sustainability criteria affect investment performance. Nonetheless, it is important for asset owners, managers and financial advisors to apply relevant sustainability indicators, which can significantly affect the performance of financial investments, in compliance with EU regulations. Several macroeconomic factors such as persistent inflation, rising interest rates, a looming recession and political uncertainties are weighing on tactical allocation decisions for many stakeholders.

The COVID-19 crisis has shown a transition path to a circular, productivity-increasing, inclusive and clean economy that can be accelerated through a green economic recovery. This will be essential to create a more resilient economy and sustainable returns. Like investors, consumers are also demanding more corporate social responsibility in the current crisis. This underlines the growing importance of the three-pillar principle, the balance between social, ecological and economic goals. When it came to the publicly funded rescue packages to mitigate the economic impact of the COVID-19 crisis, sustainability was initially given little consideration globally. But there was increasing pressure on governments from different parties to combine stimulus packages with a green recovery. One example is the group of 178 investors who wrote a letter to the EU heads of state and government calling for sustainable reconstruction. In total, they manage over USD 103 trillion in assets. The fact that the demands of consumers and investors have been successful can be seen, for example, in companies such as Microsoft, BP and Shell, which are shifting directions to align themselves with the goals of the Paris Agreement. Politicians are also waking up to this trend. At the European level, the Green Deal was passed, and Germany and France passed low-carbon economic stimulus packages to tackle the COVID-19 crisis.

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Education - Jun 07, 2023

Higher Conviction Sustainability: The S&P 500 ESG Elite Index

Aran Spivey

Analyst, ESG Indices

S&P Dow Jones Indices

María Sánchez

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

S&P Dow Jones Indices

Executive Summary

Over recent years, investors and asset managers have broadened their approach to sustainability, in line with the proliferation of expectations from institutional investors, governments and the wider public. One such way in which this expansion has occurred in recent years is through the strengthening of conviction on sustainable index products. While screened approaches represent one established approach to sustainable indexing, we have more recently seen the growth in attention to ESG scores and stricter business activity thresholds. This is one way in which market participants can ensure that they are investing in companies with strong ESG performance, avoiding those involved in controversial business activities, while still maintaining diversified sector exposure.

In order to respond to this changing investor demand, S&P Dow Jones Indices (S&P DJI) launched the S&P 500 ESG Elite Index in December 2020. This index series is designed to measure the performance of companies that meet strict sustainability criteria, while maintaining similar overall sector weights as its benchmark.

S&P DJI ESG Scores

The demand for quality data to support investment strategies is particularly pertinent with regard to sustainability.

S&P Global provides the data that powers the globally recognized Dow Jones Sustainability Indices (DJSI), S&P 500^® ESG Index and the S&P 500 ESG Elite Index, among others. Each year, S&P Global conducts the Corporate Sustainability Assessment (CSA), an ESG analysis of over 17,000 companies. The CSA has produced one of the world's most comprehensive databases of financially material sustainability information and serves as the basis for the scores that govern S&P DJI's ESG indices.

The 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.

Index Mechanics

The S&P 500 ESG Elite Index utilizes S&P DJI’s well-established ESG indexing approach of excluding, sorting, selecting and subsequently weighting companies within an index.

First, the eligible universe is established. For the S&P 500 ESG Elite Index, the underlying benchmark is the S&P 500 ESG Index. Exclusions based on business activities are then applied. These exclusions are intended to align with high-conviction objectives by avoiding companies involved in a number of controversial business activities including oil & gas, alcohol, nuclear power and palm oil.

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Education - May 16, 2023

How Indexing Affects Shariah-Compliant Investing

Michael Orzano

Senior Director, Global Equity Indices

S&P Dow Jones Indices

John Welling

Director, Global Equity Indices

S&P Dow Jones Indices

Eduardo Olazabal

Senior Analyst, Global Equity Indices

S&P Dow Jones Indices

Shariah-compliant investing has grown considerably in recent decades, as the Islamic investment community has demanded increasingly sophisticated investment solutions that adhere to the tenets of Islamic law. As a result, the need for high-quality, transparent, Shariah-compliant benchmarks has developed. Today, Islamic indices serve a critical role in Islamic finance; these unique indices identify the universe of securities available for investment and define the way Islamic investors measure the markets.

Introducing Islamic Indices

Islamic indices are subsets of conventional benchmarks that include only companies that pass rules-based screens for Shariah compliance. The resulting Shariah indices tend to be highly correlated to their conventional non-Shariah counterparts and provide Islamic investors with Shariah-compliant versions of a wide variety of popular benchmarks. For example, the S&P 500^® Shariah is a subset of the widely recognized S&P 500 , and it includes only Shariah-compliant constituents of the S&P 500.

As with all Islamic financial products, a supervisory board of Islamic scholars oversees the rules governing Shariah-compliant indices. The board is responsible for defining and maintaining the rules governing the Shariah screening process. However, S&P Dow Jones Indices retains oversight on all other index methodology issues, including rules for company selection in the benchmark index, weighting and index maintenance.

The Ins and Outs of the Shariah Screening Process

Shariah screening is performed at two primary levels: business activity and financial ratios. First, the business activities of each company are evaluated. Companies with significant involvement in certain business activities prohibited by Shariah law are deemed noncompliant. Activities that are generally considered noncompliant include conventional financial services, alcohol, tobacco, gaming, pork, pornography and most conventional media organizations. After removing companies with noncompliant business activities, the remaining companies are examined for compliance with board-approved financial ratios. Areas of focus include the degree of financial leverage and holdings of cash, receivables or interest-earning securities.

Exhibit 1 provides a comparison of the screening methodologies employed by the S&P Shariah Indices and Dow Jones Islamic Market™ Indices. While the criteria evaluated are largely similar, there are some differences, as Shariah scholars have not reached a complete consensus on all aspects of Islamic finance. For example, the Dow Jones Islamic Market Indices exclude defense companies, while these firms are allowed in the S&P Shariah Indices. The calculations of accounting ratios also differ to some extent across the two index series.

How Indexing Affects Shariah-Compliant Investing: Exhibit 1

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Education - Apr 10, 2023

FAQ: S&P 500 Dividend Points Index

What are S&P Dow Jones Indices’ Dividend Point Indices? These indices are designed to track the total dividend payments from the constituents of an underlying index. The level of the index is based on a running total of the dividends from the underlying index’s constituents. Some indices reset to zero on a periodic basis, generally quarterly or annually. Thus, the index seeks to measure the total dividends paid in the underlying index since the previous rebalancing date, or the base date for indices that do not reset on a periodic basis. For quarterly indices, the index resets to zero after the close on the third Friday of the last month of the quarter in order to coincide with futures and options expiration. For annual indices, the index resets to zero after the close on the third Friday of December in order to coincide with futures and options expiration.

The formula for calculating the dividend point index on any date, t, for a given underlying index, x, is:

The index dividend (ID) of the underlying index is calculated on any given day as the total dividend value for all constituents of the index divided by the index divisor. The total dividend value is calculated as the sum of dividends per share multiplied by index shares outstanding for all constituents of the index which have a dividend going ex on the date in question.

Please refer to the S&P Dow Jones Indices’ Index Mathematics Methodology for more detail.

What are “dividend points?” Index points refer to the level of an index. For example, if the S&P 500 is trading at 2,100, it is said to have a level of 2,100 points. Dividend points specifically refer to the level of index points that are directly attributable to the dividends of index constituents.
What’s the difference between dividend points indices and other types of indices, like price return and total return indices? Price return indices represent changes in the market capitalization of index constituents. They do not account for dividends. The headline S&P 500, which is frequently referred to in financial media, is a price return index. There is a related index called the S&P 500 Total Return, which calculates what the performance would be if dividends paid by index constituents on the ex-dividend date of each index share were reinvested. Total return indices, therefore, represent changes in market capitalization plus reinvested dividends. Finally, dividend points indices track dividend payments in isolation, reflecting the periodic cumulative dividends of all index shares. They do not include any changes in market capitalization.

One can think of the different types of indices as representing different investment strategies. Some investors elect to reinvest dividends in the stocks they hold, and this strategy could be benchmarked with the S&P 500 Total Return. On the other hand, some investors hold stocks but do not reinvest dividends—electing instead to take dividends in cash as a source of income. This strategy could be benchmarked with a combination of the S&P 500 Price Return and a S&P 500 Dividend Points Index.

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