IN THIS LIST

Reducing Carbon Exposure in Australian Equities

FAQ: S&P Cryptocurrency Index Series

TalkingPoints: Setting a New Low-Carbon Standard with the S&P/NZX Carbon Efficient Indices

Incorporating a Minimum Variance Framework into Risk Control 2

FAQ: S&P DJI ESG Scores

Reducing Carbon Exposure in Australian Equities

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Priscilla Luk

Managing Director, Global Research & Design, APAC

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Akash Jain

Associate Director, Global Research & Design

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Tim Wang

Senior Analyst, Global Research & Design

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Anurag Kumar

Senior Analyst, Global Research & Design

Market participants are ever more cognizant of the impacts of climate change on their investments and are seeking innovative ways to reduce the carbon footprint of their portfolios, while constraining active risk. One such approach proposed in this paper evaluates the adoption of the S&P Global Carbon Efficient Index Methodology by the broad-based S&P/ASX 300.

EXECUTIVE SUMMARY

  • This paper investigates the narrow-selection-based, low-carbon portfolio construction approach and the broad-based S&P Global Carbon Efficient Index Methodology on the S&P/ASX 300, through the lens of portfolio performance and weighted average carbon intensity reduction.
  • The narrow-selection-based, unconstrained low-carbon portfolio had a 92.7% reduction in carbon intensity with a high tracking error of 5.6%. The sector-neutral approach had a moderately lower tracking error of 3.8% but also a lowered carbon intensity reduction of 71.1%.
  • Despite the pronounced carbon intensity reduction, the historical return of the narrow-based, low-carbon portfolios did not show strong evidence that companies with low carbon intensity were rewarded in their price performance, but the active risk was high.
  • The S&P Global Carbon Efficient Index Methodology is a broad-based portfolio approach, with stock weights in the underlying index tilted toward companies with low carbon intensity within each industry group and aims to closely track performance of the underlying index.
  • By applying this construction approach to the S&P/ASX 300, the carbon efficient portfolio mimicked the performance of the underlying index, with a tracking error of 80 bps over the back-tested period and an average carbon reduction of 24.5% versus the benchmark.
  • As of the June 2020 rebalance, the hypothetical S&P/ASX 300 Carbon Efficient portfolio had a carbon reduction of 28% versus the S&P/ASX 300. The top three contributors to the reduction were Energy, Utilities, and Materials.
  • Australian companies in Consumer Durables & Apparels,
    Telecommunication Services, Consumer Services, Transportation, Capital Goods, and Materials tended to be more carbon efficient than their global industry group peers. The opposite was seen in Retailing, Media & Entertainment, and Insurance companies.

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FAQ: S&P Cryptocurrency Index Series

  1. What are the S&P Cryptocurrency Indices?  These indices are designed to measure the performance of a selection of digital assets (crypto assets) listed on recognized, open exchanges that meet minimum liquidity and market capitalization criteria. The indices aim to bring transparency to the emerging cryptocurrency market.

    As of May 3, 2021, the S&P Cryptocurrency Index Series includes the following indices:

    • S&P Bitcoin Index: This index is designed to track the performance of the digital asset Bitcoin.
    • S&P Ethereum Index: This index is designed to track the performance of the digital asset Ethereum.
    • S&P Cryptocurrency MegaCap Index: This index is designed to track the performance of the digital assets Bitcoin and Ethereum weighted by market cap.

  1. Who is your provider for cryptocurrency data?  Our cryptocurrency pricing and reference data is provided by Lukka, Inc. via its Lukka Prime and Lukka Reference Data products. Lukka is the leading crypto asset data services provider for institutions, including fund administrators and fund auditors that serve over 160 active crypto funds today. For more information about Lukka, please refer to the website: https://data.lukka.tech/prime/.

    S&P Global, Inc., the parent of S&P Dow Jones Indices LLC, is an investor in Lukka. For information on S&P Global's investment in Lukka, please see here. In addition, representatives of Lukka may provide consultative services to the Index Committee from time to time.

  2. What pricing is used as end-of-day for index calculation? S&P Dow Jones Indices uses the Lukka Prime Fair Market Value end-of-day price taken at 4:00 p.m. EST for cryptocurrency index calculation. Other end-of-day index levels will be added for additional markets and regionsas demand warrants. Lukka's methodology is the first of its kind for designed specifically for determining the fair value pricing of liquid cryptocurrency assets.
  3. What is the Fair Market Value Pricing Methodology? The Lukka Prime Fair Market Value Pricing uses a proprietary methodology to determine the primary exchange of each digital asset at any given time, which in turn determines that asset's fair market value.
  4. Why use Fair Market Value Pricing? The Fair Market Value Pricing Methodology was designed to align to both Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) guidelines. Additionally, the Lukka Prime infrastructure and data quality adhere to the standards set by the American Institute of Certified Public Accountants (AICPA) for Service Organizations. Lukka was the first AICPA SOC 1 Type 2 and AICPA SOC 2 Type 2 middle and back office crypto service organization. Many funds holding cryptocurrencies use Lukka data to strike a daily NAV.

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TalkingPoints: Setting a New Low-Carbon Standard with the S&P/NZX Carbon Efficient Indices

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Ryan Christianson

Associate Director, APAC Lead, ESG Indices

To meet the growing demand for sustainable index-based strategies in New Zealand, S&P DJI has launched the S&P/NZX Carbon Efficient Indices, including the S&P/NZX 50 Carbon Efficient Index and S&P/NZX 50 Portfolio Carbon Efficient Index. The index series is designed to incentivize companies to compare their carbon intensity to their industry group peers.

1. Can you share some background on the S&P Carbon Efficient Indices? What are the key elements and objectives that went into creating the S&P/NZX Carbon Efficient Indices?

Ryan: The idea of implementing a carbon efficient methodology to a benchmark index has been around for over a decade, and S&P DJI began launching the S&P Carbon Efficient Indices in 2009.

The key objective behind the index is to apply a weighting methodology that incentivizes companies to compare their carbon intensity to their industry group peers around the world—recognizing that there is global consensus around climate change, and that environmental threats comprise the top five long-term global economic risks. A company's weight may be adjusted positively or negatively based on its carbon intensity; however, companies are not excluded from the index solely due to their carbon intensity.

In addition to the respective comparison to global industry peers, company disclosure of carbon emissions is also reviewed and affects the weight adjustment of the constituent within the index. Utilizing S&P Global Trucost's environmental dataset, we review both the Scope 1 and Scope 2 carbon emission disclosure statuses.

With the launch of the S&P/NZX Carbon Efficient Indices, we have revamped the entire methodology to recognize the carbon impacts of companies by comparing them to their global industry peers, in addition to their peers in New Zealand.

From a performance perspective, the index series is designed to track the baseline S&P/NZX 50 Index and S&P/NZX 50 Portfolio Index closely, with the aim of providing risk/return characteristics that are similar to the benchmarks.

2. What other types of considerations are taken when evaluating constituents for the S&P/NZX Carbon Efficient Indices?

Ryan: With regard to the weight adjustments, one other component we review is the industry group's "impact level," which is classified as high, medium, or low. High impact industry groups include those such as Energy and Materials, whereas low impact industry groups include those such as Media and Financial Services.

There are two factors that we consider for constituent selection, and these are the "High Non-Disclosing Carbon Emitters" and "Controversies Monitoring" screens. As of March 2021, these two screens applied to zero companies in the S&P/NZX 50 Index.

The "High Non-Disclosing Carbon Emitters" screen excludes any company that is deemed to have high carbon emissions while also not disclosing their carbon intensity. This screen is in line with the objective of the index, as it incentivizes the disclosure of environmental impacts even if the company's emissions are high.

The "Controversies Monitoring" screen uses a third-party data source called RepRisk. Index constituent companies are monitored by RepRisk, a leading provider of business intelligence on environmental, social, and governance (ESG) risks. RepRisk analyzes companies for a range of issues including economic crime and corruption, fraud, illegal commercial practices, human rights issues, labor disputes, workplace safety, catastrophic accidents, and environmental disasters. Using these data, each company is assigned a daily RepRisk Index (RRI) indicator.

If RepRisk reports that a company has met or exceeded an RRI indicator of 75, the company will be removed from the index. It will be considered for reinstatement only when it satisfies all the eligibility criteria and its RRI score has remained below 75 on all days since the previous year's rebalancing date.

3. What S&P Global Trucost carbon data are used in the S&P/NZX Carbon Efficient Indices?

Ryan: The carbon efficient index series utilizes the environmental dataset published by S&P Global Trucost. Specifically, the data used are the absolute and intensity figures for carbon emissions, as well as the disclosure status. Carbon intensity is calculated using the Direct + 1st Tier Indirect emissions, which is a combination of Scope 1, 2, and Upstream Scope 3.

S&P Global Trucost's environmental data are comprehensive, covering over 15,000 companies globally, and locally in New Zealand it covers all 50 stocks within the S&P/NZX 50 Index. Data are updated on an annual basis following a strict process that reviews publicly disclosed information, or in the absence of public disclosure, uses a proprietary environmentally extended input-output (EEI-O) model.

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Incorporating a Minimum Variance Framework into Risk Control 2

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

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Laura Assis Iragorri

Analyst, Global Research & Design

S&P Dow Jones Indices

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Cristopher Anguiano

Senior Analyst, Global Research & Design

INTRODUCTION

In this paper, we introduce the new S&P 500® Futures Daily Risk Control 5% Index (the Risk Control 2 Minimum Variance), which is the latest enhancement to S&P DJI’s Risk Control 1 (RC 1) and Risk Control 2 (RC 2), and a variation on our existing standard RC 2 methodology.[1]

Our risk control techniques began with RC 1, which allocates to equity and cash to achieve a target volatility.  RC 2 then introduced fixed income as another asset class and allocates between an equity and liquid bond index to target a specific volatility.  The bond sleeve in RC 2 is generally a risk reduction tool.  However, in volatile periods when no suitable combination of equity and fixed income is able to attain the target volatility, RC 2 rotates its bond sleeve completely to cash, thereby defaulting to RC 1.

In this new index, we take RC 2 a step further, to RC 2 Minimum Variance.  We allocate to equity and bonds like RC 2; however, unlike RC 2, we introduce cash as an extra alternative rather than a complete swap when underlying volatility picks up.

Incorporating a Minimum Variance Framework into Risk Control 2 Exhibit 1

WHY A NEWER VERSION OF RC 2?

Though RC 2 takes the RC 1 approach a notch higher by introducing bonds, it still has one shortcoming.  In instances when the volatility target is relatively too low (i.e., during periods of sell-off), the bond sleeve of RC 2 switches completely to cash.

While allocating to cash reduces index volatility, thus bringing it in line with the target, this comes at a cost of higher turnover resulting from this bond-to-cash swap.  Our new optimized approach addresses this problem through its innovative technique and significantly reduces turnover.

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FAQ: S&P DJI ESG Scores

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, part of S&P Global, have a long history of collaboration since joining forces to launch the world-renowned Dow Jones Sustainability World Index in 1999.

  2. Where does S&P DJI get its ESG data?  S&P Global provides the data that powers the globally recognized Dow Jones Sustainability Indices (DJSI), S&P 500 ESG Index, and others in the S&P ESG Index Series. Each year, S&P Global conducts the Corporate Sustainability Assessment (CSA), an ESG analysis of over 11,000 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.

S&P DJI ESG SCORES

General Questions

  1. 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. They are a second set of ESG scores calculated by S&P Global ESG Research, in addition to the S&P Global 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 S&P Global ESG Scores that result from S&P Global'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 over 20 industry-specific criteria scores that can be used as specific ESG signals (see Exhibit 1).

    faq-spdji-esg-scores-exhibit-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.

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