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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: S&P DJI ESG Scores

The S&P 500 ESG Index: Defining the Sustainable Core

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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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. Who is SAM?  SAM, part of S&P Global, provides the data that powers the globally recognized Dow Jones Sustainability Indices, S&P 500 ESG Index, and others in the S&P ESG Index Series. Each year, SAM conducts the Corporate Sustainability Assessment, an ESG analysis of over 7,300 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 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 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 some 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).

    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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The S&P 500 ESG Index: Defining the Sustainable Core

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Mona Naqvi

Senior Director, Head of ESG Product Strategy, North America

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Daniel Perrone

Director and Head of Operations, ESG Indices

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Reid Steadman

Managing Director, Global Head of ESG

The launch of the S&P 500 ESG Index in April 2019 signaled an evolution in sustainable investing.  Indices based on environmental, social, and governance (ESG) data were no longer simply a means for companies to declare their sustainability credentials or tools to manage tactical investments playing a minor role in investors’ portfolios.  The S&P 500 ESG Index and other such indices were built to underlie strategic, long-term mainstream investment products.

For decades, the prospect of inclusion in ESG indices like the Dow Jones Sustainability Indices has encouraged companies to manage their businesses with various stakeholders and objectives in mind.  However, these pioneering, best-in-class indices tended to be narrow, including only a small selection of the top ESG performers.  This presented challenges to individual and institutional investors who were concerned about the risks inherent in highly concentrated portfolios defined by these indices.

The S&P 500 ESG Index addressed the need for an index that incorporates ESG values while offering benchmark-like performance.  Intentionally broad—including over 300 of the original S&P 500 companies—the S&P 500 ESG Index reflects many of the attributes of the S&P 500 itself, while providing an improved sustainability profile.

This paper outlines the characteristics of the S&P 500 ESG Index that have appealed to investors, including:

  • The easy-to-understand methodology behind the index;
  • How “financial materiality” drives index construction;
  • The similar risk/return profiles of the S&P 500 ESG Index and the S&P 500;
  • How the ESG characteristics of the S&P 500 ESG Index are improved campared with those of the S&P 500; and
  • Specific examples demonstrating how the S&P 500 ESG Index methodology sorts and selects companies.

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