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TalkingPoints: ESG Goes Mainstream in Australia – Get to Know the S&P/ASX 200 ESG Index

Index Construction Matters: The S&P SmallCap 600®

Sector Primer Series: Utilities

TalkingPoints: How to Engage ESG in More Meaningful Ways

InsuranceTalks: How Do Insurance Companies Use Fixed Income ETFs?

TalkingPoints: ESG Goes Mainstream in Australia – Get to Know the S&P/ASX 200 ESG Index

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Daniel Perrone

Director and Head of Operations, ESG Indices

S&P Dow Jones Indices

With growing interest in environmental, social, and governance (ESG) investing around the world, S&P DJI has launched the S&P/ASX 200 ESG Index in order to provide a transparent measure of the Australian equities market with a sustainability lens.

1. Why is the S&P/ASX 200 ESG Index significant to the Australian market

The S&P/ASX Index Series has played a significant role in characterizing the performance of the Australian equity market since its inception in April 2000. Since then, the S&P/ASX 200 has served as the foundation for benchmarks and index-based investing strategies in Australia. The S&P ASX/200 ESG Index combines the broad-market coverage of the S&P/ASX 200 with improved ESG characteristics. By targeting 75% of each GICS® industry group’s float-adjusted market capitalization in the S&P/ASX 200, the S&P/ASX 200 ESG Index offers similar industry group weights to that of its benchmark, thereby resulting in a risk/return profile that closely tracks its underlying index.

The S&P/ASX 200 ESG Index is part of the S&P ESG Index Series, which is designed to help investors integrate ESG objectives without compromising their investment objectives. The indices enhance overall ESG performance, targeting companies that rank highly according to our S&P DJI ESG Scores. The index design allows this ESG performance boost to come at a low cost in terms of tracking error as well.

The index eligibility and constituent selection process are driven by the S&P DJI ESG Scores. These scores employ data gathered through SAM’s Corporate Sustainability Assessment (CSA), which SAM1 has developed and administered over the past 20 years. The CSA and resulting S&P DJI ESG Scores provide an unparalleled view into companies’ sustainability performance in Australia. The CSA raises corporate awareness on upcoming ESG issues, challenging Australian companies to think about emerging ESG risks and opportunities in their industries. As a result, the CSA helps identify companies that are ahead of the curve on these topics. The CSA also contributes toward more transparency and reporting on these issues to the benefit of the broader investment community.

2. How and why would market participants use this new index in their practice?

With the S&P/ASX 200 ESG Index, investors are now able to move ESG from the periphery of their portfolios into the core. By providing a similar risk/return profile to that of the S&P/ASX 200, it has become easier and more attractive to allocate more to ESG than ever before. In addition, the S&P/ASX 200 ESG Index methodology is simple and accessible to everyone, particularly to those considering making their first ESG investment. By offering improved ESG characteristics without needing to make too many exclusions, the tracking error of the S&P/ASX 200 ESG Index to the S&P/ASX 200 can be kept low. This profile makes the S&P/ASX 200 ESG Index appealing to institutions, retail investors, and the financial advisor community alike.

In addition, as with any of our benchmark solutions, this index has a range of potential applications, such as defining an investable universe, benchmarking investment performance, or supporting the construction of passive portfolios through investment vehicles like ETFs that are now available in the Australian market.

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Index Construction Matters: The S&P SmallCap 600®

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Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

Launched in 1994, the S&P 600 is designed to track the performance of small-cap U.S. equities and has outperformed the Russell 2000 by an average of 1.6% per year over the past 25 years. This outperformance highlights the importance of index construction; unlike the Russell 2000, the S&P 600 uses an earnings screen—companies must have a track record of positive earnings before they are eligible to be added to the index. The resulting quality factor exposure has played a significant role in explaining the S&P 600’s relative returns, and why it has been a harder benchmark for active managers to beat.

RELATIVE RETURNS COMPARISON: S&P 600 VERSUS RUSSELL 2000

Exhibit 1 shows the cumulative total returns for the S&P 600 and the Russell 2000 since Dec. 31, 1994. The S&P 600 posted higher annualized returns and lower volatility than the Russell 2000 over the entire period, and it outperformed the Russell 2000 in 17 of the past 25 full calendar year periods.

Index Construction Matters: The S&P SmallCap 600®: Exhibit 1

Exhibit 2 shows that the S&P 600 also typically outperformed the Russell 2000 over other horizons. Indeed, the S&P 600 outperformed over most rolling three-month, six-month, one-year, three-year, and five-year periods, with both the frequency and magnitude of outperformance increasing over longer time horizons.

Index Construction Matters: The S&P SmallCap 600®: Exhibit 2

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Sector Primer Series: Utilities

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Sherifa Issifu

Senior Analyst, U.S. Equity Indices

S&P Dow Jones Indices

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Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

The Global Industry Classification Standard® (GICS®) assigns a company to a single business classification according to its principal business activity.  This assignment uses quantitative and qualitative factors, including revenues, earnings, and market perception.  The sector is the first level of the four-tiered, hierarchical industry classification system that includes 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries.

Within the GICS framework, as outlined in Exhibit 1, Utilities companies include those that are primarily engaged in:

  • Supplying electric, gas and water utilities;
  • Operating as Independent Power Producers, Gas & Power Marketing & Trading Specialists, or Integrated Energy Merchants energy traders; and 
  • Generating and distributing electricity using renewable sources.

COMPOSITION

The S&P 500® Utilities comprises all companies in the S&P 500 that are assigned to the Utilities sector by GICS. Created in 1957, the S&P 500 was the first broad U.S. market-cap-weighted stock market index. Today, it is the basis of many listed and over-the-counter investment instruments.

The Utilities sector is the fourth smallest by capitalization of the 11 sectors in the S&P 500, representing 3.07% of the index as of June 30, 2020 (see Exhibit 2). This compares to 4.17% and 2.23% for the S&P MidCap 400® and S&P SmallCap 600®, respectively. Overall, the Utilities sector accounts for 2.95% of (and 71 securities within) the S&P Total Market Index; only the Energy and Materials sectors (2.63% and 2.69%, respectively) account for less, by index weight.

With a total float-adjusted market capitalization of USD 786.16 billion, the S&P 500 Utilities sector comprised 28 companies as of June 30, 2020. The two largest companies in the sector were NextEra Energy Inc (NEE) and Dominion Energy Inc (D), with float-adjusted market caps of USD 117.55 billion and USD 68.13 billion, respectively. There were no Utilities companies in the top 10 of the S&P 500—NextEra Energy Inc ranked as the 46th largest stock, representing 0.46% of the index. The mean market cap of S&P 500 Utilities stocks was USD 28.08 billion, the median market cap was USD 20.86 billion, and the lowest market cap was USD 7.95 billion.

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TalkingPoints: How to Engage ESG in More Meaningful Ways

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Mona Naqvi

Global Head of ESG Capital Markets Strategy

S&P Global Sustainable1

The outperformance of funds that take environmental, social and governance (ESG) issues more seriously than their peers has reinforced why investors might want to integrate these factors into portfolios via the type of tools that S&P Dow Jones Indices has developed.

Encouraged by evidence of the materiality of ESG issues during the Covid-19 led volatility, there is greater appetite for sustainable themes in investor portfolios to align investments with one’s values and potentially generate higher risk-adjusted returns. At the same time, fuelled by greater transparency over how companies act and behave, and also spurred by trends in public opinion towards issues that matter to society as a whole, investors are seeking ways to leverage data and research to gain greater exposure to ESG factors.

Amid these trends, Mona Naqvi, Head of ESG Index Strategy for North America at S&P Dow Jones Indices (S&P DJI), spoke with AsianInvestor to explain the importance of financial materiality and other key ways to assess ESG, to help it be a core building block in portfolio construction.

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InsuranceTalks: How Do Insurance Companies Use Fixed Income ETFs?

With Eric Pollackov, Global Head of ETF Capital Markets, Invesco ETFs

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

Eric Pollackov is the Global Head of ETF Capital Markets for Invesco ETFs. In this role, Eric proactively develops relationships with sell-side trading desks, implements capital market strategies for Invesco's ETFs, and develops and measures the success of client interaction.

S&P DJI: Tell us a bit about your role at Invesco and how you serve insurers.

Eric: My role puts me at the center of the ETF ecosystem, where I interact daily with ETF trade desks, exchanges, portfolio managers, and various types of clients. Our team’s goal is to provide the most seamless and efficient execution experience when using any of Invesco’s 219 U.S.-listed ETFs.

With insurers increasingly turning to ETFs, my team and I work in partnership with the institutional insurance group to assist clients in understanding the ins and outs of ETF structure, liquidity, and trading. Whether they are buying ETFs for the first time or adding onto established positions, we provide the information clients need to successfully implement their investment views via Invesco’s vast array of ETF product offerings.

S&P DJI: In the past five years, we have seen ETF AUM in insurance general accounts double; as of year-end 2019, insurers held USD 31.2 billion in ETFs. What are some of the scenarios in which insurance companies may be utilizing ETFs, and why?

Eric: ETFs provide cost-efficient, convenient, and nimble access to core and non-core asset classes, yielding a number of potential applications for an insurer’s general account. One primary use case is for manager transitions. ETFs can help insurers maintain exposure to a given asset class or market, while the due diligence and implementation processes are completed on a separate account mandate. A second application is for tactical beta tilting. Tactical beta can take on many forms, but it is traditionally used to overweight or underweight specific risk factors, sectors, or asset classes to capture short-term investment opportunities. Also notable is the use of ETFs as a liquidity sleeve in the general account to complement individual securities or managers. Holding a small liquidity sleeve of ETFs may allow insurers to facilitate cash needs in a cost-efficient way by liquidating ETF shares to raise cash, rather than meddling with core positions in the portfolio.

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