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

FAQ: S&P DJI ESG Scores

InsuranceTalks: A Multi-Asset Solution for Navigating Volatile Markets

The S&P/ASX 200 ESG Index: Integrating ESG Values into Core in Australia

FATalks: Factors, Risk, and Why Passive Outperforms over Time

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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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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InsuranceTalks: A Multi-Asset Solution for Navigating Volatile Markets

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.

Rhonda Elming is Senior Vice President, Annuity Product Development at Sammons Financial Group. Based in West Des Moines, Iowa. Elming is responsible for fixed annuity product strategy, including new product development and managing the profitability and risk profile of the company’s inforce block of business.

S&P DJI: Tell us a bit about your role at Sammons Financial Group and how you serve the insurance space.

Rhonda: I lead a team of actuaries and analysts that are focused on creating innovative fixed annuity product solutions to help people prepare for retirement, while also helping the company understand and manage financial risks. I work closely with each of our distribution channel leadership teams to identify and understand its unique business and client needs. Through that process, we do a lot of ideation to arrive at a product design that meets the needs of the target market and fits within the desired risk and profitability requirements for the company. My team is responsible for the pricing, regulatory filings, and implementation efforts to bring the products to market.

In my product management role, I have the responsibility of effectively managing the risk and profitability of both the annunity new business and the in-force block. Annunities are a spread business; a large part of this role is setting interest-crediting rate or index parameters on the products.

S&P DJI: Is risk management more of a focus now for Sammons Financial Group in the current market environment?

Rhonda: Yes, the current economic environment is a challenge! Market volatility and historically low interest rates have resulted in widespread adjustments to product portfolios including lowering crediting rates or policy benefits. In some cases, insurers have also suspended sales of products with unfavorable risk or profitability profiles.

Planning for a prolonged low interest rate environment—with the potential for negative interest rates—has been a high priority for a while now. A “lower-for-longer” outlook, particularly for longer duration assets, may lead to higher levels of spread compression on in-force blocks of business and put pressure on insurers’ ability to continue to offer longer liabilities, like guaranteed living benefit riders or guaranteed universal life insurance.

The pandemic has also created unique challenges, with most insurance company employees and distributors working from home. Annuity sales have fallen this year due to shelter-in-place restrictions, record unemployment, and volatile economic conditions. Agility is the name of the game, as insurers adapt to new work arrangements, regulatory changes, and a heightened need to help policy owners, distribution partners, and their local communities through this difficult time.

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The S&P/ASX 200 ESG Index: Integrating ESG Values into Core in Australia

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Daniel Perrone

Director and Head of Operations, ESG Indices

EXECUTIVE SUMMARY

  • The S&P/ASX 200 ESG Index is designed to align investment objectives with environmental, social, and governance (ESG) values.
  • It can serve as a benchmark as well as the basis for index-linked investment products. Historically, the index’s broad market exposure and industry diversification has resulted in a return profile similar to that of the S&P/ASX 200.
  • The index uses the S&P DJI ESG Scores (see page 4) and other ESG data to select companies, targeting 75% of the market capitalization of each GICS® industry group within the S&P/ASX 200.
  • The S&P/ASX 200 ESG Index excludes thermal coal, tobacco, controversial weapons, and companies with low UN Global Compact (UNGC) scores. In addition, those with S&P DJI ESG Scores in the bottom 25% of companies globally within their GICS industry groups are excluded.
  • Our methodology results in an improved composite ESG score compared with the S&P/ASX 200.

INTRODUCTION

An increasing number of investors require indices that are aligned with their investment objectives and their personal or institutional values.  The S&P/ASX 200 ESG Index was designed with both of these needs in mind.

The S&P/ASX 200 ESG Index is broad and constructed to be part of the core of an investor’s portfolio, unlike many ESG indices that have preceded it, which were thematic or narrow in their focus.  By targeting 75% of the S&P/ASX 200’s market capitalization, industry by industry, the S&P/ASX 200 ESG Index offers industry diversification and a return profile in line with Australia’s leading benchmark .

Yet the composition of this new index is meaningfully different from that of the S&P/ASX 200 and more compatible with the values of ESG investors.  Exclusions are made related to thermal coal, tobacco, controversial weapons, and alignment with UNGC principles.  Furthermore, companies with low ESG scores relative to their industry peers around the world are also excluded.  The result is an index suitable for investors moving ESG from the fringe of their portfolio to the core.

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FATalks: Factors, Risk, and Why Passive Outperforms over Time

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

Larry Swedroe is Chief Research Officer of Buckingham Wealth Partners. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with enthusiasm few can match.

Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has since authored seven more books, co-authored eight more, and has had articles published in the Journal of Accountancy, Journal of Investing, AAII Journal, Personal Financial Planning Monthly, and Journal of Indexing.

S&P DJI: You recently participated in a webinar geared toward financial advisors titled “How Did COVID-19 Affect Active vs. Passive Performance?” in which SPIVA® results through the initial wave of the pandemic were analyzed. What were your biggest takeaways from the analysis of this data?

Larry: One of the biggest myths that Wall Street wants and needs investors to believe in order to keep them playing the game of active management and paying higher fees is, “Active management maybe doesn’t win in bull markets due to a cash drag, but these managers will protect you in bear markets.” I might be willing to accept a lower return in the long run if I get insurance in the really bad market environments, especially if I’m a retiree in the withdrawal phase. The truth is, active managers generally tend to actually do a little bit worse in bear markets than bull markets. One study found[1] that in every single turning point in the market, the average active manager got it wrong. For example, when the market was at a peak in March 2000, active managers had the least amount of cash and at the bottom in 2008-2009, they had the most cash.

This data is in line with the period we examined in the webinar. During the initial stages of the COVID-19 crisis, even though active managers had the ability to go to cash, almost two-thirds still underperformed. Every year, I hear that this is a stock picker’s year, but it has never overall been a stock picker’s year when you adjust for risk appropriately.

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