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

The S&P/B3 Brazil ESG Index: A New Benchmark for Sustainability and Investment

FAQ: S&P IPSA ESG Tilted Index

InsuranceTalks: Participating and Protecting Using Dividends

TalkingPoints: The S&P New China Sectors Index: Accessing the Growth Drivers of the “New China” Economy

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

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Reid Steadman

Managing Director, Global Head of ESG & Innovation

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Mona Naqvi

Global Head of ESG Capital Markets Strategy, S&P Global

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Daniel Perrone

Director and Head of Operations, ESG Indices

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Ryan Heslin

Analyst, ESG Indices

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Margaret Dorn

Senior Director, Head of ESG Indices, North America

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 compared 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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The S&P/B3 Brazil ESG Index: A New Benchmark for Sustainability and Investment

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Laura Assis Iragorri

Analyst, Global Research & Design

S&P Dow Jones Indices

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María Sánchez

Associate Director, Global Research & Design

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Reid Steadman

Managing Director, Global Head of ESG & Innovation

INTRODUCTION

Indices that integrate environmental, social, and governance (ESG) data are moving from the margins to the mainstream, as investors increasingly seek to align their values with their investments. A new type of ESG index is emerging to facilitate this change in Brazil: the S&P/B3 Brazil ESG Index. Jointly developed by S&P Dow Jones Indices (S&P DJI) and the Brazilian stock exchange (Brasil Bolsa Balcão [B3]), this index not only highlights strong ESG companies—as ESG indices have traditionally done—but it also enables allocation to such companies without requiring investors to take on major risks relative to the market.

THE EVOLUTION OF ESG INDICES

In 1999, S&P DJI launched the first global ESG index, the Dow Jones SustainabilityTM World Index (DJSI World). By including the top 10% of companies, industry by industry, according to their ESG performance, as determined by the Corporate Sustainability Assessment (CSA) conducted by SAM, part of S&P Global, this groundbreaking index encouraged companies to incorporate many ESG factors in their decisions, extending beyond short-term financial considerations.

In the years that followed, other indices, including regional versions of the DJSI World, such as the DJSI Emerging Markets, were launched with this same philosophy in mind: to highlight best-in-class companies and thereby inspire companies to improve their ESG approaches in order to qualify for inclusion in these indices.

Though these indices have been successful and have indeed inspired companies to change in positive ways, aspects of their methodologies present challenges for many investors. Some strategies can be too narrow for investors who want to remain broadly diversified. Though many high-conviction investors use the narrow, best-in-class indices for investment, we saw a need from market participants for ESG indices with returns more in line with the broader market, while providing a more sustainable portfolio of companies. An example of an index that launched in 2019 that typifies this investor-oriented methodology is the S&P 500® ESG Index.

With the launch of the S&P/B3 Brazil ESG Index, Brazil now has an investor-oriented ESG index of its own. This index maintains a large portion of the companies in its underlying index, the S&P Brazil BMI, thereby staying broad and diverse while still screening out companies involved in certain business activities and controversies, as well as those with sustainability profiles that run counter to ESG investors' preferences.

HOW THE INDEX WORKS

The philosophy behind the S&P/B3 Brazil ESG Index is to maintain broad market exposure while aligning with the values of sustainability-focused investors.

The first step is to exclude companies involved in certain business activites contrary to general ESG values. For companies involved in tobacco, controversial weapons, and thermal coal, certain maximum revenue thresholds are set, as defined in the index methodology. If a company generates revenue exceeding these thresholds, it will be excluded at the annual index rebalance that takes place the last business day of April each year. Companies with business practices out of alignment with the United Nations Global Compact (UNGC) are also excluded at the annual rebalance. The exclusion criteria used in Step 1 are provided by Sustainalytics.

Once these exclusions are implemented, an additional screen is applied: companies without S&P DJI ESG Scores are eliminated. Once this is done, the list of companies eligible for the sorting and selection process has been defined.

The remaining companies are then weighted by their ESG scores, subject to certain weighting constraints defined in the methodology. This way, while companies with poor ESG scores can be included, they are given a low weight in the index.

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FAQ: S&P IPSA ESG Tilted Index

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.

    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.

  2. Who is SAM?  SAM, was founded in 1995 and has been a partner of the S&P Dow Jones Indices since 1999, when they worked together to launch the Dow Jones Sustainability Index (DJSI) Series. SAM provides ESG Research and Benchmarking and conducts the annual SAM Corporate Sustainability Assessment (CSA). SAM was formerly a part of asset mananger RobescoSAM. In January 2020, it became a part of S&P Global.

S&P IPSA ESG TILTED INDEX

  1. What is the S&P IPSA ESG Tilted Index? The S&P IPSA ESG Tilted Index is designed to measure the performance of eligible securities in the S&P IPSA that meet sustainability criteria, while attempting to improve the overall S&P DJI ESG Score with respect to the S&P IPSA by overweighting or underweighting ("tilting") companies based on their S&P DJI ESG Scores.
  2. 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. The S&P DJI ESG Scores are used in the constituent weighting process in the S&P IPSA ESG Tilted Index. They are a second set of ESG scores calculated by SAM, in addition to the S&P Global ESG Scores (formerly known as 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 S&P Global ESG Scores. They are based on 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).

  3. 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: Participating and Protecting Using Dividends

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.

Joyana Pilquist, CFA is Vice President, Head of Derivatives at American Equity Investment Life Insurance Company.

S&P DJI: What is your role at American Equity, and how do you serve the insurance space?

Joyana: I am Vice President and Head of Derivatives at American Equity. My team and I hedge the embedded derivatives in our fixed index annuity liabilities for American Equity Investment Life Insurance Company and Eagle Life Insurance Company.

S&P DJI: What considerations are top of mind as you and your team are considering what index will be at the center of a fixed index annuity (FIA)?

Joyana: The most immediate consideration when contemplating a new index is whether we think the index design and objectives can help us potentially create higher risk-adjusted and stable returns for our policyholders over the long term, while still maintaining option costs. Renewal rate integrity is something that American Equity has always deemed an essential business philosophy, so stabilizing costs to hedge policyholder returns is important. It is also important to us that the index be reliable and understood with relative ease. It must fill a gap in the policyholders’ ability to potentially increase account values in different economic regimes.

S&P DJI: Earlier in 2020, we saw periods of extreme volatility and sharp declines in the market. How do you try to plan for and protect against these conditions as you’re developing new FIAs?

Joyana: Selecting the right type of index is an important part of our plan. We’ve found risk control indices to be an effective tool in mitigating the effects of extreme volatility and sharp market downturns in an investment portfolio. Volatility tends to increase as the market decreases. The risk control mechanism decreases the allocation to the underlying index as volatility increases and, therefore, mitigates its effects on the overall index. This, in turn, tends to lessen sharp declines in the risk control index compared to indices without the risk control mechanism.

S&P DJI: American Equity uses the S&P 500® Dividend Aristocrats® Daily Risk Control 5% Index within one of its FIAs. What characteristics did this index have that made it well suited for use within an FIA?

Joyana: We added the S&P 500 Dividend Aristocrats Daily Risk Control 5% Index to our index offerings back in 2014. The index was simple to understand with two components (equity and cash). We appreciated how the underlying index, the S&P 500 Dividend Aristocrats, which represents the equity component, was a proven index with a demonstrated track record for performance. The companies that make up the underlying index are all highly rated (investment grade), large (at least USD 3 billion market cap), diversified across market sectors, and have a long history (25 years minimum) of paying and increasing dividends. It was expected that, as more of the baby boom generation retires, demand for dividend-paying stocks would increase and, historically, those stocks have provided some downside protection in volatile markets. These reasons, along with the addition of the risk control mechanism, make the index attractive for our use.

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TalkingPoints: The S&P New China Sectors Index: Accessing the Growth Drivers of the “New China” Economy

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Michael Orzano

Senior Director, Global Equity Indices

Take a look at how the S&P New China Sectors Index helps market participants see China’s changing economy in a novel way.

  1. What is the rationale behind the construction of the index?

    Historically, China’s growth has been driven by companies in the banking, natural resources, and manufacturing sectors—many of which are state-owned enterprises. However, as China’s economy matures, consumption and service-related industries are becoming structurally more important. Because the country’s stock market continues to have significant exposure to these “old economy” sectors, many market participants are seeking alternative index solutions to participate more directly in China’s fastest growth areas. We believe the S&P New China Sectors Index meets this need in the marketplace, given its focus on companies operating in industries poised to benefit from China’s transition to a consumer- and service-oriented economy.

  1. How does the index work?

    Subject to meeting minimum size and liquidity requirements, all companies domiciled in China and Hong Kong are eligible, including A-shares and offshore listings in Hong Kong, the U.S., and Singapore. Companies classified within the Global Industry Classification Standard® (GICS®) sectors and industries listed in Exhibit 1 are then selected for inclusion.

    If more than 300 companies are selected, only the largest 300 by float-adjusted market cap are included. The index is weighted by float-adjusted market cap, subject to a single-stock cap of 10%, and it is rebalanced semiannually in June and December.

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