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The S&P 500® ESG Index: Integrating Environmental, Social, and Governance Values into the Core

Integrating ESG Values into Core around the World: The S&P 500® ESG Index and Beyond

Discover Material Insights with S&P DJI ESG Data

Understanding REIT Sectors

SPIVA® Scorecards: An Overview

The S&P 500® ESG Index: Integrating Environmental, Social, and Governance Values into the Core

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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

EXECUTIVE SUMMARY

  • The S&P 500 ESG Index aligns 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. The index’s broad market exposure and industry diversification result in a return profile similar to that of the S&P 500.
  • The index uses the new 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 500.
  • The S&P 500 ESG Index excludes tobacco, controversial weapons, and companies not in compliance with the UN Global Compact (UNGC). 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 500. This holds true in all industries.

INTRODUCTION

An increasing number of investors require indices that are aligned with their investment objectives and their personal or institutional values.  The S&P 500 ESG Index was designed with both of these needs in mind.

The S&P 500 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 500’s market capitalization, industry by industry, the S&P 500 ESG Index offers industry diversification and a return profile in line with the U.S. largecap market.

Yet the composition of this new index is meaningfully different from that of the S&P 500 and more compatible with the values of ESG investors.  Exclusions are made related to tobacco, controversial weapons, and compliance with the UNGC.  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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Integrating ESG Values into Core around the World: The S&P 500® ESG Index and Beyond

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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

EXECUTIVE SUMMARY

  • The S&P ESG Indices align investment objectives with environmental, social, and governance (ESG) values.
  • The indices, which include the S&P 500 ESG Index can serve as benchmarks as well as the basis for index-linked investment products. The S&P ESG Indices’ broad market exposure and industry diversification result in return profiles similar to those of their benchmarks (see Appendix 1).
  • The indices use the new 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 each index.
  • The S&P ESG Index Series excludes tobacco, controversial weapons, and companies not in compliance with the UN Global Compact (UNGC). 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 improved composite ESG scores for all the indices in the series (see Exhibit 4).

INTRODUCTION

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

The S&P ESG Indices are broad and constructed to be part of the core of an investor’s portfolio, unlike many ESG indices that have preceded them, which were thematic or narrow in their focus.  By targeting 75% of the benchmark index’s market capitalization, industry by industry, the S&P ESG Indices offer industry diversification and return profiles in line with their underlying markets (for a full list of indices in the series and their return profiles, see Appendix 1).

Yet, the composition of these new indices are meaningfully different from that of their benchmark indices and more compatible with the values of ESG investors.  Exclusions are made related to tobacco, controversial weapons, and compliance with the UNGC.  Furthermore, companies with low ESG scores relative to their industry peers around the world are also excluded. The result is an index series suitable for investors moving ESG from the fringe of their portfolio to the core.

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Discover Material Insights with S&P DJI ESG Data

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Mona Naqvi

Senior Director, Head of ESG Product Strategy, North America

  1. INTRODUCTION

A quarter of all professionally managed assets now incorporate environmental, social, and governance (ESG) considerations,[1] from the impact of climate change to equality and human rights.  The rich history of S&P Dow Jones Indices (S&P DJI) in this area began in 1999 by pioneering ESG indexing with the launch of the Dow Jones Sustainability Index (DJSI), which marks its 20th anniversary in 2019.

S&P DJI continues to lead sustainable indexing solutions with a suite of more than 150 headline ESG benchmarks, shaping the sustainable investing landscape.  The industry has changed considerably over the past 20 years, from a focus on sector exclusions borne out of the socially responsible investment (SRI) movement, to more nuanced approaches to broad market ownership that reweight based on company performance on ESG.  These are largely driven by the improved availability and quality of ESG data, amplified by the launch of S&P DJI ESG Scoresa rigorous new ESG dataset cultivated over 20 years of sustainable investment experience by our partner, RobecoSAM (through its SAM[1] brand), that are now available to the market for the first time. 

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Understanding REIT Sectors

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Qing Li

Director, Global Research & Design

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Michael Orzano

Senior Director, Global Equity Indices

INTRODUCTION

In recent years, the U.S. real estate sector expanded to include a wide range of companies that own and operate a diverse set of assets.  As recently as 2010, the sector was dominated by companies that owned traditional commercial properties such as office buildings, apartment complexes, warehouses, and shopping centers.  However, the recent growth of specialized REITs—like those that own cell towers, data centers, and timberland, among other non-traditional real estate assets—has transformed the sector into a complex array of companies that derive income from highly distinct assets.  While all REITs share certain characteristics such as offering relatively high dividend yields, the fundamental differences in the underlying assets owned by REITs across sectors have led to different investment characteristics and patterns of returns and volatility.

REIT SECTOR OVERVIEW

There are two main types of REITs: equity REITs and mortgage REITs.  Equity REITs own and operate income-producing real estate and typically earn income through rents.  Mortgage REITs lend money directly to real estate owners and operators, or indirectly through the purchase of mortgages or mortgage-backed securities, and they earn income from the interest on these investments.  Based on the property type each equity REIT owns, we can further categorize it by its sector.  Most REITs specialize in a single property type, while some manage portfolios that include multiple types of properties.  Exhibit 1 provides an overview of the main equity REIT sectors.  

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SPIVA® Scorecards: An Overview

WHAT IS SPIVA?

S&P Indices versus Active (SPIVA) scorecards are semiannual scorecards published by S&P Dow Jones Indices that compare the performance of active equity and fixed income mutual funds against their benchmarks over a number of time horizons.  The inaugural scorecard was published in 2002 and focused on the U.S., but the scorecard has since been extended to Australia, Canada, Europe, India, Japan, Latin America, and South Africa.

WHAT IS UNIQUE ABOUT THE SPIVA SCORECARDS?

SPIVA scorecards are unique because they rely on datasets that address issues related to measurement techniques, universe composition, and fund survivorship.  While these issues are far less frequently discussed, they can have meaningful impacts on results.  In particular, the datasets correct for the following biases.

  • Survivorship Bias Correction: Many funds may merge or be liquidated during a given period. For someone making an investment decision at the beginning of the period, these funds are part of the opportunity set.  Unlike other comparison reports, SPIVA scorecards account for the entire opportunity set—not just the survivors—thereby eliminating survivorship bias.
  • Apples-to-Apples Comparison: Fund returns are often compared with popular benchmarks such as the S&P 500®, regardless of size or style classifications. SPIVA scorecards avoid this pitfall by comparing funds against benchmarks that are appropriate for that particular investment category.

For example, U.S. mid-cap value funds are compared with the S&P MidCap 400® Value, while the S&P SmallCap 600® Growth serves as the benchmark for U.S. small-cap growth funds.

  • Asset-Weighted Returns: Average returns for a fund group are often calculated based on equally weighting the entire fund universe. However, a more accurate representation of how market participants fared in a particular period can be ascertained by weighting each fund according to its net assets.  SPIVA scorecards show both equal- and asset-weighted averages
  • Style Consistency: U.S., Canada, and India SPIVA scorecards measure consistency for each style category across different time horizons. Style consistency is an important metric because style drift (the tendency of funds to diverge from their initial investment categorization) can affect asset allocation decisions.
  •  Data Cleaning: SPIVA scorecards avoid double counting multiple share classes in all count-based calculations. Typically, the share class with the highest assets under management at the beginning of the period is selected.  Since this is meant to be a scorecard for active managers, index funds, leveraged and inverse funds, and other indexlinked products are excluded.

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