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Water Risk for Business – Three Key Questions

Most Major Islamic Indices Have Outperformed Conventional Benchmarks in 2016

What Is Your Retirement Number?

How to Get into (Index) Heaven

Asian Fixed Income: Chinese Bond Market Was Slow in 2016

Water Risk for Business – Three Key Questions

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Neil McIndoe

Head of Environmental Finance


Water crises are the top societal global risk in terms of impact, according to The World Economic Forum’s Global Risk Report 2016.

There is of course no lack of water; the risk is around availability of fresh water which constitutes just 2.5% of the world’s water. This has broadly been the case for millennia – what’s new is the enormous growth in demand for fresh water.

Rising water demand is largely influenced by population growth and its food and energy needs. The world population of 7 billion today is projected to grow to over 10 billion by 2050 and the United Nations predicts an associated 55% rise in global water demand.

Companies need to answer three questions to ensure they have resilient business models:

  1. How dependent is my business on water throughout the value chain?
  2. Are any of these dependencies in water stressed areas?
  3. Do I make sufficient profit from my local use of water to compete with other users?

Water Dependency

Companies need to understand their dependency on water throughout the value chain. Many companies – not unnaturally – focus on their own direct use of water. Fig 1 represents the water footprint of a fruit juice company along the value chain. Previously, the majority of their water initiatives were in the bottling process, which accounted for just 3% of water use. Once this was understood, a number of different mitigation strategies were deployed to improve resilience where it most mattered in the fruit growing stage, including long term contracts with farmers in areas of more robust water supply and joint investment in water irrigation efficiency.


Water Stress 

Water stress is not simply a consideration for companies operating in the world’s hotter countries. The UK is not often thought of as an area for concern but a 2013 government study classified 9 out of the 24 water company areas as having “serious” water stress.

This stress can translate into business risks in two main ways. Firstly, there is simply insufficient water for the business to operate, or to operate at its optimum capacity. The mining industry is one that frequently has this issue. But it is the second that will increasingly become a standard business concern – that of cost.

Water /Profit

While water has historically been plentiful and inexpensive, this is not the future outlook. Increasing competition for a scarce resource will require companies to make sufficiently good economic use of water to enable them to secure supplies as costs rise.

In Australia’s Murray River basin, where water trading has taken place for a number of years, we have seen water rights sold off by agriculture concerns to other sectors such as mining who use the water more profitably.

To understand and mitigate future risk for both themselves and investors, companies need to understand where in their value chains water presents the biggest risk, alongside competition for water in the river basins in which they operate.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Most Major Islamic Indices Have Outperformed Conventional Benchmarks in 2016

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Michael Orzano

Head of Global Exchanges Product Management

S&P Dow Jones Indices

Most S&P Dow Jones Indices Shariah-compliant benchmarks outperformed their conventional counterparts through the end of September 2016, with financials—which is largely absent from Islamic indices—significantly underperforming and information technology—which tends to be overweight in Islamic indices—performing well (see Exhibit 1).


The S&P Global BMI Shariah and Dow Jones Islamic Market World Index each gained 6.4% YTD as of Sept. 30, 2016, outperforming their conventional counterparts by 120 bps and 140 bps, respectively.  Meanwhile in the U.S., the S&P 500® Shariah gained 6.2% over the same period, slightly outperforming the conventional S&P 500.  The Dow Jones Islamic Market Europe Index posted the largest outperformance relative to its conventional counterpart; its exclusion of the embattled European banking sector boosted its relative performance.

Emerging Markets Rebound, Supported by Low Rates

Supported by low and declining global interest rates, emerging market equities and currencies have bounced back in 2016, with the Dow Jones Islamic Market World Emerging Markets Index gaining 12.9% YTD as of Sept. 30, 2016, outpacing all other major regions.  European equities have lagged, as economic malaise continues to weigh on the region and the Brexit vote added to uncertainty.  U.S. and Asian markets each gained about 6% YTD as of Sept. 30, 2016, supporting the overall growth in global equities.


MENA Equities Extend 2015 Losses

Despite a rebound in oil prices earlier in the year, MENA equities were sharply in the red as of Sept. 30, 2016, with the S&P Pan Arab Composite Shariah down nearly 9% YTD.  The conventional S&P Pan Arab Composite declined slightly less, aided by its relatively lower weight to Saudi Arabia, which has experienced double-digit losses.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

What Is Your Retirement Number?

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Philip Murphy

Former Managing Director, Global Head of Index Governance

S&P Dow Jones Indices

Wealth drawdowns and volatility of returns are not the only risks facing defined contribution (DC) retirement plan participants.  Those relying primarily on 401(k)s and other DC plans for retirement income also need to address longevity, inflation, and variability in the price of income.  Furthermore, many traditional guidelines for withdrawal policies are simply insufficient for real-life application.  We hear a lot of debate around withdrawal rates expressed as a starting percentage of capital that is adjusted up each year for inflation—should the initial rate be 3%, 4%, or even 5%?  Such rules are naïve in that they fail to take into account the changing price of income, and they tend to be backward looking.  They are also usually accompanied by statements of probability—e.g., there is a 95% chance you will not run out of money, etc.

Can investors relate to statistical confidence levels?  If you tell someone that she has a 95% chance of not running out of money, this may sound pretty good.  However, if you tell that person that if she had 100 lives, you would expect her to run out of money in five of them, so things may not look so good.  The results in those five trials are too catastrophic for comfort.

Retired investors generally seek to retain control over their capital, and they need sensible strategies for funding consumption throughout their lives.  Sustainable systematic withdrawal policies must regularly take asset value and the price of income into account.  M. Barton Waring and Laurence B. Siegel do a great job of explaining this in a 2015 Financial Analysts Journal article titled “The Only Spending Rule Article You Will Ever Need.”

How variable is the affordability of income?  In conjunction with the S&P STRIDE index series, S&P DJI seeks to calculate the cost of inflation-adjusted income starting at specific points in time.  Exhibit 1 shows the U.S. dollar price of inflation-adjusted income starting in January 2030 and lasting 25 years.  It illustrates how many U.S. dollars would be required at the end of each year from 2005 to 2015 to lock in USD 1 of real income per year starting in 2030.  The table also shows annual total returns of the S&P 500, as well as the wealth and income performance of a hypothetical investment in the S&P 500.

We begin with USD 500,000 invested in the S&P 500 at the end of 2005.  At that time, 2030 income cost USD 12.35 per future real U.S. dollar, so I could have spent my USD 500,000 to lock in USD 40,490 per year (starting in 2030).  However, I thought I could eventually end up with more future income by investing in the stock market.  After one year, my wealth had grown to USD 578,950, and the price of 2030 income dropped from USD 12.35 to USD 11.03.  I could have sold my stocks to lock in USD 52,490 of future income, but I stayed invested.  I did this every year; by 2015, my wealth grew to USD 1,011,874, and the income I could afford to lock in grew to USD 56,154.

However, there are some striking observations buried within the table.  First, during the entire period, my account value grew at an annual rate of 7.3%, but my future income grew at an annual rate of only 3.3%.  Next, as recently as 2012 and in spite of the fact that my wealth had grown to USD 663,127, I would have been better off locking in future income in 2005, when I could have acquired USD 40,490 per year rather than only USD 29,702!

Changes in wealth do not proportionally translate into changes in future income.  For retirement savers, keeping an eye on expected future income may be just as important as account balances—if not more so.  Since no one knows the future sequence of investment returns or income cost, the wisest policy may be to lock in future income a little bit at a time.


The posts on this blog are opinions, not advice. Please read our Disclaimers.

How to Get into (Index) Heaven

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Reid Steadman

Former Managing Director, Global Head of ESG & Innovation

S&P Dow Jones Indices

A poll conducted in 2014 revealed that 74% of Americans believe in heaven, which was defined for respondents as a place “where people who have led good lives are eternally rewarded.” The index world has a heaven too, where companies aspire to be and good deeds are recognized. It’s called the Dow Jones Sustainability Index.

When companies make it into the Dow Jones Sustainability Index – an index series that incorporates environmental, social, and governance (ESG) factors into its inclusion criteria and weighting schemes – they are justifiably proud. But how does a company get into paradise? It’s not easy. Regular confession and a real desire to change are required.

The measurement tool for whether a company is “good” and heaven bound is a survey. Our partner, RobecoSAM, every year issues the Corporate Sustainability Assessment, which covers varied topics such as executive pay, gender equality, and corporate citizenship. The effort dedicated to this survey is simply incredible. In 2015, 2,126 companies were assessed, either by themselves or by RobecoSAM; 2,145,567 data points were collected and analyzed; and, on average, 150 hours were spent on each assessment.

What is the Goal?
The aim of the survey is to determine:

  1. Is a given company aware of sustainability issues?
  2. Does the company have a strategy to address them?
  3. Is the company making progress and reporting its results?

These are basic objectives but it takes a lot of work to figure out where a company stands in achieving them.

A Peek Inside the Survey
Because different factors matter in different industries, the survey varies by industry group. It’s still worthwhile, though, to glance through one survey to get a feel for what companies are reporting and RobecoSAM is measuring. Here is a link to a sample survey for the Metals & Mining industry. If you will read some of the questions, you will notice how RobecoSAM draws out information that allows it to achieve its three aims listed above.

The questions on human rights highlight this really well. Section 3.2.5 asks if the company is aware of and committed to human rights:

Does your company have a policy in place for its commitments to respect human rights in accordance with the UN Guiding Principles on Business and Human Rights? Please provide supporting evidence.

The next section, 3.2.6, asks if the company has a human rights strategy:

Has your company developed and implemented a due diligence process to identify, prevent, mitigate, and account for how to address its impacts on human rights? The process should enable the remediation of any adverse human rights impacts a company causes or contributes to. Please provide supporting evidence.

And, finally, 3.2.7 determines whether the company is measuring and is reporting its progress:

Has your company conducted an assessment of potential human rights issues across your business activities in the past three years?

The Reward
Whether altruism exists among people is debatable, but this we know about corporations: when they dedicate their scarce resources to something, it’s because they want a return. Getting into index heaven, the Dow Jones Sustainability Index, is one potential reward, but an even more tangible payout is investment from the growing number of institutions that care about ESG factors.


The posts on this blog are opinions, not advice. Please read our Disclaimers.

Asian Fixed Income: Chinese Bond Market Was Slow in 2016

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Michele Leung

Former Director, Fixed Income Indices

S&P Dow Jones Indices

The performance of China’s fixed income market has lagged other Asian countries this year.  According to the S&P China Bond Index, the fixed income market delivered a YTD total return of 3.57% as of Oct. 11, 2016.  China was one of the top three outperforming countries in the S&P Pan Asia Bond Index last year; the other two countries measured by the index, Indonesia and India, increased 17% and 9% YTD, respectively.  Despite China opening up its bond market to offshore market participants, the country still underperformed, and in February there was a short rally following the Chinese Interbank Bond Market (CIMB) announcement, yet the gain was reversed in April.

The size of China’s bond market has continued to expand nevertheless.  The market value tracked by the index reached CNY 48 trillion, whereas corporate bonds represented 34% of the overall market.

The yield of Chinese bonds trended lower, aligning with the global market.  The yield-to-worst of the S&P China Bond Index tightened 17 bps to 2.93% YTD.  The yields of the government and corporate bonds were 2.73% and 3.34% respectively.  Among all the sector-level subindices, the S&P China Industrials Bond Index had the highest yield, at 3.56%.

The S&P China Bond Index is designed to track the performance of local-currency-denominated bonds from China.  S&P Dow Jones Indices has launched both broad-based and investible indices of the S&P China Bond Index Series.

Exhibit 1: Total Return Performance of the S&P China Bond Index, S&P China Government Bond Index, and the S&P China Corporate Bond Index


The posts on this blog are opinions, not advice. Please read our Disclaimers.