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Core ESG Indexing Is Engaged to Drive Change

Record Participation in the CSA Powers the DJSI into Its Third Decade

SPIVA® Latin America Mid-Year 2020 Scorecard: Convergence to Underperformance

ESG – All the Rage!

Tesla Added to the S&P 500

Core ESG Indexing Is Engaged to Drive Change

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Shaun Wurzbach

Managing Director, Global Head of Financial Advisor Channel

S&P Dow Jones Indices

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I define core ESG indexing as the use of indices designed to apply environmental, social, and governance (ESG) screening and ESG scores to recognized and sometimes iconic indices like the S&P 500®, S&P/ASX 200, or S&P/TSX Composite. These headline indices become actionable components of asset allocation when a fund or separately managed accounts (SMA) provider tracks the index. Our SPIVA® and Persistence Scorecards prove time and again that these well-designed indices are fit for that purpose. Now we have designed and launched core ESG versions of these indices to leverage SAM’s1 robust ESG data to measure the ESG engagement of companies in the benchmark index. Looking at the cost and availability of the ETFs that currently exist in the U.S., U.K./Europe, Canada, and Australia in this core ESG category, it is fair to say that the partnership of index providers, ETF data providers, asset managers, and market makers has democratized access to ESG for strategic allocation. But it’s okay with me if you prefer to think of that use of ESG as thematic rather than strategic.

How exactly is core ESG indexing engaged to drive the types of change that ESG investors want to see? At first glance, most core ESG indices are not excluding as many industries or companies as ESG “leader” indices. The conscious design difference in core ESG has helped to historically ensure that core ESG indices track their benchmark closely. Yet the core ESG selection of eligible companies based on ESG score leads to industry and sector differences we can see. Exhibit 1 shows the last company selected and the next company not selected based on ESG scores for some of the industries within the S&P 500. Sector weight information is available free on spglobal.com/spdji, showing sector weight differences between benchmark and ESG indices.

At the company level, our expectation is that CFOs are engaged in addressing ESG inquiries from firms like SAM. SAM accesses both public and non-public information to render scores. This inquiry and reporting drives people and process changes at these companies as they attempt to improve year over year. And those same CFOs try to ensure their company is selected in core ESG indices. As investor demand for ESG continues to increase, my expectation is that selection in the S&P 500 ESG Index will matter to CFOs in a similar way to how selection matters in one of our Dividend Aristocrats® indices.

Another aspect of engagement that core ESG indices drive is bringing more transparency to how companies are managing material nonfinancial risks and opportunities. Is that information relevant to company valuation? A growing field of accountancy as well as education and training practice led by universities and the Sustainability Accounting Standards Board (SASB) are making that point, and I think that point is often missed by advisors and investors of my generation. We were trained to look at the three financial statements of the firm. We may need to have it pointed out to us how substantial the shift has been in valuation to intangible assets. Exhibit 2 illuminates this point in the ubiquitous S&P 500 by showing how intangible assets have increased significantly as a driver of market capitalization for the top five companies in the index over time.

Exhibit 2 shows that we need to be more curious about how ESG can provide information about intangible assets and nonfinancial risks and opportunities. More information and data from ESG data providers like SAM will paint a more complete picture of how to measure the long-term sustainable performance of equity and fixed income asset classes.

1 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.

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

Record Participation in the CSA Powers the DJSI into Its Third Decade

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Manjit Jus

Managing Director and Global Head of ESG Research & Data

S&P Global

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In 2020, the 21st rebalancing of the Dow Jones Sustainability Indices (DJSJ) occurred; however, this is the first time it has taken place solely under the umbrella of S&P Global (after S&P Global’s  acquisition of RobecoSAM’s ESG Ratings business in January 2020). It also marked a new step forward toward greater transparency and insight, as S&P Global announced to companies that they would be receiving a new level of granularity in their results—scores on up to 120 individual questions and metrics in the Corporate Sustainability Assessment (CSA). The 2020 CSA saw a number of key updates to the methodology, including the addition of specific questions on plastic waste, revised questions on ESG-focused products and services in the financial industry, and the extension of information security questions to a broader set of industries. These topics reflect the shifting landscape of investor interest as it relates to ESG and challenge companies to think about emerging topics as they begin to materialize in the form of new risks or opportunities. While we saw strong improvements in some areas, we also saw that companies across many industries continue to struggle on topics such as cybersecurity. From a governance perspective, fewer than 20% of companies across all industries have board members with relevant cybersecurity or IT experience. New questions introduced in the pharmaceuticals industry highlighted that few companies publicly report on information related to fair drug pricing, another topic that is certainly likely to gain increased attention as a result of the ongoing global health crisis.

This year, despite the ongoing global challenges, we saw an increase of nearly 19% in the number of companies completing the CSA, bringing the total number of CSA participants to 1,386. This is the highest number in the DJSI’s more than 20 years of history and the biggest year-over-year increase, ever. Reassuringly, we saw growth across all regions, despite the different local economic and political challenges that companies faced. Reflecting on past years, it would seem that crises serve as a strong driver to bolster sustainability agendas. Between 2008 and 2009, we saw an increase in company participation of nearly 15%, the second highest record in DJSI history. Interestingly, the Financial sectors drove much of this growth. In 2020, the Real Estate and Financial sectors demonstrated the highest growth rate—a clear sign that ESG is at the top of the agenda for financial institutions as they brace for new regulations and requirements for ESG disclosure—at both the company level and in their ESG product portfolios.

For more detailed information on this year’s DJSI rebalance and key highlights from the CSA, please read our insight. For more detailed information and findings from this year’s results, please read our Annual Scoring & Methodology Review.

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

SPIVA® Latin America Mid-Year 2020 Scorecard: Convergence to Underperformance

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Maria Sanchez

Associate Director, Global Research & Design

S&P Dow Jones Indices

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We recently published our industry-famous SPIVA report for the Latin America region. SPIVA, which stands for S&P Indices Versus Active, analyzes the performance of actively managed mutual funds against their respective category benchmark. In the case of Latin America, S&P Dow Jones Indices began publishing the scorecard in 2014, covering Brazil, Chile, and Mexico.

The SPIVA Latin America Mid-Year 2020 Scorecard shows that the majority of active equity managers in Chile and Mexico failed to outperform their benchmarks over 1-, 3-, 5-, and 10-year periods, even when the first half of 2020 offered abundant opportunities for active managers. The dispersion and volatility of the S&P Latin America BMI’s constituents remained above the historical median for four of the six months.1

However, Brazilian active managers in the Brazil Equity Funds, Brazil Large-Cap Funds, and Brazil Corporate Bond Funds categories managed to take advantage of the circumstances in the short term. We have seen this outperformance by active managers on a short-term basis in the past as well.

A compilation of the Latin America SPIVA scorecards from year-end 2014 to mid-year 2020 show that when observing one-year periods, Chilean active managers outperformed in December 2014; Brazilian active managers outperformed in one or more of their categories in June 2015, December 2015, and June 2016; and the majority of Mexican equity active managers were able to beat their benchmarks in December 2019 (see Exhibit 1).

However, when compared with a longer time horizon, say a three-year period, we see that the percentage of active managers outperforming goes down.

And when considering even longer time periods, like across a five-year period, the majority of active managers in all categories for all three countries were outperformed by their benchmarks.

Lastly, for the 10-year period observed, the percentage of funds outperformed by their benchmarks converged in a range above 70%.

As evidenced by the SPIVA scorecards, the majority of active managers underperform most of the time, especially across long-term horizons, demonstrating how difficult is to consistently beat the benchmark.

1 Index Dashboard: Dispersion, Volatility & Correlation: January 2020; February 2020; March 2020; April 2020; May 2020; June 2020.

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

ESG – All the Rage!

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Stuart Magrath

Senior Director, Channel Management, Australia and New Zealand

S&P Dow Jones Indices

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It appears that environmental, social, and governance (ESG) investing is “all the rage”—not only in the Asia Pacific region but all around the world. At S&P DJI, we have spent a lot of time and effort thinking through how best to construct indices that consider ESG values. One of our more recent innovations has been to launch ESG versions of our headline indices. One such headline index is the S&P/ASX 200, for which we now have an ESG version, the S&P/ASX 200 ESG Index.

By way of a quick summary, the S&P/ASX 200 ESG Index uses the same universe of constituents as the benchmark S&P/ASX 200, and then we apply a three-step process of screening, sorting, and selecting companies to make up the S&P/ASX 200 ESG.

  • The screening process removes any companies involved in the production or sale of tobacco, controversial weapons, and thermal coal, as well as those ranked among the lowest 5% of UN Global Compact scores. We also remove companies with an S&P DJI ESG Score that is in the bottom 25% of scores within their GICS® industry group globally.
  • We then sort the stocks from best to worst, according to their S&P DJI ESG Score within each GICS industry group.
  • Finally, we select stocks “top down” in each GICS industry group seeking to capture, as close as possible, 75% of the market capitalization. We repeat this process for each industry group.

Currently the S&P/ASX 200 ESG Index has 119 constituents, having removed 81 through the screen, sort, and select process.

In late September 2020, S&P DJI hosted a webinar with State Street Global Advisors, the Australian Securities Exchange (ASX), and a local financial adviser. We explored how the S&P/ASX 200 ESG Index was designed to be core to investors’ portfolios, and that the methodology adopted is not “puritanical,” but rather seeks to achieve a broadly similar risk/return profile to that of its benchmark, while providing investors with an index that also removes the worst-performing companies from an ESG perspective. In this way, market participants can be assured that they are not increasing risk, or foregoing returns, while also investing in a way that aligns with their values.

Tim Mackay, director and owner of Quantum Financial, provided some valuable insights from a practitioner’s perspective. Tim shared how the path he has trodden has led him to a point where he is advising clients to have ESG investing solutions at the core of clients’ portfolios. From a position of initial skepticism, where clients were not prepared to give up returns for a “feel good” investment, and where there were difficult trade-offs between the “E,” “S,” and “G” components (e.g., airlines pollute but employ lots of people, whereas clean industries don’t employ as many people), fee compression was the catalyst for taking a second look at sustainable investment solutions.

Tim also suggested that the uptake of ESG investing solutions has been turbo-charged by the COVID-19 pandemic, and after last summer’s bushfire in Australia, producing a slew of new investment products that are hitting the market in short order. While advisers may initially use these products as “satellite” investments, solutions that can sit at the core of a client’s portfolio are also emerging; exchange-traded products such as those that track the S&P/ASX 200 ESG Index can provide a diversified, transparent, flexible, and cost-efficient way to incorporate ESG into core investments.

The “ESG Goes Mainstream in the Wake of 2020 Upheavals” complimentary webinar replay is available on demand.

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

Tesla Added to the S&P 500

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Hamish Preston

Associate Director, U.S. Equity Indices

S&P Dow Jones Indices

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Yesterday, S&P Dow Jones Indices announced that Tesla will be added to the S&P 500® prior to the open on Monday, Dec. 21, 2020. The Index Committee has not yet determined which current constituent Tesla will replace, nor how Tesla will be added to the index—because of its size, S&P DJI is seeking feedback through a consultation to answer the latter question. Still, the announcement highlights the importance of understanding the impact of index construction and index implementation.

Here is a brief overview of the S&P U.S. Indices Methodology document, some information to contextualize Tesla’s addition, and what impact it may have on the market.

S&P 500 – Not Simply the Largest 500 U.S.-Domiciled Companies

The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities, with more than USD 11.2 trillion indexed or benchmarked to the index as of December 2019. But while it is synonymous with U.S. equity market performance, the S&P 500 does not necessarily comprise the largest 500 U.S. companies.

Instead, our equity indices methodology identifies several eligibility criteria that new index additions must meet, including, but not limited to, market capitalization and liquidity thresholds, along with a history of positive earnings. Exhibit 1 provides an overview of these requirements.

Satisfying the eligibility rules does not guarantee index addition: the Index Committee takes into account several factors when considering constituent changes to the S&P 500, such as sector representation and index turnover. These constituent considerations—and indeed any resulting changes—are made on an ongoing, as-needed basis rather than on a set frequency.

Potential Impacts of Tesla’s Addition

Tesla’s float market capitalization of USD 304 billion (as of the close on Nov. 16, 2020) would make it the largest S&P 500 addition ever. Indeed, it is currently around two and a half times larger than Berkshire Hathaway (USD 127 billion) and nearly three times larger than Facebook (USD 90 billion) when they were added in February 2010 and December 2013, respectively.

Importantly, the growth of the S&P 500’s market capitalization over the last decade—from USD 9 trillion to around USD 30 trillion today—means that Tesla’s weight upon addition (1%, using Nov. 16’s close) would be less than Berkshire Hathaway’s 1.3% index weight when it was added.

From a sector perspective, Tesla’s addition is also likely to increase the weight of Consumer Discretionary in the index and help to alleviate the benchmark’s sensitivity to the Information Technology sector. For example, assuming all of Tesla were included at once, as of Nov. 16’s close the Consumer Discretionary sector would be 12.08% of the S&P 500 (this figure is based on the S&P 500 having 501 companies instead of its usual 500—the stock Tesla will replace in the index has yet to be announced by the Index Committee).

The potential change in the distribution of weights within the Consumer Discretionary sector—Tesla would currently be the second-largest sector constituent—may also reduce the sector’s sensitivity to Amazon.

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