Today is the 125th Boston Marathon—a big day in the world of distance running. Organized by the Boston Athletic Association (BAA), it is perhaps the pre-eminent annual event on the global marathon calendar. The 20,000 runners in today’s race were selected in May 2021, around the same time S&P DJI rebalanced the constituents of the S&P 500® ESG Index. What does one have to do with the other? More than you’d think.
The way S&P DJI and the BAA determine eligibility and eventual selection for these two fields of competitors is strikingly similar. They both start with an overall universe of candidates, apply a transparent rules-based screening process to determine eligibility, and compare potential constituents to their peers in a math-based selection process.
The S&P 500 ESG Index aims to increase the sustainability profile of the S&P 500 while maintaining a similar risk/return profile to the underlying index. It achieves its low performance tracking error by maintaining a similar industry group balance to the S&P 500.
The Boston Marathon comprises a field of marathoners that is faster than the broader universe of runners but is still reflective of the overall runner population. It achieves this by maintaining similar gender and age group diversity to the applicant field.
The Eligibility Universe
To be included in an index or a marathon, one must first be eligible. Both begin with a broad universe of constituents and whittle things down from there. For the S&P 500 ESG Index, that universe is the S&P 500. For the Boston Marathon, it’s all runners who have completed a certified marathon in the 12 months before the application period. Both are broad but already impressive fields.
The Screening Process
S&P DJI first eliminates companies involved with certain business activities, companies with disqualifying UN Global Compact Scores, and companies with ESG scores in the bottom 25% of their Global GICS® industry group. The remaining companies form the S&P 500 ESG Index eligibility universe.
The BAA eliminates runners who do not meet the time qualifying standards, which vary depending on the runner’s age and gender. All runners who meet their respective qualifying times are eligible for the Boston Marathon.
Here’s where the S&P 500 ESG Index and Boston Marathon methodologies become eerily similar. In both cases, just because you meet the eligibility criteria does not mean you are ultimately selected for inclusion.
S&P DJI goes through each GICS industry group and selects the highest-performing companies by ESG score until as close to 75% of the group’s market cap is reached. Once complete, the S&P 500 ESG Index is formed.
The BAA goes through each gender’s age group and selects the fastest applicants first until the entry limit for each group is reached. Once complete, the field of Boston Marathon runners is set.
It’s All Relative
The common theme between the S&P 500 ESG Index and the Boston Marathon selection processes is the way eligible constituents are ranked against their peers. For the index, it’s not how high your ESG score is, but how high your ESG score is within your industry group. And for the Boston Marathon, it’s not how fast you are, but how fast you are relative to your gender and age group peers.
That’s why it’s difficult to predict each year which companies will make it into the S&P 500 ESG Index and which runners will get to run the Boston Marathon. Every year the scores and finish times are different—we don’t know who makes the cut until we can compare everyone.
As distance running has surged in popularity, it has become increasingly difficult to get into the Boston Marathon. The race has served as a proverbial carrot that encourages runners to train harder, and the result has been faster entry times and higher qualifying standards.
ESG investing is also surging in popularity, as market participants across the globe are increasingly prioritizing investments that align with their values. This, in turn, has had the desirable effect of increased engagement from companies through greater transparency and implementation of sustainable business practices. Benchmarks such as the S&P 500 ESG Index look to further encourage this trend and make the competition for inclusion tougher each year, as companies increase their ESG adoption.
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