In April 2021, the S&P Global Clean Energy Index underwent changes to reduce constituent concentration, ease liquidity limitations, and improve index replication. The total number of constituents rose, and the weighting scheme was modified. As a provider of choice, S&P DJI also launched a focused index, the S&P Global Clean Energy Select Index, which consists of the top 30 clean-energy-related stocks derived from the broader S&P Global Clean Energy Index.
As part of the initial consultation in March 2021, the Index Committee proposed a follow up consultation for further enhancements to the index methodology. This was issued on Aug. 20, 2021, and the results were announced on Sept. 21, 2021. The confirmed changes are intended to improve transparency, enhance diversification, further reduce the index’s carbon footprint, and align the index methodology with market trends and sustainable investing norms.
October 2021 Rebalance Incorporates Part of the Announced Changes
Except for the inclusion of emerging markets-listed companies to increase diversification, all changes took effect after close on Oct. 15, 2021, coinciding with the semiannual review for the S&P Global Clean Energy Index and S&P Global Clean Energy Select Index. Exhibit 1 summarizes changes for these indices.
Improved Selection and Scoring Transparency (Effective October 2021)
A notable change in the October rebalance was the move toward a more systematic implementation of a core part of the methodology. Through the introduction of FactSet’s Revere Business Industry Classification System (RBICS) and S&P Global Trucost’s Power Generation Data, the new methodology seeks to improve transparency for selection and scoring of clean-energy-related companies. Clear thresholds have been defined, using power generation and revenue datasets, to determine a company’s involvement in clean-energy-related businesses. This is a positive step forward for the S&P Global Clean Energy Index series since its launch in 2007, as S&P DJI continues to review and adopt new capabilities to its indices.
Stricter ESG Standards (Effective October 2021)
The existing carbon screening rule was modified1 to improve its effectiveness, thereby reducing the carbon footprint. Previously, all eligible stocks, including those with lower exposure scores (0.75 and 0.5),2 were used to calculate the distribution of carbon-to-revenue footprints, which was subsequently used to determine cut-off thresholds at which companies were excluded. The revised rule states that this distribution will now be determined only by companies in the preliminary universe that have maximum clean energy exposure (i.e., exposure score 1). This change lowers the average and narrows the carbon footprint distribution, which in turn results in a lower and stricter cut-off threshold.
In addition to modifying the carbon screen, S&P DJI announced the introduction of exclusion criteria (Sustainalytics Business Activity Screenings, Sustainalytics Global Standards Screening, and Media and Stakeholder Analysis Overlay) to monitor for controversial behavior, involvement in specific business activities, and adherence to international norms and standards. The impact of these screens is shown in Exhibit 3.
Emerging Markets-Listed Stocks to Become Eligible (Effective April 2022)
While the scope of the index objective will remain the same, the consultation results confirmed the expansion to include emerging markets-listed companies. This change will only apply to the S&P Global Clean Energy Index and will take effect starting April 2022. Once effective, emerging markets could represent close to 15% of the index, and we anticipate the index target constituent count to rise to 100, based on preliminary projections. While this could be subject to change, we also expect the number of exposure score 1 stocks to rise, which would lead to a higher overall exposure to clean energy (index weighted average exposure score estimated to be 0.95).
The clean energy segment continues to be in the spotlight with increased spending on renewable power3 required to meet global climate change objectives. As this segment continues to grow, the evolution of the S&P Global Clean Energy Index Series offers a pure, liquid, and transparent exposure to clean energy.
1 The carbon-to-revenue footprint standard score is calculated for each stock in the preliminary universe. The score is calculated by subtracting the mean carbon-to-revenue footprint of all preliminary universe stocks with an exposure score of 1 as of the rebalancing reference date from each stock’s carbon-to-revenue footprint, and then dividing the difference by the standard deviation (also determined based on preliminary universe stocks with an exposure score of 1). The top and bottom 5% are excluded from the mean and standard deviation calculations. Companies with a score greater than 3 will not be eligible for inclusion.
2 All companies in the S&P Global Clean Energy Index universe are assigned exposure scores that denote their involvement in clean-energy-related businesses. An exposure score of 1 is assigned to companies with maximum clean energy exposure, 0.75 to companies with significant clean energy exposure, 0.5 to companies with moderate clean energy exposure, and 0 to companies with no exposure.
3 Financial Times – IEA warns spending on clean energy must triple to curb climate change.The posts on this blog are opinions, not advice. Please read our Disclaimers.