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Why COP Matters to Everyone

The S&P SmallCap 600 Turns 27

Gold Demand in India Bounced Back in 2021

Stretched Supply Chains Spur Commodities Prices Higher

Net Zero Index Strategies for Developed Markets

Why COP Matters to Everyone

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Jaspreet Duhra

Managing Director, Global Head of Sustainability Indices

S&P Dow Jones Indices

1.5°C, net zero emissions, COP, Glasgow, Paris, carbon offsets, stranded assets…
Or… as Greta might say “blah blah blah.”1

With so much information, it’s easy to tune out to the noise of climate change.

From the heatwaves of California,2 to the climate protesters in London,3 to the floods in Bangladesh,4 climate change is affecting everyone.

For 25 years, the U.N. has been bringing together almost every nation on Earth for global climate summits, which are known as “COPs” (Conference of the Parties). This year is the 26th annual summit—giving it the name COP26. The summit is in Glasgow, with the U.K. as host and president.5

COP26 will see delegates from up to 197 countries gather to detail how they will achieve the goals of the Paris Agreement6 to limit global warming to well below 2°C and pursue efforts to limit it to 1.5°C. This requires hitting net zero emissions by 2050, meaning the emissions produced by humankind would be balanced by emissions removal.

Committing to net zero reduction targets by 2050 may seem like a relatively easy target to agree to, given it’s almost 30 years away—but it isn’t. Long-term targets require short-term milestones. One of the key asks at this year’s COP is that countries come forward with ambitious 2030 emission reductions targets.7

Curbing emissions in the next 10 years inevitably means there will be widespread impacts on all of us sooner—the way we travel, live, eat—almost no aspect of our lives will be untouched.

What’s the Role of Indices?

“To achieve our climate goals, every company, every financial firm, every bank, insurer and investor will need to change.” – UN Climate Change Conference UK 20218

There are many reasons for investors to align their portfolios with net zero, from concerns about climate risks in their portfolios to seeking investment opportunities. Likewise, there are many ways to align portfolios with a net zero scenario, for instance increasing exposure to companies aligned with 1.5°C or reducing exposure to the worst climate polluters. Climate investing is a complex and multi-faceted field.

At S&P DJI we have created a series of rules-based indices that are designed to select a hypothetical portfolio of companies that collectively align with a 1.5°C scenario: the S&P PACTTM Indices (S&P Paris Aligned & Climate Transition Indices). Aligned with the ambitions of COP, these indices apply constraints for today, as well as with a 2050 outlook. There are immediate relative carbon footprint reductions of 30% or 50% relative to the benchmark, along with an ongoing requirement for the indices to decarbonize at a rate of 7% year-on-year. The indices are based on the latest climate science with the rate of annual decarbonization in line with, or beyond, the decarbonization trajectory from the IPCC’s 1.5°C scenario.

Our methodology produces broad and diverse indices while intending to meet the minimum standard for EU Climate Transition benchmarks and EU Paris-Aligned benchmarks, and it aligns with the Taskforce on Climate Related Financial Disclosures (TCFD).

Please see our dedicated Net Zero page for more information and resources.

We know why COP matters, now what actions will we take?










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

The S&P SmallCap 600 Turns 27

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Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

The S&P SmallCap 600® celebrated its birthday last week, marking 27 years since its launch on Oct. 28, 1994. Designed to reflect the performance of small-cap U.S. equities, the index’s cumulative total returns have been affected by trends and narratives impacting the equities segment, historically.

For example, Exhibit 1 shows that the S&P 600™ was affected by the so-called COVID-19 correction in 2020 and the subsequent rebound. The strength of the index’s rebound since Q4 2020 meant that its 59.5% total return since its last birthday was its highest figure, ever—quite the birthday present!

A key reason for the strength of the S&P 600’s rebound in the past 12 months is its greater sensitivity to U.S. macroeconomic variables, as many investors revised upwards their economic projections amid vaccine announcements and the subsequent rollout. As Exhibit 2 shows, smaller companies are typically more domestically focused in their revenue exposures, which helps to explain why the S&P 600’s returns have been more correlated to changes in U.S. GDP growth and consumption and investment, historically.

Some market participants might view small-caps as a relatively inefficient asset class more suited to the endeavors of active managers. However, data from our SPIVA® Scorecards suggests otherwise: most U.S. small-cap active managers underperformed the S&P 600 in 14 of the past 20 full calendar-year periods.

Our SPIVA U.S. Mid-Year 2021 Scorecard results also made for disappointing reading for those thinking that recent market movements would have offered a more favorable environment for active managers, as 78% of U.S. small-cap active funds underperformed the S&P 600 in the 12-month period ending June 30, 2021. The equivalent figure over the three-year horizon was 54.8% and underperformance increased to 66.7%, 83.5%, and 93.8% over the 5-, 10-, and 20-year horizons, respectively.

Additionally, the S&P 600 has typically been a harder benchmark to beat than the Russell 2000, another index designed to represent the performance of small-cap U.S. equities. As we have written about before, unlike the Russell 2000, the S&P 600 employs an earnings screen and the resulting quality exposure has contributed to its outperformance, historically. More recently, differences in sector weights and constituent composition helped to explain the S&P 600’s relative returns in 2020 and its sector-led bounce back so far in 2021. In short, index construction matters!

Finally, the breadth and depth of the U.S. equity market means that the S&P 600, its returns, and its characteristics may be relevant to investors around the world. As with portion sizes, what is smaller in the U.S. is larger elsewhere. For example, Exhibit 5 demonstrates that the float market capitalization of S&P 600 constituents is equivalent to that of several countries in the S&P Global BMI. Hence, having a view on U.S. small-cap equities may be as helpful for explaining global equity returns as understanding the trends and narratives affecting those countries.


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

Gold Demand in India Bounced Back in 2021

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Jim Wiederhold

Former Director, Commodities and Real Assets

S&P Dow Jones Indices

In 2020, pandemic-driven lockdowns in India caused gold demand to drop. So far in 2021, Indian demand for gold is 500 tons greater, even with two months left in the calendar year. China has been the primary destination for gold over the past few years and that continued this year, but a strong pickup in Indian demand coupled with lower growth in consumption from China is allowing India to gradually narrow the gap. According to the World Gold Council, jewelry demand rose 58% year-over-year in India in Q3 2021, compared with 32% growth in China over the same period. Similar year-over-year outperformance was seen in gold bar and coin investment growth from India versus China. Depending on demand in Q4 2021 with the Diwali festival, India could return to peak levels last seen in 2013. That year was the last time India was the number one destination for gold, beating out China.

There are a few positive catalysts helping the second most populous country in Asia. The government lowered the import duty to 7.5% from the prior 12.5%, making it cheaper to buy in India this year. Previously, a relatively high duty compared with other major economies dampened demand somewhat, but the sheer size of gold jewelry demand in India seemed to always overcome this headwind. This is less of a headwind after the reduction.

Pent-up demand after a once-in-100-years pandemic played a role in the massive increase this year. Base effects distorted most economic data at some point, but the increase in demand was unexpected by most analysts. India was hit hard by COVID-19 but each time restrictions were lifted, imports picked up. Gold imports initially contracted sharply in May and June 2021, but surged from July through September from pent-up demand for weddings and improved business sentiment in the gems and jewelry industry, according to the Reserve Bank of India.

Switzerland is the world’s largest exporter of gold and the origin of half of India’s gold imports in a typical year. The percentage of India’s total gold imports coming from Switzerland has been on the rise over the past few years, as it is known for having some of the best gold refineries producing the finest quality gold.

With the Diwali season providing a strong backdrop for gold demand, the typically price-sensitive Indian buyers are seeing gold as more attractive at these lower levels compared with last year. During this festive time, gold may find its footing again as the market turns attention back to the precious metal.

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

Stretched Supply Chains Spur Commodities Prices Higher

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Fiona Boal

Managing Director, Global Head of Equities

S&P Dow Jones Indices

The S&P GSCI, the broad commodities benchmark, rallied 5.8% in October. Performance was solid across sectors, with energy-related commodities continuing to outperform and grains and metals regaining some of their recent weakness. With two months of the year remaining, the S&P GSCI is up 46.3% YTD, the index’s best performance over the first 10 months of a calendar year in its 30-year history.

Natural gas prices in Europe and coal prices in China lost some of their luster in October, with countries intervening after record price spikes in September. The S&P GSCI Natural Gas fell 10.0%, as Russia came to the rescue promising more exports to Europe. The S&P GSCI Petroleum continued higher by 9.7%, almost matching the prior month’s strong performance. A perfect storm of catalysts from delayed production increases, strong global demand, and logistics issues were still very much in play in global energy markets.

Most commodities within the agriculture space rallied in October, with the S&P GSCI Agriculture ending the month 3.6% higher. The S&P GSCI Kansas Wheat jumped 7.4% over the month. Strong import demand, poor spring wheat harvests, and an export duty imposed by Russia have heightened expectations of relatively tight global wheat supplies this season. For the second consecutive month, S&P GSCI Cotton was the best performer in the agriculture complex, rallying 8.6%. The rally has been fuelled by optimist estimates of demand, as consumers emerge from COVID-19 restrictions, while the overall harvesting pace for the U.S. crop has been slowed by various forms of weather adversities and maturation rates.

The S&P GSCI Livestock fell 1.5% in October, with lean hog prices tumbling. Hog supplies in the U.S. continue to greatly outpace demand. U.S. pork exports to China have fallen for the last three months, while record pork prices in the domestic market are having a negative impact on per capita consumption.

Most industrial metals charged higher in October, while the S&P GSCI Aluminum was the only one to cool off by 4.9%, but it still showed a sector-best 34.4% YTD performance. The remaining major LME-traded industrial metals rose each by at least 7.0%. The S&P GSCI Zinc hit a 14 year high after major smelters around the world cut output on the back of higher power costs. The S&P GSCI Lead lagged the other industrial metals YTD, but lead the way in October by rising 15.2%.

Gold enjoyed a modest revival in October, with the S&P GSCI Gold gaining 1.5%. After lagging other inflation-sensitive assets for most of 2021, and with inflation showing few signs of abating, market participants may be reassessing their gold positions. On the flip side, while gold is considered an inflation hedge, reduced stimulus and interest rate hikes would likely push government bond yields and the U.S. dollar up, denting non-yielding gold’s appeal.

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

Net Zero Index Strategies for Developed Markets

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Ben Leale-Green

Former Associate Director, Research & Design, ESG Indices

S&P Dow Jones Indices

The S&P PACTTM Indices (S&P Paris-Aligned & Climate Transition Indices) comprise the S&P Climate Transition (CT) Indices and the more ambitious S&P Paris-Aligned (PA) Indices. These indices are intended to meet the EU’s minimum standards for EU Climate Transition benchmarks and EU Paris-aligned benchmarks under the Regulation (EU) 2016/1011 (EU Benchmark Regulation). The indices follow a 1.5°C scenario toward net zero by 2050 and incorporate recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). This blog focuses on the S&P PA Index for developed markets (the S&P Developed Ex-Korea LargeMidCap Net Zero 2050 Paris-Aligned ESG Index).

What are the high-level ESG exposures? The indices show improvements across a large range of climate and ESG factors, including physical risks, transition risks, and opportunities, alongside environmental, social, and governance exposure improvements.

Which ESG factors are important in driving the weights of the index? First, approximately 23% of the weight from the investable universe is excluded and a further 16% active share (which measures the percentage of index weights that differ from the underlying index) is taken on from reweighting.

The active share from exclusions is easy to quantify—it is simply the excluded weight of the underlying index. The active share from reweighting is attributed to climate factors (see Exhibit 3), largely caused by the transition pathway (aligning with 1.5°C on a forward-looking basis), high impact revenues (to maintain neutrality, per the EU Benchmark Regulation), physical risk, and ESG scores.

How has the index performed? We see an excess return from the S&P Paris-Aligned Index, with lower volatility and max drawdown, resulting in a higher risk-adjusted return. Of this excess return, around two-thirds can be explained by equity risk factors, leaving around one-third of the excess return as unexplained alpha (stock specific).

To learn more about the S&P PACT Indices, we have a short overview and longer paper to explain some technical details, both of which and much more can be found on our Net Zero investment theme page.

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