In a recent public consultation, evolving investor sentiment and the changing needs of the ESG landscape were reflected through S&P DJI stakeholders’ feedback on the S&P ESG Indices. The results were published April 1, 2022.1 So, what are the changes?
- Quarterly eligibility checks instead of annual to incorporate the latest available information on a more timely basis and to avoid including companies that violate eligibility criteria for a longer period
- Additionally, an expanded and revised list of product involvement exclusions, including oil sands, small arms and military contracting exclusions
- As well as a switch of United Nations Global Compact (UNGC) data provider from Arabesque to Sustainalytics.
EXCLUSIONS BASED ON BUSINESS ACTIVITIES
The adoption of negative screens has increasingly come into focus for many ESG strategies. This shift in preference was reflected in the additional exclusions covering:
- Small Arms: Companies with any involvement in the manufacture or sale of small arms. Companies whose revenues from the retail or distribution of small arms are above or equal to 5%. Companies with significant ownership (above or equal to 25%) of companies that manufacture or sell small arms.
- Military Contracting: Companies that manufacture military weapon systems or integral, tailor-made components of these weapons, or that provide tailor-made products or services that support military weapons with a revenue threshold greater than or equal to 10%.
- Controversial Weapons: Companies with any revenue coming from providing components or services for the core weapon system, which are either not considered tailor-made or not essential to the lethal use of the weapon. Companies with significant ownership (above or equal to 25%) of the companies described above.
- Oil Sands: Companies with revenue greater than or equal to 5% coming from oils sands extraction.
The consultation results also reflected the need for stricter rules around companies’ involvement in activities such as tobacco, which resulted in the lowering of the business involvement threshold from 10% to 5%. Tobacco was also one of the categories in which significant ownership exclusions will no longer be applied, so as to not unfairly penalize certain companies.
For companies involved in tobacco, thermal coal, oil sands, controversial weapons, small arms or military contracting, the consultation results have further defined certain maximum revenue thresholds. If a company generates revenue exceeding these thresholds, it will be excluded at the quarterly index eligibility review. Companies with business practices out of alignment with the UNGC will also be excluded at the quarterly index eligibility review.
EXCLUSIONS BASED ON THE UNITED NATIONS GLOBAL COMPACT
S&P DJI will change the provider of UNGC data from Arabesque to Sustainalytics, and will exclude companies deemed to be non-compliant. Sustainalytics’ Global Standards Screening assesses companies’ impact and the extent to which a company causes, contributes or is linked to violations of international norms and standards such as the UNGC principles.
S&P DJI maintains its ongoing commitment to keep live ESG index methodologies relevant and match investor conviction. Methodology changes will be implemented in conjunction with the upcoming rebalancing.
1 To view all announcements, please see here.The posts on this blog are opinions, not advice. Please read our Disclaimers.