The S&P 500® ESG Index celebrated its fifth birthday on Jan. 28, 2024. Over the past five years, the index has become an important piece of the sustainable indexing puzzle for investors looking to leverage the strength of the S&P 500 while incorporating meaningful and measurable sustainability-focused enhancements.
Traditionally, five-year celebrations are marked by gifting something made from wood. As a symbol, wood represents strength, stability and the ability to withstand challenges. It embodies the vitality needed to overcome obstacles and adapt to changing circumstances. In many ways, this is appropriate symbolism for an index that has been designed to help investors address the challenges and changing circumstances in an evolving world.
Let’s celebrate this milestone with a quick look back at the past five years of the S&P 500 ESG Index.
From the Beginning
The launch of the S&P 500 ESG Index on Jan. 28, 2019, signaled an evolution in sustainable investing. The index filled an important gap for investors seeking to incorporate ESG values while maintaining similar overall characteristics to the widely known and utilized S&P 500 (see Exhibit 1).
Evolving Sustainability Landscape
Adapting to the ever-changing landscape of sustainable indexing has been essential over the lifespan of the S&P 500 ESG Index. Several refinements have been made to the index methodology to reflect the evolving sentiments of a sustainability-minded investor. These views have been voiced in the results of several market consultations that led to a revised and expanded list of exclusions based on a company’s involvement in certain business activities (see Exhibit 2). The consultations also addressed several other relevant updates, including more frequent eligibility checks for business involvement activities3 and UNGC exclusions.4 Most recently, S&P Dow Jones Indices consulted the market on two key sustainability enhancements, which resulted in the change from the Sustainalytics Product Involvement to the S&P Global Business Involvement Screens and the change from the S&P DJI ESG Scores to the S&P Global ESG Scores.5
With these enhancements, the S&P 500 ESG Index has retained its main objective, which is to maintain similar overall industry group weights to the S&P 500, while enhancing the overall sustainability profile of the index with an average ESG Score improvement of 7.65% over its five-year lifespan.7
As seen in Exhibit 3, the S&P 500 ESG Index has outperformed the S&P 500 not only over its five years of live history, but over the shorter-term one-year and three-year periods as well. One might assume that this outperformance has come at the expense of an increased risk profile for the index, but as we can see in Exhibit 4 that is not the case. The risk/performance profile of the S&P 500 ESG index was significantly better than the S&P 500 over both the three- and five-year timeframes.
One of the main criticisms around sustainability investment strategies is that the over (or under) performance is simply a result of over (or under) weights to particular sectors. In Exhibit 5, it is clear that it is not true for the S&P 500 ESG Index, which has maintained similar sector exposure to the S&P 500 since its launch. This is further evidenced by examining the performance attribution of the S&P 500 ESG Index. Exhibit 6 highlights that the excess returns have been primarily driven by stock selection rather than differences in sector exposure. This is by design, as the methodology lends itself to a broadly sector-neutral outcome. Thus, the outperformance was not all necessarily due to significant overexposure to Information Technology and underexposure to Energy, as some might assume.
The five years of live history for the S&P 500 ESG Index is indeed something to celebrate, and we look forward to watching our sustainable indexing star continue to shine.
1 Illustration reflects the current use of the S&P DJI ESG Scores in the index methodology. On Jan. 23, 2024, S&P Dow Jones Indices announced the results of a consultation which disclosed the transitioning of the S&P DJI ESG Scores to the S&P Global ESG Scores. The changes will be implemented as of the market open on May 1, 2024. For more information on the S&P Global ESG Scores, please refer to the S&P Global ESG Scores Methodology.
2 In cases where risks are presented, S&P Global releases a Media and Stakeholder Analysis (MSA) which includes a range of issues such as economic crime and corruption, fraud, illegal commercial practices, human rights issues, labor disputes, workplace safety, catastrophic accidents and environmental disasters. The Index Committee reviews constituents flagged by S&P Global’s MSA to evaluate the potential impact of controversial company activities on the composition of the indices. If the Index Committee decides to remove a company, that company is ineligible for re-entry for at least one full calendar year, beginning with the subsequent rebalancing.
3 Index constituents are reviewed on a quarterly basis for ongoing eligibility under the Business Activities exclusion criteria. Companies determined to be ineligible are removed from the index, effective after the close of the last business day of July, October and January. The reference date for this review is the last business day of the previous month. No constituent will be added to the index as a result of any deletion that may take place. Changes to Sustainalytics coverage are not considered as part of this review.
4 As a result of market consultation that was finalized Jan. 23, 2024, S&P DJI is revising the Quarterly Eligibility Review process in relevant indices, so UNGC eligibility is always reviewed in March, June, September and December, in line with the schedule of the Global Standards Screening dataset. This will ensure a timely removal of those companies classified as Non-Compliant with UNGC eligibility requirements regardless of the rebalancing schedule of the specific index. For more information on the results of this consultation, please visit UNGC Quarterly Eligibility Review Methodology Updates
5 Both enhancements will be implemented to align with the annual rebalance of the S&P 500 ESG index which is effective after the close of the last business day of April. For more information, please reference Transitioning S&P Sustainability Indices to S&P Global ESG Scores and Business Involvement Screens (spglobal.com)
6 For more information on the market consultations that resulted in these changes, please visit Historical Announcements – Client Resource Center | S&P Dow Jones Indices (spglobal.com)
7 The index has achieved an average S&P DJI ESG Score improvement of 7.65% (at the index level) from Jan. 27, 2020-Jan. 29, 2024, representing an average of 21.47% of the overall ESG improvement potential, given the sustainability characteristics of the starting universe.
The posts on this blog are opinions, not advice. Please read our Disclaimers.