Stockholm (NordSIP) – S&P Dow Jones Indices (S&P DJI), unveiled its new S&P 500® ESG Index, on Monday, April 8th, according to a press release. The index is aligned with ESG selection guidelines and designed to track the S&P 500 benchmark.
The S&P 500® ESG Index is constructed in 5 stages, according to S&P DJI’s methodology. In the first step, the new index excludes tobacco, controversial weapons, and companies not in compliance with the UN Global Compact (UNGC). Further exclusions are then conducted in the next phase, where the index rejects companies with S&P DJI ESG Scores in the bottom 25% of their industry group globally. Step three sorts the remaining companies in the S&P500 by their S&P DJI ESG Scores within each industry group, so that the top 75% companies by market capitalisation in industry group can be selected in the next phase. In the final step, the index weighs companies by float-adjusted market capitalisation.
According to the S&P 500® ESG Index’s methodology, S&P DJI ESG Scores are based on data gathered by SAM, a division of RobecoSAM, through SAM’s Corporate Sustainability Assessment (CSA). The CSA is an annual evaluation of companies’ sustainability practices, covering a wide range of industry-specific ESG criteria. Companies are categorised in different industry groups according to the Global Industry Classification Standard (GICS), a proprietary four-tiered, hierarchical industry classification system developed by S&P and MSCI in 1999.
“We are excited to bring to market these innovative ESG indices and scores. S&P Dow Jones Indices pioneered ESG indexing over 20 years ago with the 1999 launch of the Dow Jones Sustainability World Index, the first global sustainability benchmark. Our philosophy as an independent index provider is to offer choice to investors. We will continue to contribute to the growth of sustainable finance and economies through our indices,” said Alex Matturri, Chief Executive Officer at S&P Dow Jones Indices.
The construction of the S&P 500® ESG Index led to its exclusion of 154 companies included in the S&P 500, equivalent to 23.43% of the S&P 500 market capitalization as of December 2018. The methodology led to the exclusion of 14, 54 and 89 companies in phases one, two and four, respectively.
Calculations by the index provider suggest the new ESG index tracks its benchmark quite well. Annualised returns on the ESG version of the S&P 500 are 33bps and 18bps above the original index for one-year and three-year horizons, while only 2bps below over five years. The annualised risk is 9bps and 2 bps above the benchmark over one-year and three-year horizons and 2bps below over five years. The realised tracking error is never above 1% for any of these time horizons.
“An increasing number of investors require indices that are aligned not only with their investment goals but also their individual and institutional values,” said Reid Steadman, Global Head of ESG Indices at S&P Dow Jones Indices. “The S&P 500® ESG Index is constructed with both of these needs in mind. Unlike many ESG indices that preceded it – which were more thematic or narrower in their focus – the S&P 500® ESG Index is broader and developed to target the core of an investor’s portfolio.”
In the coming months, S&P DJI will also launch a global family of ESG indices based on its other widely tracked regional and country-specific large and mid-cap benchmarks used in the Americas, Europe, Middle East and Africa (EMEA) and Asia-Pacific (APAC).