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Factor Strategies in Brazil: A Practitioner's Guide

FAQ: beS&P Index Solutions

Transitioning S&P Sustainability Indices to S&P Global ESG Scores and Business Involvement Screens

Aligning Index Strategies with the UN Sustainable Development Goals

FAQ: S&P SDG Indices

Factor Strategies in Brazil: A Practitioner's Guide

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Rupert Watts

Head of Factors and Dividends, Product Management

S&P Dow Jones Indices

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Hugo Barrera

Senior Analyst, Factors and Dividends Product Management

S&P Dow Jones Indices

What Are Factor Indices?

Capturing market idiosyncrasies and desired risk/return characteristics has been a fundamental component in the active management space for decades.  Taking the fundamental ideology behind an investment strategy and democratizing it within an index allows for it to provide at minimum a gauge for relative performance and at best the ability to systematically track alpha.

When looking at factor strategies in Brazil, we will be focusing on four different strategies.

When looking at factor strategies in Brazil, we will be focusing on four different strategies.

Enhanced Value: At the most basic level, the goal of investing in value stocks is to buy stocks that are “cheap” or trading at a discount relative to their peers based on company fundamentals.

Momentum: The goal of momentum investing is to capture the stocks that have had the highest price appreciation relative to their peers with the expectation that they will further outperform in a rising market.

Quality: Investing in companies that have quality characteristics seeks to capture stocks that have fundamentals that exemplify a well-run company relative to their peers.

Low Volatility/Inverse-Risk Weighted: Low volatility or inverse-risk weighted strategies allow for participation in the market even during turbulent or volatile times.

Each strategy has its own risk/return characteristics that we will discuss throughout this paper.

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FAQ: beS&P Index Solutions

  1. What is beS&P?  S&P Dow Jones Indices’ (S&P DJI) beS&P offering brings new, customer-driven index concepts to life. Leveraging our world-class index governance framework and unmatched indexing expertise, we work with customers to launch indices that comply with applicable regulatory standards and industry best practices while tapping into targeted, less standard exposures. Through beS&P, customers can provide input into an index methodology designed by S&P DJI. beS&P is a separate offering from S&P DJI’s custom index solutions.
  2. What types of customers might be interested in beS&P solutions?  The beS&P offering is capable of being used across a broad spectrum of customers. We see interest from customers seeking to apply their own sustainability requirements, particularly with regard to specific security-level exclusions based on their specific theme or objective.
  1. What is the customer’s role in beS&P indices? Customers may have input into discrete aspects of the index methodology at the inception of the index and on an ongoing basis. Examples of these aspects can include defined screens, thresholds of exclusion and exclusion lists. Aspects under the customer’s control will be rules based and fully disclosed in the beS&P index methodology, including the name of the customer. Customers will need appropriate mechanisms in place to ensure the ongoing integrity of the index aspects under its control.

  1. How is S&P DJI involved in the development of beS&P indices? Due to the bespoke nature of beS&P indices, there is no “one size fits all” approach to developing these indices. As such, the S&P DJI R&D Services and S&P DJI Index Governance teams are involved in designing all new beS&P indices to ensure they are robust and fit to meet the index objectives.
  2. What other roles does S&P DJI play in beS&P indices? S&P DJI is the index sponsor and benchmark administrator of beS&P indices.
  3. How are beS&P indices branded? beS&P indices carry S&P DJI trademarks. Branding is differentiated from traditional S&P DJI indices through the use of the beS&P brand in the index name. Any customer discretion and/or determination of the index will be fully disclosed in the index methodology. The customer's name will be included in the index methodology in addition to a description of the customer’s role in providing input into the index construction and/or maintenance. If applicable, there may also be a link in the index methodology to a customer-owned website where the customer details the aspect of its methodology under its control, such as a securities exclusion list.

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Transitioning S&P Sustainability Indices to S&P Global ESG Scores and Business Involvement Screens

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Barbara Velado

Senior Analyst, Research & Design ESG Indices

S&P Dow Jones Indices

On Dec. 6, 2023, S&P Dow Jones Indices launched a consultation to propose two key enhancements to its sustainability index offerings.  S&P DJI periodically conducts market consultations to help ensure its indices continue to stay timely and relevant, while reflecting financial markets and the sustainability landscape’s ongoing evolution.

The consultation’s proposed enhancements, which have been adopted as per S&P DJI’s announcement on Jan. 23, 2024, resulted in:

  • Changing from Sustainalytics’ Product Involvement Screens to S&P Global Sustainable1’s (S1’s) Business Involvement Screens (BIS); and
  • Changing from the S&P DJI ESG Scores to S1’s S&P Global ESG Scores.

Here, we explore in more detail the rationale and impact of each of these changes.

S&P Global Business Involvement Screens

BIS are used to help remove companies involved in business activities not aligned with investors’ sustainability goals, such as thermal coal, tobacco and controversial weapons.  While levels of involvement deemed acceptable for index inclusion can differ across investor goals, these and other screens are often considered minimum standards for sustainability-focused investors.

Further strengthening transparency and providing additional granularity around reasons for exclusions drove the transition of S&P DJI’s sustainability indices to the S&P Global BIS dataset.

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Aligning Index Strategies with the UN Sustainable Development Goals

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Stephanie Rowton

Director, Head of Sustainability Indices EMEA

S&P Dow Jones Indices

Since its introduction several years ago, environmental, social and governance (ESG) investing has evolved to measure risk, materiality and other exogeneous factors to help investors align portfolios with broader sustainability- and society-related objectives.

However, since the United Nations (UN) introduced its framework for sustainability and development, some of the business community has also looked to integrate an alternative approach.  By aligning investments with the UN Sustainable Development Goals (SDGs), market participants can assess how their investments influence environmental sustainability, economic sustainability and inclusive societies.

Incorporating an approach within index-based strategies that aligns with the UN SDGs could dramatically expand the opportunities to deploy capital toward specific societal and sustainability-focused objectives.

This paper explains the role SDGs can play in building effective, transparent and consistent indices that align with society’s broader objectives, as measured by the SDGs.  The paper also examines best practices for gathering and incorporating data that measure a company’s alignment with SDGs across its revenue sources and operations.

An Alternative to ESG Investing

ESG investing often involves a risk-based scoring system that starts with assessing the financial materiality of ESG factors for an industry or specific company.  Factors include those that may have a present or future impact on a company’s value drivers, earnings capacity, competitive positioning or long-term value for its shareholders, and if those factors have a significant impact on society or the environment.

A different approach is to identify the measurable and specific impacts that a company’s activities make on society and the environment, regardless of the financial materiality implications.

One way to implement this type of investing is to employ a framework that aligns with the UN SDGs.

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FAQ: S&P SDG Indices

Company Background

  1. Who is S&P Dow Jones Indices? S&P Dow Jones Indices (S&P DJI) is the largest global resource for essential index-based concepts, data and research, and it is home to iconic financial market indicators, such as the S&P 500® and the Dow Jones Industrial Average®. More assets are invested in products based on our indices than products based on indices from any other provider in the world. Since Charles Dow invented the first index in 1884, S&P DJI has been innovating and developing indices across the spectrum of asset classes, helping to define the way investors measure and trade the markets.
  2. Who is S&P Global Sustainable1?  S&P Global Sustainable1 serves as the central source for sustainability intelligence from S&P Global. Through the use of S&P Global Trucost’s environmental data, Sustainable1 is a leader in carbon and environmental data and risk analysis and assesses risks relating to climate change, natural resource constraints and broader environmental, social and governance (ESG) factors.

  1. Who is Impact Cubed?  Impact Cubed is a London-based provider of sustainability impact data and analytics. Impact Cubed’s data are based on factual and quantitative analyses that enable the company to assess a security through a range of lenses, including alignment with the United Nations Sustainable Development Goals (SDGs).
  2. Why did S&P DJI choose Impact Cubed for an SDG index?  The chosen dataset encapsulates a holistic framework of issuer-level data that offers 3.5 times the granularity of other data providers. This means identifying positive and negative real-world outcomes related to investees’ operations, products and services. This in turn enables an understanding of what a company does, where it does it and how it aligns with the SDGs, considering geolocation.
  3. How does Impact Cubed assess alignment to the SDGs?  There are two approaches in the methodology used to assess SDG alignment: revenue and operational. These approaches are translated into three different datasets.
    1. Revenue is based on what a company makes (its products and services) and uses company-disclosed revenues, which are mapped to one of the products and services in Impact Cubed’s industry classification framework. Each business activity is classified as positively aligned, neutral or negatively aligned to one or more SDGs.
    2. Operational is based on a company’s operations (how the products and services are made) and uses various operational ESG factors from Impact Cubed's corporate factor model. Each factor is mapped to one or more SDGs.
    3. Both approaches are combined to provide a holistic view of SDG alignment based on what a company makes as well as its operations.

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