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FAQ: S&P Dow Jones Indices’ Transition to S&P Global Business Involvement Screens & ESG Scores

Case Study: PenSam Net Zero Indices

TalkingPoints: Finding Resilience amid Uncertainty: A Low Volatility High Dividend Approach for the A-Share Market

Why Does the S&P 500 Matter to Hong Kong?

FAQ: iBoxx ESG Index Series

FAQ: S&P Dow Jones Indices’ Transition to S&P Global Business Involvement Screens & ESG Scores

Company Background

S&P Dow Jones Indices (S&P DJI) is home to iconic financial market indicators, such as the S&P 500® and the Dow Jones Industrial Average® and is the largest global resource for essential index-based market concepts, data, and research.

S&P DJI has been a pioneer in sustainability indexing for more than 20 years, starting with the 1999 launch of the Dow Jones Sustainability World Index. Today, S&P DJI offers an extensive range of indices and index-based solutions to address varying performance and sustainability objectives. These include broad-based, market-capitalization sustainability indices such as the S&P 500 ESG Index, as well as more thematic and targeted climate-focused indices.

  1. What is S&P DJI changing?  As previously announced on Jan. 23, 2024, S&P DJI is implementing changes to two datasets that are used to screen and identify eligible companies for potential inclusion to its range of sustainability/ESG indices.

S&P DJI is transitioning all indices that are currently using S&P DJI ESG Scores to S&P Global ESG Scores. In addition, S&P DJI will also transition the Business Involvement Screens data source from Sustainalytics’ Product Involvement Screens to S&P Global’s Business Involvement Screens for many of its indices.

Both the S&P Global Business Involvement Screens and S&P Global ESG Scores are published by S&P Global Sustainable1 (S1), which operates independently from S&P DJI.

For the S&P Global ESG Score transition, there will be no change to how the score is used across the impacted indices. The S&P Global ESG Score measures a company’s performance on and management of material ESG risks, opportunities and impacts informed by a combination of company disclosures, Media and Stakeholder Analysis (MSA), modeling approaches and in-depth company engagement via the S&P Global Corporate Sustainability Assessment (CSA). For more information on the S&P Global ESG Score, please refer to the S&P Global ESG Scores Methodology.

For the Business Involvement Screens transition, existing screens will be replaced by the direct equivalent in the new data set and no modifications will be made to the existing levels of involvement described in the relevant index methodology. Sustainalytics’ Global Standards Screening dataset will continue be used where relevant.

2. How were these decisions made?  The changes are being implemented following feedback gathered from a market consultation that S&P DJI conducted in 2023. As part of its index governance process, S&P DJI periodically conducts market consultations to help inform customers, index users and market participants of proposed index methodology changes and ensure that its indices and benchmarks continue to remain timely and relevant and reflect appropriate global financial market trends, including those related to the evolving sustainability landscape.

In early December 2023, S&P DJI conducted a market consultation outlining the two proposed changes to gather comments and feedback from key customers, index users and market participants. S&P DJI also extended the consultation period in early January 2024. Following a review of the consultation results, S&P DJI then announced its decision on Jan. 23, 2024.

S&P DJI reviews its methodologies and data sources on an ongoing basis to ensure that its indices use the most appropriate datasets that are available to help the indices better meet their objectives and its clients make better informed decisions.

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Case Study: PenSam Net Zero Indices

Background

S&P Dow Jones Indices (S&P DJI), the world’s largest provider of financial market indices, was engaged by PenSam, the Danish labor market pension fund, to develop a solution that corrected portfolio construction concerns that it had with its existing climate benchmark. S&P DJI was able to develop a solution that considered:

  • A science-based IPCC approach to portfolio decarbonization using Scope 1+2+3 carbon emissions data
  • Optimizer capabilities that would limit unwanted risks (including tracking error, active sector/industry deviation and stock concentration)
  • Bespoke ESG criteria provided by the client
  • Increased exposure to companies with revenues aligned to climate opportunities

To implement the index solution, S&P DJI developed a new bespoke index framework under our beS&P™ capability, which brings new, client-driven index concepts to life.

A Simple Approach to Achieving Net-Zero

The index methodology developed for PenSam follows a customized version of the S&P Carbon Budget Index (CBI) Series, which was launched by S&P DJI in 2022. The methodology is based on the concept paper, “Net- Zero Carbon Portfolio Alignment”, which makes the case for the cost of delay. The paper references the Intergovernmental Panel on Climate Change’s (IPCC)

argument that limiting global warming from pre-industrial levels to 1.5°C with an 83% probability by 2050 means that the planet has a remaining carbon budget of 300 GtCO2 as of 2020.3 In 2022, this implies a reduction in the volume of CO2 by 12% year-over-year in order to achieve this goal. This approach may be mirrored in a diversified index by observing the carbon footprint of companies every year;

if companies are able to reduce their footprint in-line with this goal, then the index weights may remain the same— however, for cases in which corporates, not individually but overall, fail to achieve the required targets, the index will be reweighted such that the carbon ownership will still be reduced by 12%. As the carbon budget shrinks with time, if investors delay action and companies do not reduce emissions accordingly, then the required 12%

decarbonization will become 20% in 2025, and 47% in 2028. Despite the rapidly depleting carbon budget, the S&P CBI methodology offers a high level of flexibility by allowing custom decarbonization pathways that cater to clients’ initial and final carbon reduction goals. For example, the index designed for PenSam applies an initial 70% carbon reduction that is followed by a 7% year-over-year reduction compatible with the 2024 Vintage4 model. Furthermore, there is a floor to the reduction level, as there will always be emissions in 2050 that will then have to be captured.

Case Study: PenSam Net Zero Indices: Exhibit 1

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TalkingPoints: Finding Resilience amid Uncertainty: A Low Volatility High Dividend Approach for the A-Share Market

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Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones Indices

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Jason Ye

Director, Factors and Thematics Indices

S&P Dow Jones Indices

The S&P China A-Share LargeCap Low Volatility High Dividend 50 Index is designed to offer liquid and tradable exposure to dividends and low volatility, two well-known risk factors that have delivered risk premium in the China A-share market in the past.

The two factors are combined through sequential dividend and low volatility screens. Companies exhibiting high dividend yield may fall in a “dividend trap,” since high dividend yield can be caused by decreasing stock prices rather than increasing dividend payments. Overlaying a low volatility screen on a high dividend portfolio may help to eliminate the dividend trap, resulting in improved absolute and risk-adjusted returns.

Since inception, the index has shown robust return, lower risk, reduced drawdown and cheaper valuation than its benchmark. The index may be appealing to those who wish to maintain equity exposure during turbulent market environments or those who are interested in increasing equity exposure but have limited risk appetite.

Uncertainty has been a common theme for the China equity market since 2021, amid worries over economic slowdown. The S&P China A-Share LargeCap Low Volatility High Dividend 50 Index may help to provide a defensive and resilient solution for investors to ride through this challenging period.

1. How does the index work?

The S&P China A-Share LargeCap Low Volatility High Dividend 50 Index is designed to have significant large-cap and high dividend exposure while limiting volatility. Index construction starts from the S&P China A Domestic LargeCap, which consists of the top 70% of stocks by float market capitalization in the China A market. As of Dec. 31, 2023, the S&P China A Domestic LargeCap had 610 constituents. First, the top 100 stocks with the highest yields are selected. After that, volatility screening is applied to eliminate the 50 most volatile stocks. To maximize dividend exposure, the remaining 50 names are weighted by dividend yield. The index rebalances semiannually in January and July.

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Why Does the S&P 500 Matter to Hong Kong?

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Sue Lee

Director, APAC Head of Index Investment Strategy

S&P Dow Jones Indices

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Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

Executive Summary

The S&P 500® is a renowned benchmark for large-cap U.S. equities.  The index reflects approximately 80% coverage of investable market capitalization in the U.S. equity market and includes 500 leading companies, many of which are the world’s largest and most recognizable companies with a global reach of operations, customers and revenue sources.  As of the end of 2022, USD 11.4 trillion was indexed or benchmarked to the S&P 500, with indexed assets making up approximately USD 5.7 trillion of this. As a consequence of an increasing popularity and scale of S&P 500-related products, including index funds, exchange-traded funds (ETFs) and listed derivatives such as futures and options, the typical cost and barriers to entry for S&P 500-linked investments have fallen over time.

In this paper, we examine the S&P 500 from the perspective of a Hong Kong-based investor, including:

  • The relevance of the U.S. in the global economy and global equity markets;
  • Comparison of the S&P 500 to the leading large-cap equity benchmark in Hong Kong;
  • Complementary aspects of an S&P 500-linked investment for a broad-based Hong Kong equity portfolio; and
  • The differences between the S&P 500 and other indices or active portfolios tracking U.S. equities.

The Size and Relevance of the U.S.

The U.S. equity market represents a significant portion of the global economy and equity opportunity set.  Exhibit 1 shows the relative sizes of gross domestic product (GDP) along with equity market capitalization for the U.S., China, Hong Kong and the rest of the world.  When Hong Kong equity investors make choices among countries, over 60% of their opportunity set is composed of U.S. stocks.

Why Does the S&P 500 Matter to Hong Kong?: Exhibit 1

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FAQ: iBoxx ESG Index Series

Company Background

  1. Who is S&P Dow Jones Indices (S&P DJI), and how did iBoxx become part of the S&P DJI brand? S&P Dow Jones Indices (S&P DJI) is home to iconic financial market indicators, such as the S&P 500® and the Dow Jones Industrial Average®. Through the merger with IHS Markit, the iBoxx brand became part of S&P DJI, bringing with it the widely recognized fixed income benchmarks across corporate credit, tradeable and sovereign bond indices.
Sustainability at S&P DJI

S&P DJI has been a pioneer in environmental, social and governance (ESG) indexing for 20 years, starting with the 1999 launch of the Dow Jones Sustainability World Index. Today, we offer an extensive range of indices to fit varying risk/return and ESG expectations, from broad-based sustainability and low-carbon climate approaches to thematic strategies.

  1. Who is S&P DJI’s ESG data provider? S&P Global, a parent company of S&P DJI, provides the data that powers S&P DJI’s globally recognized equity and fixed income indices. iBoxx also collaborates with external partners to leverage a multitude of ESG datasets to fulfill specific client demands.
iBoxx ESG Indices
  1. What is the iBoxx ESG Index Series? The iBoxx ESG Index Series is a set of market-capitalization-weighted indices that target securities meeting specific sustainability criteria on corporate bond indices. The index series includes suites across the following two ranges:
  • iBoxx Corporates SRI Screened
  • iBoxx Corporates ESG

    1. Why was the iBoxx ESG Index Series created? The iBoxx ESG Index Series was launched to provide an ESG-oriented and investable expansion of leading market benchmarks, such as the iBoxx corporate bond indices across currencies, including the euro (EUR), U.S. dollar (USD) and pound sterling (GBP), and across the investment grade and high yield universes.
    1. What indices are in the iBoxx ESG Index Series? The iBoxx index series consists of the following index families:
  1. iBoxx USD Corporates SRI Screened
  2. iBoxx EUR Corporates SRI Screened
  3. iBoxx GBP Corporates SRI Screened
  4. iBoxx USD High Yield Corporates Developed Markets SRI Screened
  5. iBoxx EUR High Yield Corporates SRI Screened
  6. iBoxx USD Corporates ESG
  7. iBoxx EUR Corporates ESG
  8. iBoxx GBP Corporates ESG
  9. iBoxx USD High Yield Developed Markets Corporates ESG
  10. iBoxx EUR High Yield Corporates ESG

    11. Each index family includes a comprehensive suite of subindices spanning across maturities, ratings and sectors. Further indices or index families may be available in the future.

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