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Global Sector Primer Series: Financials

InsuranceTalks: An Enhanced Approach to Managing Risk

Driving toward a Greener Future

Bringing ESG Considerations to Australian Strategies

FAQ: S&P DJI ESG Index Series

Global Sector Primer Series: Financials

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Hector Huitzil Granados

Analyst, Global Equity Indices

Introduction

The Global Industry Classification Standard® (GICS®) assigns companies to a single classification at the sub-industry level according to their principal business activity using quantitative and qualitative factors, including revenues, earnings and market perception.  The sector is the first level of the four-tiered, hierarchical industry classification system that includes 11 sectors, 24 industry groups, 69 industries and 158 sub-industries.  The classification standard is in constant evolution to ensure that it reflects the current state of industries globally.

The Financials sector includes, but is not limited to:

  • Companies with conventional banking operations;
  • Insurance and reinsurance brokerage firms;
  • Financial exchanges and providers of financial decision support tools and products, including rating agencies;
  • Institutions that provide consumer finance services;
  • Investment management and brokerage firms;
  • Firms providing mortgage and mortgage-related services; and
  • Companies with significantly diversified holdings across three or more sectors, none of which contribute a majority of profit or sales.

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InsuranceTalks: An Enhanced Approach to Managing Risk

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Phillip Brzenk

Head of Multi-Asset Indices

Insurance Talks is an interview series where insurance industry thinkers share their thoughts and perspectives on a variety of market trends and themes impacting indexing.

Phillip Brzenk is Head of Multi-Asset Indices at S&P Dow Jones Indices (S&P DJI). His team is responsible for the product management of multi-asset and option indices, which cover a variety of outcome-oriented index solutions including managed volatility, retirement, dynamic allocation, inflation hedging, sustainability, and absolute return.

S&P DJI: Following the 2008 Global Financial Crisis (GFC), many investors with longer-term time horizons and liabilities found themselves more averse to volatility. How did this give rise to the S&P Risk Control Indices?

Phil: The GFC brought significant disruption to the markets, with U.S. equities (as measured by the total return of the S&P 500®) dropping over 55% from Oct. 9, 2007, to March 9, 2009. In addition, correlations between asset classes increased, reducing potential diversification benefits normally associated with standard allocation strategies. Coming out of the crisis, there was a clear need to develop a systematic asset allocation framework that could react quickly to changing market conditions, with a particular focus on controlling volatility—and with that, S&P DJI was a pioneer in the market when we launched the first  S&P Risk Control Indices in 2009.

S&P DJI: Some practitioners might ask, why manage risk when it can be avoided?

Phil: The S&P Risk Control Indices attempt to give asset class exposure to equities and cash (Risk Control 1 [RC]) or equities and Treasury bonds (Risk Control 2 [RC2]) for potential long-term return premium over short-term cash. The index series incorporates a reactionary asset allocation framework that shifts between the asset classes in order to target a specific volatility target percentage. While volatility is not precisely equivalent to risk, having a volatility target enables participants to match their appetite for risk taking. The asset allocation framework and volatility target in S&P DJI’s risk control indices have historically enabled them to achieve reduced tail risk and higher risk-adjusted returns compared to standard equity exposure.

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Driving toward a Greener Future

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Jason Ye

Director, Strategy Indices

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Izzy Wang

Analyst, Strategy Indices

Executive Summary

Climate change is disrupting the global economy and affecting everyone. The transition from fossil fuel vehicles to electric vehicles (EVs) is often considered a critical step in decarbonizing the global transportation system. The adoption of EVs has accelerated over the past few years. Since 2012, global EV sales have grown at a CAGR of 56%. In 2021, sales doubled from the previous year, hitting a record high of 6.75 million units (see Exhibit 1). Going forward, restrictions or even banning the production of fossil fuel vehicles, the tax credits for purchasing EVs, growing preference for EVs among young consumers, and billions of investments in EV charging infrastructure could continue to boost the supply and demand of electric vehicles. For market participants, this global structural shift from traditional engine vehicles to EVs represents meaningful opportunities.

Exhibit 1: Global Electric Vehicle Sales Have Had Rapid Growth

An Electric Era Is Coming

More than 20 countries have announced their intention to fully phase out new sales of internal combustion engine (ICE) vehicles over the next 30 years, with many targeting zero carbon emissions by 2050.  The U.K. is set to ban new sales of petrol and diesel cars by 2035.  The U.S. government has set a target for half of new auto sales to be electric by 2030, with a USD 7.5 billion package to roll out charging stations across the country.  Meanwhile, leading traditional automakers are pivoting toward EV manufacturing.  General Motors has set an aggressive goal to exclusively produce EVs by 2035, and Ford announced it would target 40% of its vehicle production to be EVs by 2030.  To meet the stated targets of all countries, the International Energy Agency’s forecast shows that global EV sales would need to increase to 25 million vehicles by 2030, representing 15% of the market share.

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Bringing ESG Considerations to Australian Strategies

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Barbara Velado

Senior Analyst, Research & Design ESG Indices

This paper will demonstrate the potential improvements in environmental, social and governance (ESG) characteristics that are reflected in ESG benchmarks versus traditional market-capitalization-weighted benchmarks in a hypothetical group of Australian equities.  We explore how various sustainability-focused indices might provide improved ESG characteristics, while maintaining comparable sectoral and country composition to that of traditional equity benchmarks.  The alternatives to market-cap-weighted equity indices we considered include: a broad-based domestic ESG index, international carbon control indices, a global ESG real estate index, and a global net zero infrastructure index.

AN OVERVIEW OF SUSTAINABILITY-FOCUSED INDICES

The S&P/ASX 200 ESG Index draws on the intelligence of the S&P DJI ESG Scores, which robustly measure companies’ ESG risk and performance factors to measure the performance of securities from the benchmark index that meet sustainability criteria.  It is designed with the goal of maintaining similar industry group weights as its benchmark, with the overall result of improving ESG performance.  It excludes companies with activities in key negative ESG areas, such as the extraction and consumption of thermal coal, production of tobacco and controversial weapons, as well as companies with poor alignment with UN Global Compact (UNGC) principles, involvement in relevant ESG controversies, and those identified as ESG laggards.

The S&P Developed Ex-Australia LargeMidCap Carbon Control Index and the S&P Emerging LargeMidCap Carbon Control Index focus on carbon intensity reduction and employ the carbon emissions intensity figures published by S&P Global Trucost.  The index design aims to minimize average carbon intensity of the underlying benchmark, while offering diversification across a range of companies in the underlying index.  The indices also apply exclusions based on companies’ involvement in specific business activities including fossil fuel, tobacco, controversial weapons, alcohol, gambling and adult entertainment, as well as companies with poor alignment with UNGC principles, low S&P DJI ESG Scores, and involvement in relevant ESG controversies.

The Dow Jones Global Select ESG Real Estate Securities Index (RESI) uses data from GRESB and is designed to be representative of the investment characteristics of the Dow Jones Global Select Real Estate Securities Index, a conventional real estate benchmark, but with an improved sustainability profile through the use of GRESB scores.  As a leader in evaluating ESG characteristics of real estate companies, GRESB uses a framework that is specifically tailored to real estate companies and seeks to embrace industry best practices on the full range of ESG issues that can be material to shareholders.  The indices also apply exclusions based on companies’ involvement in specific business activities including fossil fuel, tobacco, controversial weapons, alcohol, gambling and adult entertainment, as well as companies with poor alignment with UNGC principles and involvement in relevant ESG controversies.

Finally, the Dow Jones Brookfield Global Infrastructure Net Zero 2050 Climate Transition ESG Index relies on innovative environmental datasets published by S&P Global Trucost to select and weight companies from the listed infrastructure universe to be collectively compatible with a 1.5ºC global warming climate scenario at the index level.  The index design also aims to be in line with the EU Climate Transition Benchmark requirements and the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), including but not limited to a 30% carbon intensity reduction relative to the underlying benchmark, a baseline 7% average year-over-year self-decarbonization, activity exclusions and a reduction in index exposure to physical climate risks.

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FAQ: S&P DJI ESG Index Series

COMPANY BACKGROUND

  1. Who is S&P Dow Jones Indices?  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®. The largest global resource for essential index-based market concepts, data, and research, it is a major investor resource to measure and trade the markets.

    ESG at S&P DJI

    S&P Dow Jones Indices 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 core ESG and low-carbon climate approaches, to thematic and fixed income ESG strategies.

  2. Where does S&P DJI get its ESG data?  S&P Global provides the data that powers the globally recognized Dow Jones Sustainability Indices (DJSI), S&P 500 ESG Index, and others in the S&P ESG Index Series. Each year, S&P Global conducts the Corporate Sustainability Assessment (CSA), an ESG analysis of over 11,000 companies. The CSA has produced one of the world’s most comprehensive databases of financially material sustainability information and serves as the basis for the scores that govern S&P DJI’s ESG indices.

S&P DJI ESG INDICES:

  1. What is the S&P ESG Index Series?  The S&P ESG Index Series is a set of market-capitalization-weighted indices, targeting securities that meet industry-specific sustainability criteria. The indices maintain similar overall industry group weights as their underlying indices. ESG stands for environmental, social, and governance.
  2. Why was the S&P ESG Index Series created?  The S&P ESG Index Series was launched to provide ESG-oriented and investable alternatives to leading market benchmarks, such as the S&P 500.
  3. What are the S&P DJI ESG Scores?  S&P DJI ESG Scores are environmental, social, and governance scores that robustly measure ESG risk and performance factors for corporations, with a focus on financial materiality. The S&P DJI ESG Scores are used in the constituent selection process in the S&P ESG Index Series. They are a second set of ESG scores calculated by S&P Global ESG Research, in addition to the S&P Global ESG Scores that are used to define the Dow Jones Sustainability Indices constituents.

    The S&P DJI ESG Scores are the result of further scoring methodology refinements to the S&P Global ESG Scores that result from S&P Global’s annual Corporate Sustainability Assessment (CSA), a bottom-up research process that aggregates underlying company ESG data to score levels. The scores contain a total company-level ESG score for a financial year, comprising individual environmental (E), social (S), and governance (G) dimension scores, beneath which there are on average over 20 industry-specific criteria scores that can be used as specific ESG signals (see Exhibit 1).

    A company’s total ESG score is the weighted average of all criteria scores and their respective weights. Each individual ESG dimension score (e.g., a company’s “E” score) is the weighted average of all criteria scores and weights within a specific ESG dimension. Total ESG scores range from 0-100, with 100 representing best performance.

    For more information on the S&P DJI ESG Scores, please see the S&P DJI ESG Scores Frequently Asked Questions.

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