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Identifying and Implementing Net-Zero-by-2050 Strategies: A Case Study

Why Does the S&P 500® Matter to Japan?

Transition to Net Zero with the S&P PACT™ Indices (S&P Paris-Aligned & Climate Transition Indices)

InsuranceTalks: A Robust Rotation Strategy Designed to Reflect Equity Market Dynamics

Why Index Construction Matters in Colombian Equity Benchmarks

Identifying and Implementing Net-Zero-by-2050 Strategies: A Case Study

Typically, low-carbon indices have largely seen relative decarbonizations— improvements against the underlying index—but not Paris Agreement-aligned absolutely sustainable strategies. To be aligned with the Paris Agreement (i.e., a net zero scenario) and absolutely sustainable with regards to greenhouse gas (GHG) emissions, a strategy must align with a specified GHG emissions reduction pathway. To reach net zero by 2050, scientific consensus explains that 1.5°C scenarios would likely help to meet this goal, while 2°C scenarios would most likely reach net zero closer to 2070-2080 (see Exhibit 1).

Identifying and Implementing Net-Zero-by-2050 Strategies: A Case Study: Exhibit 1

While net zero alignment may be a key target, it isn’t the only climate or ESG concern faced by investors. The changing climate potentially exposes us to transition and physical risks, while other broader ESG factors may be ethically desirable, financially material, or both. Many of these ESG factors are uncorrelated, which can make it difficult to understand what the real goal is for a multifaceted ESG investing strategy. The question then becomes: how best to align with a targeted climate scenario and can this be done alongside other ESG objectives?

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Why Does the S&P 500® Matter to Japan?

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Priscilla Luk

Managing Director, Global Research & Design, APAC

S&P Dow Jones Indices

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Tim Wang

Senior Analyst, Global Research & Design

S&P Dow Jones Indices

The S&P 500 is a renowned benchmark for large-cap U.S. equities.  The index is designed to measure 500 leading companies and covers approximately 80% of investable market capitalization in the U.S. equity market.  As of year-end 2020, over USD 13.5 trillion was benchmarked to the S&P 500 alone, with indexed assets making up USD 5.4 trillion of this total. Exchange-traded products based on the S&P 500 have been cross-listed in various markets across the globe, but what creates the international appetite for U.S. equities, especially the S&P 500?

In this paper, we will:

  • Compare the S&P 500 to the leading equity benchmark in Japan;
  • Explore the significance of the S&P 500 in the global equity market; and
  • Compare S&P 500 performance to that of active U.S. large-cap funds.

COMPARISON OF THE S&P 500 AND THE TOPIX

The S&P 500 and the TOPIX are widely regarded as primary performance indicators for the U.S. and Japanese equity markets, respectively.  Both indices have been commonly used as benchmarks for investment in domestic stocks or equity funds for decades. However, the indices vary significantly due to the different economic landscapes and financial market developments they reflect.

The TOPIX consists of 2,000 domestic common stocks listed on the Tokyo Stock Exchange First Section, while the S&P 500 comprises 500 leading U.S. companies representing around 80% of the market cap of the U.S. equity market.  Index members for both indices are weighted by their free-float market capitalization.  Despite the fact that the number of S&P 500 members is only one-quarter of the number of TOPIX constituents, the float-adjusted market cap of the S&P 500 is 10 times that of the TOPIX.

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Transition to Net Zero with the S&P PACT™ Indices (S&P Paris-Aligned & Climate Transition Indices)

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Barbara Velado

Senior Analyst, Research & Design ESG Indices

S&P Dow Jones Indices

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Mona Naqvi

Global Head of ESG Capital Markets Strategy

S&P Global Sustainable1

Backed by evidence from the UN Intergovernmental Panel on Climate Change (IPCC), ambition has grown to limit global temperature rise to 1.5°C since pre-industrial levels, reaching net zero by 2050.  Currently, 70% of global CO2 emissions are covered by net zero targets (IEA, 2021).

To date, climate-conscious investors have largely focused on reducing relative portfolio carbon exposure; however, a combination of new forward-looking datasets and index innovation is emerging.  Investors now have the choice to align with a scenario that may mitigate the most catastrophic impacts.  The European Union (EU) has defined minimum standards for the EU Climate-Transition Benchmarks (CTB) and EU Paris-aligned Benchmarks (PAB), both of which are absolutely 1.5°C and 2050 net zero compatible. Our S&P PACT Indices offer a sophisticated, but accessible, solution for investment product providers to incorporate these standards and further climate objectives, which will support investors to:

  1. Implement the objectives of the Paris Agreement and align investments with a 1.5°C trajectory toward achieving net zero emissions by 2050;
  2. Adopt a strategy intended to meet the minimum standards for EU CTBs and EU PABs and recommendations from the Task Force on Climate-related Financial Disclosures (TCFD)—accounting for the physical risks, transition risks, and opportunities arising from climate change; and
  3. Address other climate objectives in an efficient manner, while staying as close to the underlying index as possible with broad, diversified exposure.

    This paper underscores how the S&P PACT Indices could help investment product providers transition to a 1.5°C world and achieve other climate objectives, utilizing an accessible index construction.

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    InsuranceTalks: A Robust Rotation Strategy Designed to Reflect Equity Market Dynamics

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    Phillip Brzenk

    Managing Director, Global Head of Multi-Asset Indices

    S&P Dow Jones 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.

    Kun Qiu is Co-Head of Derivatives Trading and Analytics at Security Benefit where his team manages a notional fixed index annuity (FIA) derivatives portfolio of more than USD 19 billion and seeks to help develop the next generation of FIA products.

    S&P DJI: Security Benefit has been a leader in so-called custom indices in FIA products. How did that happen, and why was it important to Security Benefit to innovate in that way?

    Kun: After the Global Financial Crisis, the industry was ripe for change in terms of smarter diversification and downside protection. We stepped up our game and became a pioneer of sorts by bringing to market a broad range of underlying index options—across asset types—in our FIA product line that the industry has followed. Later in 2014, we began a strategic focus on building a premier investment team at Security Benefit. The team has been diving deeply into the existing FIA market. We keep looking for innovative index strategies driven by historically proven academic research. We are continuously pushing our technology to achieve better hedging efficiency as well, as we seek to deliver more interest potential for our customers.

    S&P DJI: What role do indices play in the information Security Benefit provides to consumers?

    Kun: At Security Benefit, our products that are based on indices (like FIAs) are sold through independent, third-party financial professionals who choose to do business with us. We don’t sell directly to consumers, and we have an indirect line of communication to them through the materials we create to explain how our products may be used. Consumers, along with their financial professionals, are better positioned to make the investment planning decisions for their individual situations.

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    Why Index Construction Matters in Colombian Equity Benchmarks

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    Silvia Kitchener

    Director, Global Equity Indices, Latin America

    S&P Dow Jones Indices

    INTRODUCTION

    Introduced on Oct. 24, 2013, the S&P Colombia Select Index is one of the leading benchmarks measuring the Colombian equity market.  Designed to track the largest and most liquid Colombian stocks, this index was authorized by the Colombian Ministry of Finance and Public Credit (Ministerio de Hacienda y Crédito Público [MHCP]) in 2015 to sit alongside the MSCI COLCAP Index as the only two domestic equity components of the Índice Agregado de Renta Variable Local (IARVL).  The IARVL is a composite index calculated by the MHCP to track the performance of the Colombian equity market and serve as a benchmark for private and public institutional portfolios, including those of pension funds.

    While the S&P Colombia Select Index and MSCI COLCAP Index share the objective of measuring the performance of the local equities market, the S&P Colombia Select Index’s inclusion of single-company and sector caps results in a more diversified measure of the Colombian equities market.  Despite the larger number of securities in the MSCI COLCAP Index, it is a more concentrated index at the company and sector level, compared with the S&P Colombia Select Index.  These variations in exposure have also led to meaningful differences in risk/return profiles historically, with the S&P Colombia Select Index outperforming the MSCI COLCAP Index over the mid and long term. 

    METHODOLOGY OVERVIEW

    The S&P Colombia Select Index methodology is composed of four sections: the underlying universe, eligibility criteria, index construction, and index maintenance.

    A Closer Look at the Universe

    The S&P Colombia Select Index methodology starts with a universe composed of the S&P Colombia BMI, a sub-index of the S&P Global BMI, which has eligibility requirements that must be met by all emerging market companies.  Additionally, the universe can be expanded to include Colombian companies trading on the Colombia Stock Exchange (Bolsa de Valores de Colombia [BVC]) that meet the eligibility criteria of the S&P Colombia Select Index, so that it contains at least 14 stocks.

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