IN THIS LIST

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

TalkingPoints: S&P GSCI Electric Vehicle Metals - Commodities Go Electric

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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TalkingPoints: S&P GSCI Electric Vehicle Metals - Commodities Go Electric

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Fiona Boal

Head of Commodities and Real Assets

As the world has begun to focus on new technology to aid in the global energy transition, electric vehicles are becoming more a part of everyday life. S&P Dow Jones Indices (S&P DJI) collaborated with S&P Global Commodity Insights (SPGCI) to launch the S&P GSCI Electric Vehicle Metals, which seeks to track commodities used in the production of electric vehicles.

  1. What drove the creation of this index?
    The index was created in response to client demand for investable thematic strategies that offer exposure to the global energy transition. The energy transition represents both a significant challenge and opportunity to financial market participants, and nowhere is that dichotomy more obvious than in commodities markets.

    Historically, technology has often worked against commodities, either by encouraging substitution or improving productivity, and thereby requiring less of a certain raw material to meet demand. But in the case of decarbonization, the opposite is true—the adoption of green technologies signals strong demand for many commodities, particularly metals. The switch from internal combustion engine (ICE) vehicles to electric vehicles (EV) is one of the most visible and fastest-moving decarbonization themes. The S&P GSCI Electric Vehicle Metals is designed to allow market participants to measure the performance of the metal components of an EV.

  2. Why launch this index now?
    EVs have gone mainstream, this is no longer an infant industry and market participants are looking for ways to track EV market performance, evaluate EV investment and develop EV investment strategies. Replicating the tradeable metal components of an EV on a production-weighted basis in an index is an innovative way to meet this investor demand. SPGCI forecasts that plug-in EVs on the roads could displace over 5 million barrels per day of gasoline and diesel consumption globally by 2040. However, demand for metals
    used in EVs is expected to increase over the same period, especially copper and lithium, which should experience a near 600% increase in demand.

    Coinciding with the growth in EV production has been the development of new commodities futures markets for EV battery metals such as cobalt and lithium. Liquid futures markets are an essential component of the price discovery mechanism in commodities markets and expand the accessible ecosystem for market participants. Liquid futures markets also make it possible to create an index that seeks to reflect all of the major metal components of an EV.

  3. How does the index work?
    The S&P GSCI Electric Vehicle Metals is a commodities futures-based index that is designed to reflect the performance of the tradeable metals used in the production of an EV. The expertise of SPGCI is leveraged for data to help determine the index constituents and production weights to ensure the index broadly reflects the relative metal usage in a representative EV. An important characteristic of the index is the flexibility to reweight, add or remove constituents at regular intervals to ensure that it can adapt to changes in EV technology and the launch and adoption of new metals futures contracts.

    Constituents in the index are weighted based on their current metal usage in an average EV multiplied by the average per unit price for the metal, thereby representing the relative cost (or value) of the metal components in an EV. Battery metal constituents, as defined by SPGCI but including cobalt and lithium, are capped based on contract trading volume and liquidity requirements to ensure that the index is both replicable and investable.

  4. What target audience would most benefit from using this index?
    We believe the index could have a wide application across the financial market. It was designed to be used as a benchmark to track the price performance of the major metals essential to the production of EVs and as the basis of financial products such as exchange-traded products. It may appeal to those market participants already active in commodities markets but may also be of interest to investors who have not traditionally held exposure in commodities markets but are interested in strategies that match their interest in the energy  transition.

  5. What is SPGCI's role in the index?
    As an expert in the field of energy transition, battery metals and EVs and with extensive experience undertaking commodity market assessments, SPGCI is well placed to contribute as a source of information for use in the index. SPGCI will publish the metal usage in a typical EV on a biannual basis. This usage data will be an input into the calculation to determine the individual index constituent weights in the index. SPGCI publishes EV metals components and the corresponding production weights of those components in kilograms. Ahead of publication, SPGCI engages with a range of market participants and industry bodies and may also reference research reports and other relevant resources.

    SPGCI's biannual update on the metal usage in a representative EV may include new commodities, thereby allowing that as EV technology changes, the index has the flexibility for new constituents to reflect those changes. SPGCI will monitor key components of an EV, including changing and evolving battery chemistries, which may result in the inclusion of new index constituents to those in the initial basket.

  6. What do you see are the key benefits of this index given its construction?
    An important characteristic of the S&P GSCI Electric Vehicle Metals is the flexibility to reweight and add or remove constituents at regular intervals to ensure that the index can adapt to changes in EV technology and the launch and adoption of new metals futures contracts.

    Another important characteristic of the index is that it is based on commodities futures, not equities. The presence of equity market beta in thematic indices can make it difficult for these indices to truly reflect the performance of a particular theme or component of the real economy. It may not be possible to know which companies will win the battle for EV supremacy, but measuring the supply and demand dynamics and price performance of the underlying physical components that will be needed to build out the EV fleet is relatively straightforward.

  7.  What is unique about the S&P DJI and SPGCI collaboration?
    S&P DJI is the world's leading resource for benchmarks and investable indices, and our indices are widely used to track market performance, benchmark portfolios and develop investment strategies. Our series of commodities indices, headlined by the S&P GSCI, offer market participants straightforward measures of commodity beta, commodity sectors, single commodities and commodity thematics.

    SPGCI is a leading voice in the commodities market. Each day, SPGCI publishes news, commentary, fundamental market data, research, analysis and thousands of daily price assessments widely used as benchmarks in the physical and futures markets.

    The S&P GSCI Electric Vehicle Metals is the first S&P DJI index to incorporate data from SPGCI. It is exciting to bring together the expertise of two analytically independent S&P Global divisions on such an important and relevant segment of the investment landscape. Together, we hope to improve market transparency and offer market participants the ability to build unique investment strategies across a growing segment of the energy transition.

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