IN THIS LIST

TalkingPoints: How to Engage ESG in More Meaningful Ways

InvestorTalks: Using AI to Measure Market Mood with Indices

FAQ: S&P Solvency II Capital Efficiency Corporate Bond Index

The S&P Global BMI: Providing Consistent Insights into Global Equity Markets since 1989

Potential Advantages of a Lower Allocation to Energy: The S&P GSCI Light Energy

TalkingPoints: How to Engage ESG in More Meaningful Ways

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Mona Naqvi

Global Head of ESG Capital Markets Strategy

S&P Global Sustainable1

The outperformance of funds that take environmental, social and governance (ESG) issues more seriously than their peers has reinforced why investors might want to integrate these factors into portfolios via the type of tools that S&P Dow Jones Indices has developed.

Encouraged by evidence of the materiality of ESG issues during the Covid-19 led volatility, there is greater appetite for sustainable themes in investor portfolios to align investments with one’s values and potentially generate higher risk-adjusted returns. At the same time, fuelled by greater transparency over how companies act and behave, and also spurred by trends in public opinion towards issues that matter to society as a whole, investors are seeking ways to leverage data and research to gain greater exposure to ESG factors.

Amid these trends, Mona Naqvi, Head of ESG Index Strategy for North America at S&P Dow Jones Indices (S&P DJI), spoke with AsianInvestor to explain the importance of financial materiality and other key ways to assess ESG, to help it be a core building block in portfolio construction.

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InvestorTalks: Using AI to Measure Market Mood with Indices

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

Indexing and artificial intelligence (AI) are democratizing access to institutional quality risk management. The S&P Riskcasting® Indices are designed to help keep risk in check, using AI to track signals of investor views on market risk and systematically adjusting allocations based on the signals received. S&P DJI joins Arnaud de Servigny to discuss how these innovative indices track the mood of the market to dynamically capture potential opportunities.

What's inside the S&P Riskcasting Index Series, and what is it designed to do?

S&P DJI: The index series is a rules-based, systematic multi-asset strategy that incorporates equity and fixed income. It uses a risk aversion signal to determine three different market states: bullish, neutral, or bearish. Based on the determined market state, the S&P Riskcasting Indices will allocate to different equity or fixed income indices. For example, the S&P 500® Riskcasting Index uses the S&P 500 and the S&P 10-Year Treasury Note Futures Index as its components, whereas the S&P 500 Low Volatility Riskcasting Index uses the S&P 500, S&P 500 Low Volatility Index, and S&P 10-Year Treasury Note Futures Index as its three components.

How does the risk aversion signal use S&P 500 options to measure the mood of the market?

Arnaud de Servigny: Generally, looking at risk in the finance industry, we tend to have backward-looking information on volatility and things like that. In a way, it is like looking in the rearview mirror while driving a car. What we want to do, however, is to look at what is going on right now or in the near future, and for this type of analysis we look at option markets. In the option markets, there are many different participants with many different views, and it is the diversity of these views that is interesting. If the overall market mood evolves in one direction or another, then this is something that is likely to have an impact on market performance, especially the equity market, which is what we want to capture.

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FAQ: S&P Solvency II Capital Efficiency Corporate Bond Index

The S&P Solvency II Capital Efficiency Corporate Bond Index seeks to track the performance of qualifying global corporate infrastructure bonds that meet the criteria under Solvency II.  The index utilizes an independent third-party assessment to determine eligibility for each security.

  1. What is Solvency II?  The Solvency II regime provides a framework for insurance providers in the European Union (EU).  This also applies to global insurance regulators that adhere to the Solvency II framework.  Like the Basel framework for banking institutions, it focuses on three pillars to assess capital requirements, set risk management procedures, and perform supervisory reporting for adherence to the regime.

  1. To receive preferential capital requirements, securities must qualify for capital relief.  What are the criteria for qualifying for capital relief?

    The primary requirements include the following.

    • The entity “provides or supports essential public services.”
    • More than 75% of its revenues come from infrastructure investing.
    • The level of output or the usage and price are contractually fixed.
    • The main payers are entities with an External Credit Assessment Institutions (ECAI) rating and a credit quality step of at least 3.
    • The investing entity should be able to hold the investment to its maturity.
    • There is diversification in terms of location.
    • A substantial majority of the revenues come from infrastructures located in the Organisation for Economic Co-operation and Development (OECD).

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The S&P Global BMI: Providing Consistent Insights into Global Equity Markets since 1989

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John Welling

Director, Global Equity Indices

S&P Dow Jones Indices

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Michael Orzano

Head of Global Exchanges Product Management

S&P Dow Jones Indices

Over the past few decades, best practices for global equity benchmark construction have converged on a few key principles.  First, a properly constructed global index series must fully capture the investable equity opportunity set.  In order to do so, it should include large-, mid-, and small-cap companies, incorporate minimum size and liquidity requirements, and be float adjusted so that it only includes shares available for purchase.  Second, it should utilize a modular, building block approach that allows the global opportunity set to be decomposed into subsets without gaps or overlaps.  Last but not least, it should apply a consistent methodology across markets and have continuity in its approach over time.  These principles are critical to ensuring a fair and robust benchmark that can be utilized by market participants to support key aspects of the investment process such as performance measurement, asset allocation, and index replication.

Established in 1989, the S&P Global BMI (Broad Market Index) Series pioneered these core benchmarking principles.  Ahead of its time in many respects, the S&P Global BMI lays claim to a number of important firsts in the global indexing industry; the most important of these being that it was the first to incorporate float adjustment and to include large-, mid-, and small-cap companies in a single modular global benchmark.  As a result, the S&P Global BMI is used by some of the world’s largest and most sophisticated asset managers and asset owners, who value it as a comprehensive and trusted data set.

In this paper, we will cover the following major points.

  • With more than 30 years of seamless history, the S&P Global BMI provides a consistent universe for historical market analysis and back-testing investment strategies.
  • Over the years, other major global equity indices have converged to follow the S&P Global BMI framework—in particular its float adjustment and modular inclusion of large-, mid-, and small-cap securities in a single index series.
  • The S&P Global BMI’s deep small-cap segment provides the most comprehensive measure of global small-cap securities.
  • Differing country classifications for South Korea among major index providers may lead to meaningfully different representations of the emerging market opportunity set.
  • Other competitors’ indices, such as MSCI EAFE, may inadvertently create a gap in coverage by excluding Canadian securities. An alternative, such as the S&P Developed ex-U.S. BMI, eliminates that gap.

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Potential Advantages of a Lower Allocation to Energy: The S&P GSCI Light Energy

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Fiona Boal

Managing Director, Global Head of Equities

S&P Dow Jones Indices

S&P Dow Jones Indices (S&P DJI) offers a number of strategies that track various commodities markets.  The most widely recognized of these is the S&P GSCI, which is designed to measure the performance of a broadbased, production-weighted, investable representation of the global commodities market. Energy-related futures make up more than half of the index composition.

For a less-energy-intensive commodity market measure, there is the S&P GSCI Light Energy. It tracks the same designated contracts as the headline S&P GSCI, but it divides its contract production weights in the energy sector by four, increasing the relative weights of other S&P GSCI commodity components. Therefore, the index offers a commodity exposure that is more evenly weighted across the five major commodity sectors: energy, industrial metals, precious metals, agriculture, and livestock.

Exhibit 1 compares the methodologies of the S&P GSCI Light Energy and the Bloomberg Commodity Index (BCOM). These two indices are representations of a more equal-weighted view of commodities markets. Their performance is similar, and due to lower energy weights, each index has shown much less volatility than the headline S&P GSCI.

Potential Advantages of a Lower Allocation to Energy: The S&P GSCI Light Energy: Exhibit 1

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