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TalkingPoints: S&P Dividend Monarchs Index

Dividend Strategy with Quality Yields – The Dow Jones Dividend 100 Indices

Providing Index Solutions to EU SFDR Article 9 Requirements with the S&P Paris-Aligned Indices

The iBoxx SD-KPI EUR Corporates Indices

Higher Conviction Sustainability: The S&P 500 ESG Elite Index

TalkingPoints: S&P Dividend Monarchs Index

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Jason Ye

Director, Factors and Thematics Indices

S&P Dow Jones Indices

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Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones Indices

The S&P Dividend Monarchs Index is designed to track long-standing companies in the U.S. market that have consecutively increased dividends for at least 50 years. The S&P Dividend Monarchs Index constituents have endured more than a half a century’s market turbulence and demonstrated resilience in dividend growth and stock performance. As a new generation from the flagship S&P Dividend Aristocrats® Index Series, the S&P Dividend Monarchs Index constituents push the threshold of being an elite group of dividend-paying companies to the next level.

  1. Why was the index introduced?

As a leading dividend index provider, S&P Dow Jones Indices pioneered in developing a dividend growth strategy. Since the early 1980s, our research team started to monitor U.S. companies that increased dividends for at least 10 years. In the early 2000s, as more companies were able to consecutively increase dividend payments, we raised the observation list threshold to 25 years, which then became the initial basket of “U.S. Dividend Aristocrats.” In May 2005, the S&P 500® Dividend Aristocrats was officially launched, which soon became one of the most well-recognized dividend growth strategies in the market. Since then, we have extended the S&P Dividend Aristocrats Series to cover the mid- and small-cap universes and other global markets. As of April 2023, more than USD 40 billion of ETF assets were tracking the S&P Dividend Aristocrats Indices.

Fast forward to 2023, almost 20 years since the launch of the S&P 500 Dividend Aristocrats, we found that the number of companies in the index had grown from 57 to 66.  In the past five years, we have noticed a growing number of companies consecutively increasing dividends for more than 50 years (see Exhibit 1), these companies exist not only in the large cap (the S&P 500) but also in the mid- and small-cap universes (the S&P MidCap 400® and the S&P SmallCap 600®). In January 2023, more than 30 companies from the S&P Composite 1500 had increased their dividends for at least 50 years. This created a diversified basket of stocks for a new index concept, prompting the introduction of the S&P Dividend Monarchs Index.

Talking Points: S&P Dividend Monarchs Index: Exhibit 1

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Dividend Strategy with Quality Yields – The Dow Jones Dividend 100 Indices

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Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones Indices

INTRODUCTION

Dividend-paying stocks have been in focus over the past decade—assets tracking passively managed dividend products have grown substantially on the back of demand for yield and equity participation.  However, high-yielding companies without strong financial stability may be prone to dividend cuts under the pressure from global economic uncertainties and rising interest rates.  Thus, an investment strategy searching for high yield should consider focusing on quality as well.

Among the different kinds of income-focused equity indices in the market, the Dow Jones Dividend 100 Index Series takes a unique approach.  It seeks to track the performance of 100 high-dividend-yielding stocks in each market covered that have a record of consistently paying dividends, selected for solid fundamental strength.

S&P DJI launched the Dow Jones U.S. Dividend 100 Index in 2011.  In 2021, we expanded the index series to international markets with the launch of the Dow Jones International Dividend 100 Index.  This paper investigates the following potential benefits of the Dow Jones Dividend 100 Indices.

  • Sustainable dividends with financial quality. The indices not only seek to track stocks with consistent dividend payouts, but they also apply a quality screen for the sustainability of yields.  They seek to achieve “quality yields” by requiring stocks to have paid dividends for a minimum of 10 consecutive years, and by ranking stocks by a composite score calculated from the cash-flow-to-total-debt ratio, return on equity (ROE), dividend yield and five-year dividend growth rate.  In addition to the fundamental annual rebalancing, starting from July 2018, S&P DJI introduced a monthly dividend review as an ongoing maintenance to ensure dividend sustainability.  Every month, stocks that have canceled their dividends will be removed from the indices.
  • Dividend growth against future rising rates. A focus on dividend growth in an environment where market participants are concerned about rising rates may be important.  Typically, high-yield equity strategies are biased toward rate-sensitive sectors, which tend to pay out higher yields because of the leverage that they can take on (mainly because of mature business models; e.g., Utilities).  Such entities are exposed when rates rise.  Selection based on dividend growth helps to ensure that firms that can develop their business and increase their payouts are favored in the selection process.  Such businesses are often well-managed companies, from both capital structure and operational perspectives.
  • Investability. Differentiating the Dow Jones Dividend 100 Indices from other dividend strategies are their strict size and liquidity screens and their weighting method, which is based on a modified market capitalization approach.  These attributes were chosen with the goal of increasing index investability in terms of liquidity, capacity and turnover.  Size and liquidity screens could help to reduce the influence of smaller and more distressed stocks on the portfolio, leading to a liquid basket of constituents.  A weighting method based on modified market capitalization could not only help maximize the index capacity, but it also has potential to lead to a lower turnover than alternatively weighted income indices, that weight constituents primarily by yield or total dividends.

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Providing Index Solutions to EU SFDR Article 9 Requirements with the S&P Paris-Aligned Indices

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Kieran Trevor

Analyst, ESG Research & Design

S&P Dow Jones Indices

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Barbara Velado

Senior Analyst, Research & Design ESG Indices

S&P Dow Jones Indices

Executive Summary

Guidance published by the European Supervisory Authorities (ESAs) in May 2023, has clarified the position for active and passive Article 9 financial products using an EU Paris-aligned Benchmark (PAB) or an EU Climate Transition Benchmark (CTB).  The pertinent regulatory guidance in the Q&As relating to Article 9 financial products was twofold.

  • On Nov. 17, 2022, the ESAs clarified that when an Article 9 financial product has sustainable investment as its objective, the designated index that has been selected as a reference benchmark cannot be a broad market index. As of March 2023, there were nearly 900 Article 9 funds. If these funds are benchmarked against a broad market-cap-weighted index, they will need to take action and identify an “objective-aligned” benchmark (9.1) or a PAB (9.3), if they are to maintain their Article 9 status.

  • On May 17, 2023, the ESAs stated that passive financial products that track a PAB or CTB are deemed to have a sustainable investment objective; therefore, such financial products can be categorized as Article 9.

The S&P PACTTM Indices (S&P Paris-Aligned & Climate Transition Indices) offer a broad, diversified, beta-like exposure.  Importantly, the indices seek to eliminate exposure to significant fossil-fuel-based energy (as defined by the EU’s minimum standards for PABs in the Low Carbon Benchmark Regulation (LCBR)), overcoming the “tracking error lock” to fossil fuel energy and broad benchmarks if the broad market does not transition.  In order to comply with the LCBR, the S&P Paris-Aligned Indices aim to incorporate the following climate objectives:

  • To underweight or remove the Energy sector;
  • To have defined net zero pathways;
  • To reduce forward-looking transition and physical risks; and
  • To address climate objectives and get ahead of emerging sustainability trends.

A similar framework is also utilized in our iBoxx EUR Corporates Net Zero 2050 Paris-Aligned ESG Index, with appropriate features for fixed income indices.

This paper provides an overview of the Article 9 fund market as it stands, insight into how the S&P Paris-Aligned Indices work and the exposures they exhibit from both climate and more traditional risk factor perspectives.

Article 9: Defined Inflows and Organic Growth

“Dark green” Article 9 funds have fared well relative to their “light green” Article 8 counterparts with respect to assets under management and growth.  In 2022, Article 8 funds saw net outflows over the year, while Article 9 funds saw consistent inflows for each quarter, with EUR 5.1 billion of inflows in Q4 alone. When considering growth of flows relative to assets, Article 9 funds have seen greater growth compared with Article 8 funds month-over-month since the introduction of the Sustainable Finance Disclosure Regulation (SFDR) in March 2021.  Combined, these seem to evidence investor preference for the dark green Article 9 products over their Article 8 counterparts.

As of March 2023, there were 887 European Article 9 funds (3.6% of all funds by count), down from 1,080 in September 2022, largely due to the number of downgrades to Article 8 observed in Q4 2022.

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The iBoxx SD-KPI EUR Corporates Indices

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Florian Guth

Associate Director, Fixed Income Indices

S&P Dow Jones Indices

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Sebastian Meyer

Director, Fixed Income Product Management

S&P Dow Jones Indices

Executive Summary

Sustainable development key performance indicators (SD-KPIs) are made up of various relevant environmental, social and governance (ESG) indicators.  The SD-KPI standards define the most important SD-KPIs for 68 different industries.  The SD-KPIs have been defined by SD-M GmbH since 2007, as mandated by the German federal government.  The current SD-KPI Standard 2016-2021 is the first global standard for sector-specific and material ESG indicators and is supported by the U.S. Sustainability Accounting Standards Board (SASB).  The SD-KPI Standard 2016-2021 has been included in the Federal Financial Supervisory Authority (BaFin) Guidance Notice on Dealing with Sustainability Risks for handling ESG-related risks as an external sustainability standard.  Further, the SD-KPI Standard 2016-2021 has been recommended in the guidelines of the 2020 German Sustainability Code (DNK), which allows companies to demonstrate to investors and consumers their commitment to sustainability in a way that is transparent, comparable and thus clear.

The constituent weights of the established iBoxx € Corporates are adjusted based on the SD-KPIntegration® score to create the iBoxx SD-KPI EUR Corporates.  The iBoxx SD-KPI EUR Corporates is designed to reflect the performance of EUR-denominated investment grade corporate debt.  The index aims to offer a broad coverage of the EUR corporate bond universe with adjusted weights, by allocating higher weights to issuers with higher SD-KPIntegration scores and reducing weights for those with lower scores.  The index aims to uphold minimum standards of investability and liquidity and showed a higher total return than the iBoxx € Corporates in the long term.  The iBoxx SD-KPI EUR Corporates is further broken down into two subindices based on financial or non-financial corporate sectors.  The iBoxx SD-KPI EUR Corporates had an improved risk-adjusted total return compared with the iBoxx € Corporates over the full index history.

Contextual Background

Investing sustainably and ESG integration need not be at odds with achieving an adequate risk/return ratio.  While some may argue otherwise, sustainable investing and financial returns can be in harmony.  However, there is still an ongoing debate on whether and to what extent the consideration of sustainability criteria affect investment performance.  Nonetheless, it is important for asset owners, managers and financial advisors to apply relevant sustainability indicators, which can significantly affect the performance of financial investments, in compliance with EU regulations.  Several macroeconomic factors such as persistent inflation, rising interest rates, a looming recession and political uncertainties are weighing on tactical allocation decisions for many stakeholders.

The COVID-19 crisis has shown a transition path to a circular, productivity-increasing, inclusive and clean economy that can be accelerated through a green economic recovery.  This will be essential to create a more resilient economy and sustainable returns.  Like investors, consumers are also demanding more corporate social responsibility in the current crisis.  This underlines the growing importance of the three-pillar principle, the balance between social, ecological and economic goals.  When it came to the publicly funded rescue packages to mitigate the economic impact of the COVID-19 crisis, sustainability was initially given little consideration globally.  But there was increasing pressure on governments from different parties to combine stimulus packages with a green recovery.  One example is the group of 178 investors who wrote a letter to the EU heads of state and government calling for sustainable reconstruction. In total, they manage over USD 103 trillion in assets.  The fact that the demands of consumers and investors have been successful can be seen, for example, in companies such as Microsoft, BP and Shell, which are shifting directions to align themselves with the goals of the Paris Agreement. Politicians are also waking up to this trend.  At the European level, the Green Deal was passed, and Germany and France passed low-carbon economic stimulus packages to tackle the COVID-19 crisis.

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Higher Conviction Sustainability: The S&P 500 ESG Elite Index

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Aran Spivey

Senior Analyst, Sustainability Indices

S&P Dow Jones Indices

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María Sánchez

Director, Sustainability Index Product Management, U.S. Equity Indices

S&P Dow Jones Indices

Executive Summary

Over recent years, investors and asset managers have broadened their approach to sustainability, in line with the proliferation of expectations from institutional investors, governments and the wider public. One such way in which this expansion has occurred in recent years is through the strengthening of conviction on sustainable index products. While screened approaches represent one established approach to sustainable indexing, we have more recently seen the growth in attention to ESG scores and stricter business activity thresholds.  This is one way in which market participants can ensure that they are investing in companies with strong ESG performance, avoiding those involved in controversial business activities, while still maintaining diversified sector exposure.

In order to respond to this changing investor demand, S&P Dow Jones Indices (S&P DJI) launched the S&P 500 ESG Elite Index in December 2020.  This index series is designed to measure the performance of companies that meet strict sustainability criteria, while maintaining similar overall sector weights as its benchmark.

S&P DJI ESG Scores

The demand for quality data to support investment strategies is particularly pertinent with regard to sustainability.

S&P Global provides the data that powers the globally recognized Dow Jones Sustainability Indices (DJSI), S&P 500® ESG Index and the S&P 500 ESG Elite Index, among others.  Each year, S&P Global conducts the Corporate Sustainability Assessment (CSA), an ESG analysis of over 17,000 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.

The 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.

Index Mechanics

The S&P 500 ESG Elite Index utilizes S&P DJI’s well-established ESG indexing approach of excluding, sorting, selecting and subsequently weighting companies within an index.  

First, the eligible universe is established.  For the S&P 500 ESG Elite Index, the underlying benchmark is the S&P 500 ESG Index.  Exclusions based on business activities are then applied.  These exclusions are intended to align with high-conviction objectives by avoiding companies involved in a number of controversial business activities including oil & gas, alcohol, nuclear power and palm oil.

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