IN THIS LIST

The iBoxx SD-KPI EUR Corporates Indices

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

How Indexing Affects Shariah-Compliant Investing

Applying Sustainability to Sector Indices

Seeking Stable Income: The S&P 500® Quality High Dividend Index

The iBoxx SD-KPI EUR Corporates Indices

Contributor Image
Florian Guth

Associate Director, Fixed Income Indices

S&P Dow Jones Indices

Contributor Image
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.

pdf-icon PD F Download Full Article

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

Contributor Image
Aran Spivey

Senior Analyst, Sustainability Indices

S&P Dow Jones Indices

Contributor Image
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.

pdf-icon PD F Download Full Article

How Indexing Affects Shariah-Compliant Investing

Contributor Image
Michael Orzano

Head of Global Exchanges Product Management

S&P Dow Jones Indices

Contributor Image
John Welling

Director, Global Equity Indices

S&P Dow Jones Indices

Contributor Image
Eduardo Olazabal

Associate Director, Global Exchange Indices

S&P Dow Jones Indices

Shariah-compliant investing has grown considerably in recent decades, as the Islamic investment community has demanded increasingly sophisticated investment solutions that adhere to the tenets of Islamic law. As a result, the need for high-quality, transparent, Shariah-compliant benchmarks has developed.  Today, Islamic indices serve a critical role in Islamic finance; these unique indices identify the universe of securities available for investment and define the way Islamic investors measure the markets.

Introducing Islamic Indices

Islamic indices are subsets of conventional benchmarks that include only companies that pass rules-based screens for Shariah compliance.  The resulting Shariah indices tend to be highly correlated to their conventional non-Shariah counterparts and provide Islamic investors with Shariah-compliant versions of a wide variety of popular benchmarks.  For example, the S&P 500® Shariah is a subset of the widely recognized S&P 500, and it includes only Shariah-compliant constituents of the S&P 500.

As with all Islamic financial products, a supervisory board of Islamic scholars oversees the rules governing Shariah-compliant indices.  The board is responsible for defining and maintaining the rules governing the Shariah screening process.  However, S&P Dow Jones Indices retains oversight on all other index methodology issues, including rules for company selection in the benchmark index, weighting and index maintenance.

The Ins and Outs of the Shariah Screening Process

Shariah screening is performed at two primary levels: business activity and financial ratios.  First, the business activities of each company are evaluated.  Companies with significant involvement in certain business activities prohibited by Shariah law are deemed noncompliant.  Activities that are generally considered noncompliant include conventional financial services, alcohol, tobacco, gaming, pork, pornography and most conventional media organizations.  After removing companies with noncompliant business activities, the remaining companies are examined for compliance with board-approved financial ratios.  Areas of focus include the degree of financial leverage and holdings of cash, receivables or interest-earning securities.

Exhibit 1 provides a comparison of the screening methodologies employed by the S&P Shariah Indices and Dow Jones Islamic Market™ Indices.  While the criteria evaluated are largely similar, there are some differences, as Shariah scholars have not reached a complete consensus on all aspects of Islamic finance.  For example, the Dow Jones Islamic Market Indices exclude defense companies, while these firms are allowed in the S&P Shariah Indices.  The calculations of accounting ratios also differ to some extent across the two index series.

How Indexing Affects Shariah-Compliant Investing: Exhibit 1

pdf-icon PD F Download Full Article

Applying Sustainability to Sector Indices

Contributor Image
Elizabeth Bebb

Director, Factor & Dividend Indices

S&P Dow Jones Indices

Contributor Image
Stephanie Rowton

Director, Head of Sustainability Indices EMEA

S&P Dow Jones Indices

Contributor Image
Barbara Velado

Senior Analyst, Research & Design ESG Indices

S&P Dow Jones Indices

Executive Summary

Sector-based index strategies are viewed by many investors as an effective way to express their views on macroeconomic, demographic and other trends while still achieving diversification.  Meanwhile, investors are increasingly looking for ways to incorporate sustainability considerations and personal values into all aspects of investing, including index construction.  Sector-based indices that factor in sustainability elements combine these two powerful trends and can help investors express their views on macroeconomic trends while applying a sustainability lens.

Sector indices need to account for the fact that sustainability elements don’t apply to each sector equally.  The most prominent example of this is that climate-related financial risks affect energy companies quite differently than banking institutions or other service companies.  This concept of materiality needs to be rigorously embedded throughout a sector index series.

In this paper, we explore why sector-based investing has become such a valuable tool for investors and how sustainability elements can be built into sector indices using consistent, materiality-based methodologies.

The Case for Sector Investing

Historically, a company’s sector has been shown to have a significant potential impact on the company’s stock performance, and the performance of specific sectors can vary dramatically, often reflecting broader economic conditions.  Sector indices can give investors an efficient way to express views about how various segments of the economy will perform while maintaining diversification within each sector and mitigating single-stock risk.

Achieving Diversified Exposure within Sectors

Companies in a sector tend to have similar exposure to external forces such as interest rates, inflation, gross domestic product growth, demographic trends, unemployment, technological developments, geopolitical risk and legal or regulatory changes.  For example, Consumer Discretionary companies tend to be sensitive to the strength of the economy, as well as consumer spending, sentiment and debt levels.

At the same time, each company in a sector also has a degree of idiosyncratic risk because of its business strategy, brand awareness, management team, supply chain and other factors that make up a company’s unique competitive positioning.  Going back to the Consumer Discretionary example, a company that generates most of its sales in the U.S. would be more sensitive to a U.S. recession than a company with a more geographically diverse customer base.  Similarly, a company that sources most of its products from offshore manufacturers would have more exposure to potential trade disruptions than a company that manufactures its goods locally.

By aggregating the performance of a representative subset of companies in a sector, sector indices provide insight into the performance of that sector while significantly reducing idiosyncratic risk of any one company.

Because all stocks in a sector share some level of macroeconomic risks, some investors use sector indices to express their view on the economic cycle.  A well-known example is the use of sector indices to position among cyclical and defensive sectors.  Cyclical sectors, such as Energy, Materials, Industrials, Consumer Discretionary, Financials and Information Technology, tend to be more sensitive to broader economic trends.  Defensive sectors, such as Consumer Staples, Health Care, Communication Services and Utilities, tend to be less sensitive to how the economy is performing.

pdf-icon PD F Download Full Article

Seeking Stable Income: The S&P 500® Quality High Dividend Index

Contributor Image
Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones Indices

With many countries raising interest rates to fight against inflation, the Russia-Ukraine conflict adding uncertainties to the energy supply, and repeat infection waves undermining economic activity, the world market has been struggling to recover from the COVID-19 crisis since 2020.  In turbulent times, a focus on quality stocks with high dividend yields may present a compelling investment solution for market participants seeking stable income.

The S&P 500 Quality High Dividend Index seeks to provide just such a solution—it selects stocks that rank within the top 200 of the S&P 500 by quality score and dividend yield (see Exhibit 1).  This order-indifferent approach ensures extensive and balanced exposure to both quality and dividend yield.  Constituents are equally weighted and rebalanced semiannually.

Seeking Stable Income: The S&P 500 Quality High Dividend Index: Exhibit 1

What Is Quality?

S&P Dow Jones Indices defines quality as a combination of profit generation, earnings quality and financial robustness (see Exhibit 2).  Together, these traits generally shield companies from the volatility of the economic cycle, making them slightly more immune to downturns.

Seeking Stable Income: The S&P 500 Quality High Dividend Index: Exhibit 2

pdf-icon PD F Download Full Article
Processing ...