Launched on Jan. 28, 2019, the S&P 500® ESG Index marked a significant milestone in sustainable investing. While the S&P 500 ESG Index leverages the strength, liquidity and power of the S&P 500, it also incorporates meaningful ESG factors. As a result, the index has shifted the perception of ESG indices from mere reporting tools to integral components used for investment strategies.
Intentionally broad, the S&P 500 ESG Index includes over 300 companies from the underlying S&P 500 and seeks to reflect many of the attributes of the S&P 500 itself to offer benchmark-like performance, while providing an improved ESG profile. This paper outlines the characteristics of the S&P 500 ESG Index that have appealed to investors, including:
- The easy-to-understand and transparent methodology behind the index;
- The index’s historically similar risk-adjusted performance profile to the S&P 500; and
- Improved ESG characteristics when compared with the S&P 500.
Along with the S&P 500 ESG Index, S&P Dow Jones Indices (S&P DJI) offers a range of indices that consider different levels of conviction on the integration of ESG factors, including the S&P 500 ESG Leaders Index and the S&P 500 ESG Elite Index. As a result, the S&P ESG Index Methodology can be utilized by a wide range of market participants to help them achieve their objectives.
Ecosystem
Since its launch in January 2019, the S&P 500 ESG Index has experienced significant growth in investment products tied to it, as shown in Exhibit 1. This broad ecosystem surrounding the S&P 500 ESG Index serves as a foundation for various financial products including exchange-traded funds (ETFs), exchange-traded derivatives (ETDs), mutual funds, insurance products and structured products. ETDs encompass futures contracts, such as the E-mini S&P 500 ESG Index Futures offered by CME, as well as options contracts, such as options on the S&P 500 ESG Index offered by Cboe. This ecosystem provides traders with meaningful market liquidity, which bolsters the index’s position as the most liquid sustainability index for U.S. equities.
The ecosystem of ETFs and ETDs provides investors with a range of advantages including increased liquidity, diversification benefits, risk management options and trading flexibility.
- Enhanced liquidity: Having both ETFs and ETDs linked to the S&P 500 ESG Index, investors have multiple avenues to access the underlying assets. This can increase liquidity in the market, as investors can trade ETF shares or ETD contracts.
- Diversification: The range of ETFs that utilize the S&P 500 ESG Index means investors can gain exposure to a basket of securities that integrate ESG scores, while ETDs allow investors to gain exposure synthetically, through derivative contracts. This combination can help investors achieve a diversified portfolio with an ESG lens.
- Risk management: ETDs can be used for effective risk management, such as hedging against market fluctuations or managing portfolio risk.
- Trading flexibility: Having both ETFs and ETDs linked to the S&P 500 ESG Index provides investors with flexibility in terms of trading strategies and execution.
