IN THIS LIST

The S&P 500® ESG Index: 5 Years of Defining Core through an ESG Lens

Sustainable Core in Fixed Income: iBoxx Corporates SRI Screened and ESG Indices

Carbon Accounting for Climate Aware Commodity Indexing

Introducing the Dow Jones Taiwan Technology Dividend 30 Index

TalkingPoints: U.S. Equities and Sectors in Election Years

The S&P 500® ESG Index: 5 Years of Defining Core through an ESG Lens

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Stephanie Rowton

Director, Head of Sustainability Indices EMEA

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

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 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.

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Sustainable Core in Fixed Income: iBoxx Corporates SRI Screened and ESG Indices

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Paulina Lichwa-Garcia

Associate Director, Fixed Income Indices

S&P Dow Jones Indices

Introduction

ESG within fixed income indices continues to evolve and take shape, largely driven by the growing awareness of investors and the broad emergence of ESG datasets that allow market participants to express their preferences and fine-tune their exposures.  Demand and expression can vary significantly by region, and the evolving regulatory regime around ESG and sustainability remains integral to navigating the incorporation of sustainability considerations into fixed income strategies.

While customization remains a significant factor in fixed income markets, there is growing appetite for a consistent approach to integrating sustainability into benchmarks.  The increased need for sustainability considerations in certain regions combined with the evolving requirements from a regulatory perspective have resulted in a growing demand for more standardized solutions that are easily understood, while still addressing the sustainability needs of market practitioners in fixed income.

S&P DJI’s iBoxx Corporates SRI Screened and ESG Indices were developed and launched to provide a standardized approach for incorporating sustainability considerations into EUR, USD and GBP corporate bond indices.  This new set of indices can be used as-is or can be used as a foundational universe to develop customized solutions to cater to investors’ specific needs, swiftly and efficiently.

The underlying methodology for the iBoxx Corporates SRI Screened and iBoxx Corporates ESG Indices leverages that of the S&P 500® ESG Leaders Index by mirroring similar product involvement and baseline exclusions, while incorporating additional preferences for fixed income investors.

The suite of indices encompasses two series.

  1. iBoxx Socially Responsible Investing (SRI) Screened Indices
  2. iBoxx ESG Corporates Indices, which can be catered to different investor needs

The iBoxx SRI Screened Indices are a subset of the iBoxx Corporate ESG suite.  The key difference being that iBoxx Corporates ESG Indices filter for ESG risk scores in addition to SRI screens.

In this paper, we outline the defining characteristics of the newly launched indices and discuss use cases for fixed income investors looking for a sustainability expression that can be easily understood and efficiently applied.

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Carbon Accounting for Climate Aware Commodity Indexing

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Brian D. Luke

Senior Director, Head of Commodities, Real & Digital Assets

S&P Dow Jones Indices

Introduction

Commodities have largely remained outside the purview of environmental investment frameworks, creating a gap in investing across all asset classes.  The global investment landscape is witnessing a transformative shift toward sustainability, in part driven by increasing awareness of the environmental impact of commodity production and the clean energy transition.  According to the latest S&P GSCI® world production average, over 25 billion barrels of oil are produced each year.  Combining that with the S&P Global Trucost estimate that one barrel of oil produces over 400 kilograms of CO2 equivalent (kgCO2e), the total carbon emissions for oil are over 10 trillion kgCO2e.

Investors in commodities primarily access the market through derivatives, such as oil futures.  These derivatives serve as vital tools for commodity producers, consumers and investors.  This paper explores how index-based commodity investing could be seen through a sustainable investing lens and examines the challenges and opportunities in integrating environmental considerations across asset classes.  It also delves into the role of commodity derivatives in financial markets and outlines a framework for carbon accounting to measure environmental impact.  Additionally, it highlights how the S&P Global Commodity Environmental dataset can be leveraged to measure carbon intensity for commodity indices.

Finally, this paper highlights the significance of benchmarks for environmental investing, offering an introduction to the S&P GSCI Climate Aware as a forward-thinking approach to climate-focused commodity investments.  The S&P GSCI Climate Aware is a prominent example in the past quarter century of incorporating environmental, social and governance (ESG) considerations into leading benchmarks before policy makers and regulators adopt similar rules into investment practices (see Exhibit 1).

Carbon Accounting for Climate Aware Commodity Indexing: Exhibit 1

Looking at Commodities through a Sustainable Investing Lens

The paradox in sustainable commodity investing lies in the fact that while there are extensive proposals affecting sustainable investments in stocks and bonds, commodities—one of the largest contributors to environmental degradation—remain largely untouched.  Governments around the world have introduced several regulatory measures to enhance sustainable investing practices, but the scope of these regulations has mainly focused on equity and fixed income investment products.  The European Union (EU) has led the march toward transparency and accountability for investors, asset managers and companies.

Commodity production and consumption is considered one of the leading causes of environmental degradation. While the physical production of a commodity can have a direct impact on the environment, investing in commodity derivatives could be viewed in the same light as investing in equities and bonds.  Buying stock in a company that emits carbon isn’t the same as emitting the carbon oneself, but there is an association.  While such a throughline exists for stocks and bonds, financial instruments associated with commodities, like commodity derivatives, are not subject to specific sustainability regulations.  We will discuss two elements used to create sustainability metrics in a commodity index.  First, we look at the use of transparent data to measure the impact of commodity production, and second, the connection with the physical production of commodities and the financial instruments that support the commodities market.

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Introducing the Dow Jones Taiwan Technology Dividend 30 Index

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Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones Indices

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Jason Ye

Director, Factors and Thematics Indices

S&P Dow Jones Indices

Introduction

The Dow Jones Taiwan Technology Dividend 30 Index takes an innovative approach to linking growth potential from technology companies with high dividend yield.  It seeks to measure the performance of 30 Information Technology and Communication Services companies with the highest indicated annual dividend (IAD) yield in the Taiwan market, subject to fundamental and dividend sustainability criteria.  From April 2013 to June 2024, the index had an average trailing 12-month dividend yield of 5.7% and an annual total return of 15.88%, outperforming the S&P Taiwan BMI by 2.59%.

In most markets, high-dividend-yield stocks are often associated with the Financials sector and defensive sectors such as Utilities, rather than growth sectors such as Information Technology.  This implies that searching for yield could mean giving up growth exposure for many market participants.  However, Taiwan is a unique exception.

In the 1960s, Taiwan emerged as a hub for integrated circuit (IC) assembly and packaging for foreign companies and later started to accumulate chip engineering and manufacturing know-how domestically.  After a half-century of development, it is now home to 314 semiconductor companies, accounting for over 90% of worldwide production of below-7nm semiconductors. Its Information Technology sector, which is predominately represented by semiconductor manufacturers, has evolved to be the core of Taiwan’s economy.  As of June 30, 2024, the Information Technology sector makes up 71.45% of the S&P Taiwan BMI.

Cultivated over nearly a half-century, technology companies in Taiwan grew to be mature enough to maintain a profit distribution policy.  In the Information Technology sector, 91.5% of companies paid a dividend during the 2023 calendar year with an average payout ratio of 63.7%, and 71.6% of companies had paid a dividend for five consecutive years.  In 2023, dividends from the Information Technology sector accounted for 57.8% of total dividends paid in the Taiwan market.

Additionally, surging global demand for semiconductor and related electrical components in recent years has benefited technology stocks in the Taiwan market.  In 2023, the Information Technology sector of the S&P Taiwan BMI posted a positive price return of 41.63% in USD terms, outperforming the S&P 500® by 17.4%.

Taiwan’s unique economic development and the characteristics of its market today provide a potential opportunity to track high-dividend-yielding technology companies.  Over the 11-year back-tested period, the Dow Jones Taiwan Technology Dividend 30 Index was able to maintain a level of price appreciation comparable to that of its broad market benchmark, while also delivering significant outperformance in terms of total return, showing the index’s historical ability to track high-dividend-yielding companies while maintaining growth exposure.

Dow Jones Taiwan Technology Dividend 30 Index Construction

The starting universe for the Dow Jones Taiwan Technology Dividend 30 Index are stocks from the Information Technology and Communication Services GICS® sectors in the S&P Taiwan BMI that meet size and liquidity criteria, and that have paid dividends for five consecutive years.  Then, those eligible stocks must pass two out of three fundamental screenings: positive free cash flow, positive ROE and positive five-year dividend growth.  Finally, the 30 constituents with the highest IAD yield are selected.

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TalkingPoints: U.S. Equities and Sectors in Election Years

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Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

1. Why is the U.S. market relevant to investors worldwide?

The U.S. equity market is the largest in the world, with U.S.-domiciled companies representing 60% of the index market capitalization of S&P Dow Jones Indices’ (S&P DJI’s) global equity barometer—the S&P Global BMI—at the end of March 2024. The U.S. also accounts for most of the index market capitalization in 10 of the 11 S&P Global BMI GICS sectors.

Hence, market participants that do not have a U.S. view risk overlooking a sizeable portion of the global equity opportunity set. Not only might this make it more difficult to explain the impact of narratives on global equity returns, but the distinct makeup of the U.S. equity market means that overlooking U.S. equities may impact investors’ abilities to gain strategic or tactical exposures.

2. What role can indices play in measuring equity markets?

Since Charles Dow and Edward Jones began publishing the first ever index—the Dow Jones Railroad Average—towards the end of the 19th century, indices have allowed investors to monitor the impact of trends on different market segments and to benchmark the performance of active managers.

While the first indices were equity market measures, transparent, rules-based indices have since been created for a variety of asset classes. Nowadays, indices also measure the performance of more complex strategies previously thought to be solely within the realm of active management.

Accompanying—and to a large extent, driving—the proliferation of index information, indices have come to serve as the basis for investment products, globally. The substantial adoption of index-based investment products has been driven by the increased awareness of the substantial body of evidence that shows that most active managers underperformed on an absolute and risk-adjusted basis most of the time. For example, more than 90% of U.S. Large-Cap funds based in the U.S. underperformed the S&P 500® over a 20-year period ending on Dec. 31, 2023.European Equity funds focused on large-cap U.S. equities posted similar underperformance rates: more than 90% of such active funds underperformed the S&P 500 over the 10-year period ending on Dec. 31, 2023.

3. The S&P 500 Equal Weight Index has been a popular strategy recently. What are the drivers behind this?

A notable trend in U.S. equities over the past year has been the outperformance of some of the largest companies as investors expressed their views on the potential impact of artificial intelligence on companies’ growth prospects. Against this backdrop, the representation of mega-cap companies in the S&P 500 reached multi-decade highs: the cumulative weight of the largest five companies in the S&P 500 was 25.3% at the end of March 2024—a level that has not been seen since December 1970. 

Although elevated stock-level concentration demonstrates that the S&P 500 continues to meet its stated objective of measuring the performance of large-cap U.S. equities, many investors have turned to an equal weight approach to reduce exposure to the largest names and to express views on mean reversion in equity market concentrations.

The relevance of the S&P 500 Equal Weight Index in these considerations comes from its smaller size exposure: assigning egalitarian allocations to the S&P 500’s component companies on a quarterly basis means that the equal weight index has less weight in the largest names. This methodology helped to explain most of the S&P 500 Equal Weight Index’s relative performance versus the S&P 500 over the past year, and it provides a tangible link between changes in market concentration and the equal weight index’s relative returns.

Typically, when the largest companies (to which equal weight has less sensitivity) outperformed, concentration rose, and equal weight underperformed its cap-weighted benchmark. Conversely, outperformance among smaller companies (to which equal weight has greater exposure) led to reduced concentration and greater likelihood of equal weight outperformance.

Exhibit 1: Weight of Largest Five S&P 500 Companies and Cumulative Relative Total Returns for the S&P 500 Equal Weight Index Versus the S&P 500

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