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The S&P/BMV Total Mexico ESG Index: A New Benchmark for Sustainability and Investment

TalkingPoints: Capturing ESG in Brazil: The S&P/B3 Brazil ESG Index

S&P Global ESG Data Primer

Physical versus Synthetic Gold: Know Your Gold Exposure

FAQ: The S&P Sustainability Screened Indices

The S&P/BMV Total Mexico ESG Index: A New Benchmark for Sustainability and Investment

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María Sánchez

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

S&P Dow Jones Indices

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Cristopher Anguiano

Senior Analyst, U.S. Equity Indices

S&P Dow Jones Indices

INTRODUCTION

Indices that integrate environmental, social, and governance (ESG) data are moving from the margins to the mainstream, as investors increasingly seek to align their values with their investments.  A new type of ESG index is emerging to facilitate this change in Mexico: the S&P/BMV Total Mexico ESG Index.  Jointly developed by S&P Dow Jones Indices (S&P DJI) and the Mexican stock exchange (Bolsa Mexicana de Valores [BMV]), this index not only highlights strong ESG companies—as ESG indices have traditionally done—but it also enables investors to allocate to such companies without requiring them to take on major risks relative to the market.

THE EVOLUTION OF ESG INDICES

In 1999, S&P DJI launched the first global ESG index, the Dow Jones SustainabilityTM World Index (DJSI World).  By including the top 10% of companies, industry by industry, according to their ESG performance, as determined by the Corporate Sustainability Assessment (CSA) conducted by SAM, part of S&P Global, this groundbreaking index encouraged companies to incorporate many ESG factors in their decisions, extending beyond short-term financial considerations.

In the years that followed, other indices, including regional versions of the DJSI World, and local indices, such as the S&P/BMV IPC Sustainable Index, were launched with this same philosophy in mind: to highlight best-in-class companies and thereby inspire companies to improve their ESG approaches in order to qualify for inclusion in these indices.

Though these indices have been successful and have indeed inspired companies to change in positive ways, aspects of their methodologies present challenges for many investors.  Some strategies can be too narrow for investors who want to remain broadly diversified.  Though many high-conviction investors use the narrow, best-in-class indices for investment, we saw a need from market participants for ESG indices with returns more in line with the broader market, while providing a more sustainable portfolio of companies.  An example of an index that launched in 2019 that typifies this investor-oriented methodology is the S&P 500® ESG Index.

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TalkingPoints: Capturing ESG in Brazil: The S&P/B3 Brazil ESG Index

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Silvia Kitchener

Director, Global Equity Indices, Latin America

S&P Dow Jones Indices

To address the need for a broad market ESG benchmark in Brazil, S&P DJI and B3 joined forces to launch the S&P/B3 Brazil ESG Index. S&P DJI’s Silvia Kitchener and Iuri Rapoport from BTG Pactual sat down to discuss how this innovative index captures a more complete picture of ESG in Brazil, and how it could be used to address the growing demand for ESG solutions in the region.

  1. We know that there are many types of environmental, social, and governance (ESG) indices. What is the objective of the S&P/B3 Brazil ESG Index?

    Silvia: Correct; there are various ESG indices with different objectives. Some indices use the “best-in-class” approach like the Dow Jones Sustainability MILA Pacific Alliance Index, which selects the top 30% of companies by sustainability score within each GICS® sector. The focus here is to feature the companies with the best ESG practices and policies. Then, we have the S&P ESG Indices, which are designed to provide improved ESG representation while maintaining similar overall industry group weights as their underlying indices as in the case of the S&P 500® ESG Index.


    The objective of the S&P/B3 Brazil ESG Index is to serve as a broad representative index of the Brazilian equity market with an improved ESG profile and maintain similar overall industry group weights as the S&P Brazil BMI. The index does not focus on selecting companies based on their ESG scores; however, the score determines their representation in the index. This means that companies with higher ESG scores have a higher weight in the index. Companies with lower scores are incentivized to improve their programs, practices, and policies to help increase their scores and possibly their index weight.

  2. What has demand for ESG looked like in recent years, and how important do you think ESG will be moving forward?

    Iuri: Several studies have shown that companies with better ESG practices enhance long-term returns. In general, these companies develop resilient and solid businesses, as they are more capable of dealing with externalities and adapting to new consumer behavior and regulatory demands.

    The capitalist model has changed, and nowadays companies need to add value to a diverse spectrum of stakeholders—shareholders, employees, suppliers, local community members, and society. The urgency of ESG is a global societal commitment, as defined by the UN Sustainable Development Goals and Paris Agreement, and each individual and company must play their role in helping achieve a better, more sustainable world.

    We believe companies with better ESG practices will be investors’ priority in the long run.

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S&P Global ESG Data Primer

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Mona Naqvi

Global Head of ESG Capital Markets Strategy

S&P Global Sustainable1

S&P DJI ESG SCORES (FOR MEASURING COMPOSITE ESG SCORE PERFORMANCE OF FUNDS)

S&P DJI ESG Scores robustly measure corporate sustainability performance with a focus on the most financially material issues within industries. Data is collected through the renowned SAM Corporate Sustainability Assessment (CSA) to engage companies directly for unparalleled access to private information. By going beyond simply collecting public disclosure, the CSA can bring to light emerging topics of growing interest to investors, often long before disclosure is widespread, for a cutting-edge view of corporate sustainability practices. Furthermore, this direct engagement allows us to assess how well companies actually perform on sustainability metrics, rather than simply rewarding corporate transparency and completeness, as is common with datasets that rely solely upon publicly reported information. All responses must be substantiated with internal documentation and real-life examples, audited by a third party where relevant in order to verify the accuracy of the information provided.

The CSA assesses 7,300 companies (representing approximately 95% of global market capitalization) through 61 industry assessments that cover the most relevant ESG issues.  Once a company’s assessment is complete, SAM calculates scores using a predefined scoring framework driven by the financial materiality of topics within specific industries.  The concept of materiality here is defined by both risk exposure and the relevance of financial outcomes—underpinned by more than two decades of investment performance data rather than an arbitrary or theoretical approach to identifying material issues.  Built upon a solid foundation of 600-1,000 data points per company, up to 120 question-level scores are then calculated for companies’ responses to each CSA question.  These scores are aggregated to as many as 27 industry-specific criteria, and the environmental (E score), social (S score), and governance (G score) dimensions before ultimately rolling up into the headline ESG score through a granular and bottom-up approach.

S&P Global ESG Data Primer: Exhibit 1

The CSA is an annual and resource-intensive endeavor that typically takes companies several hundred hours to complete. Once led by CSR professionals in a marketing function, today the CSA often pulls resources from across the organization for a firm-wide view of how sustainability topics influence the business operations and budgeting decisions from the c-suite. In addition to annual assessments, the methodology also incorporates the Media and Stakeholder Analysis (MSA), using daily reporting of real-time information to account for company controversies on an ongoing basis. By combining comprehensive data sources, sound methodology, and a sharp focus on material issues in this way, the CSA is recognized as the “highest quality” and most “useful” ESG assessment by global sustainability professionals and investors.

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Physical versus Synthetic Gold: Know Your Gold Exposure

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Fiona Boal

Managing Director, Global Head of Equities

S&P Dow Jones Indices

The S&P GSCI Gold was up 22% over the first 10 months of 2020.  There are a number of drivers behind its upward performance.  The global pandemic has persuaded investors that gold is a valuable addition to their portfolios as a hedge against equity returns, near zero interest rates, a depreciating U.S. dollar, and lagging economic growth.  Many institutional investors are also using gold as protection against possible deflation or conversely, against an uptick in inflation, the effect of massive fiscal, and monetary stimulus.

Investors have available to them a myriad of vehicles to invest in the performance of gold—from gold bars and mining equities to derivatives and financial products based on derivatives.  Two of the more popular gold investment instruments professional investors use are gold futures, including financial instruments based on gold futures, and exchange-traded products (ETPs) based on physical gold.  In many cases, both derivatives and ETPs are appropriate choices, but there are noteworthy differences in terms of price discovery, liquidity, leverage, cost structure, counterparty risk, and customization that warrant investigation before any investment decision is made.

Gold bugs may tout holding physical gold as offering protection from a true black swan event, such as the complete collapse of a fiat currency, but there are legitimate questions regarding how practical a few gold bars would be in the aftermath of such an event.  Nevertheless, the focus of this paper is to compare the advantages and disadvantages of investment instruments backed by physical gold versus those based on gold derivatives, not on holding physical gold bars and coins (see Exhibit 1).

Physical versus Synthetic Gold: Know Your Gold Exposure: Exhibit 1

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FAQ: The S&P Sustainability Screened Indices

COMPANY BACKGROUND

  1. Who is S&P Dow Jones Indices?  S&P Dow Jones Indices (S&P DJI) is home to iconic financial market indicators, such as the S&P 500® and the Dow Jones Industrial Average®.  The largest global resource for essential index-based market concepts, data, and research, it is a major investor resource to measure and trade the markets.

    S&P Dow Jones Indices has been a pioneer in environmental, social, and governance (ESG) indexing for over 20 years, starting with the 1999 launch of the Dow Jones Sustainability World Index.  Today, we offer an extensive range of indices to fit varying risk/return and ESG expectations, from core ESG and low-carbon climate approaches to thematic and fixed income ESG strategies.

S&P SUSTAINABILITY SCREENED INDICES

  1. What are the S&P Sustainability Screened Indices?  The S&P Sustainability Screened Indices seek to measure the performance of stocks in broad market indices, such as the S&P 500, S&P MidCap 400®, and S&P SmallCap 600®, while excluding companies involved in certain controversial business activities, companies not compliant with the United Nations Global Compact (UNGC), and companies involved in ESG controversies.
  2. What exclusions affect the calculation of the S&P Sustainability Screened Indices? As of each rebalancing reference date, companies with the following specific business activities are excluded from the eligible universe.
    • Thermal Coal: Companies are excluded that:
      • Extract thermal coal accounting for greater than 5% of their revenue; or
      • Generate electricity from thermal coal accounting for greater than 5% of their revenue.
    • Oil Sands: Companies are excluded that:
      • Extract oil sands accounting for greater than 5% of their revenue.
    • Shale Energy: Companies are excluded that:
      • Are involved in shale energy exploration and/or production accounting for greater than 5% of their revenue.
    • Tobacco: Companies are excluded that:
      • Produce tobacco;
      • Have tobacco sales accounting for greater than 10% of their revenue;
      • Have tobacco-related products and services accounting for greater than 10% of their revenue; or
      • Have an ownership stake of 25% or more in a company that has tobacco-related products and services accounting for greater than 10% of their revenue.
    • Controversial Weapons: Companies are excluded that either directly or via an ownership stake of 25% or more of another company are involved in the core weapon system, or components/services of the core weapon system that are, and are not, considered tailor-made and essential for the lethal use of the following weapons:
      • Cluster weapons;
      • Landmines (anti-personnel mines);
      • Biological or chemical weapons;
      • Depleted uranium weapons;
      • White phosphorus weapons; or
      • Nuclear weapons.
    • Small Arms: Companies are excluded that, at a 0% threshold of their revenue:
      • Manufacture and sell assault weapons and/or small arms (non-assault weapons) to civilian customers;
      • Manufacture and sell small arms to military/law enforcement customers;
      • Manufacture and sell key components of small arms; or
      • Sell and/or distribute assault weapons and/or small arms (non-assault weapons).

    In addition, companies are evaluated according to Sustainalytics’ Global Standards Screening (GSS), which is an assessment of a company’s impact on stakeholders and the extent to which a company causes, contributes to, or is linked to violations of international norms and standards.  The UNGC principles are the basis for the GSS.

    All companies classified as Non-compliant (companies that do not act in accordance with UNGC principles and associated standards, conventions, and treaties) are ineligible for the index.

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