IN THIS LIST

S&P 500^® 2017: Global Sales

S&P 500^® Corporate Pensions and Other Post-Employment Benefits (OPEB) in 2017

An In-Depth Look at the Dow Jones Sukuk Indices

Corporate Climate Competitiveness: Growing Your Business, Optimizing Investments, and Managing Costs

Carbon Scorecard: May 2018

Research - Aug 16, 2018

S&P 500^® 2017: Global Sales

Howard Silverblatt

Senior Index Analyst, Product Management

S&P Dow Jones Indices

YEAR IN REVIEW

In 2017, the percentage of S&P 500 sales from foreign countries increased slightly, after two years of measured decreases. The overall rate for 2017 was 43.6%, up from 43.2% in 2016, but down from 44.3% in 2015 and 47.8% in 2014, which was at least an 11-year record high. S&P 500 foreign sales represent products and services produced and sold outside of the U.S.

Sales in Asia declined, but they remained the highest of any region. Asia accounted for 8.26% of all S&P 500 sales, down from 8.46% in 2016, but up from 2015’s 6.77% and 2014’s 7.80%.

European sales ticked up for 2017, but they remained lower than Asia. For 2017, European sales increased to 8.14% of all sales, up from 8.13% in 2016, 7.79% in 2015 and 7.46% in 2014. The UK (which is part of European sales) increased to 1.12% from 2016’s 1.10%, after 2015’s increase to 1.86%.

Japanese sales decreased to 1.51% of all S&P 500 sales from 1.52% in 2016, and African sales inched down to 3.90% from 3.97% in 2017. Sales in Canada declined to 2.16% from 2.67% in 2016, after declining significantly to 1.17% in 2015 from 3.51% in 2014 (oilrelated sales were seen as a contributing factor).

Information technology had the most foreign exposure of any sector, even though it declined to 56.95% from 2016’s 57.15%. Energy, which was last year’s lead sector, declined to 54.06% from 58.88% in 2016.

Given the ongoing debate and legislative actions on sales, tariffs, and jobs, the level of specific data disclosed by companies continues to be disappointing.

OVERVIEW

In 2002, we removed foreign issues from the S&P 500. However, being an American company (or defined as an American company) doesn’t mean you’re not global. While globalization is apparent in almost all company reports, exact sales and export levels remain difficult to obtain. Many companies tend to categorize sales by regions or markets, while others segregate government sales. Additionally, intracompany sales—and hence, profits—are sometimes structured to take advantage of trade, tax, and regulatory policies. Changes in domicile, inspired by tax savings, have also changed the technical classification of what is considered foreign. Therefore, the resulting reported data available to shareholders is significantly less substantial and less revealing than the data that would be necessary to complete a truly comprehensive analysis. However, using the data that is available, we do offer an annual report on foreign sales, which is designed to be a starting point that provides a unique glimpse into global sales composition, but it should not be considered a statement of exact values.

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Research - Aug 06, 2018

S&P 500^® Corporate Pensions and Other Post-Employment Benefits (OPEB) in 2017

Howard Silverblatt

Senior Index Analyst, Product Management

S&P Dow Jones Indices

Providing Americans with adequate retirement income and affordable medical care was one of the country's most hotly debated social and political topics of the 20th century. However, the times have changed, along with longevity, as the medical cost of that prolonged longevity has risen, and corporations’ ability to absorb the risks associated with multidecade portfolios to finance those commitments has fallen. Over the past three decades, corporations in the private sector have successfully shifted the responsibility of retirement to individuals, as programs have been frozen or closed to new employees, with 401(k)-type saving programs acting as substitutes. What remains is a lingering program of the past that will slowly decline in size and number of covered retirees over the coming decades. For now, both S&P 500 pensions and OPEB remain a manageable cost with sufficient resources and cash flow to support them— as slowly increasing interest rates could improve funding via lower discounted liabilities for 2018. For 2017, corporate pension underfunding stood at USD 304 billion—22.1% lower than the USD 391 billion level of 2016, as markets posted a second year of impressive double-digit gains. The funding level increased to 85.62% in 2017 from 80.75% in 2016, 81.14% in 2015, and 81.12% in 2014. The most recent low-funding level was in 2012, at 77.26%, with the last full-funding level occurring in 2007, at 104.40%.

Clearly, the traditional defined-benefit corporate pension has become a relic of an earlier age, one that dates back to World War II, when the average American's life expectancy was 65 years. By 1974, when Congress passed the Employee Retirement Income Security Act (ERISA; the federal law that sets minimum standards for most voluntarily established pensions in the private industry), Americans’ average life expectancy had risen to 72 years. Today (according to the Center for Disease Control), the average life expectancy in the U.S. is 78 years (76 years for men and 81 years for women). In 1983, when the life expectancy was 74, the official Social Security age of "full retirement" was scaled forward from 65 years to 67 years, depending on the year of birth, as longevity continues to move up. Medicare eligibility, however, has remained at 65. As a result, post-employment medical costs associated with longevity have skyrocketed, as have the costs of prescription drugs and elder care.

OVERVIEW

Equity markets continued to set new highs last year, posting double-digit returns and outpacing the cost of lower interest rates, which have pushed up discounted liabilities, resulting in a 22.1% improvement in underfunding for 2017.
Interest rates utilized for discounted pension liabilities again declined in 2017, after 2015’s significant increase, and are less than half of those used in 2001.
Expected pension return rates declined for the 17th year in a row.
Most corporations have successfully shifted the burden of risk for retirement to the employee, as 401(k)-type savings accounts have become the norm, and active defined-benefit pensions in the private sector have become few and far between.
Given the dwindling coverage, the current obligations of pensions and OPEB are a manageable expense for most companies.
OPEB coverage continues to decline, as fewer covered retirees cost more per person, but are a quantifiable cost with a declining obligation.

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Research - Jul 18, 2018

An In-Depth Look at the Dow Jones Sukuk Indices

The issuance in the U.S. dollar-denominated sukuk market [as tracked by the Dow Jones Sukuk Total Return Index (ex -Reinvestment)] continued to be robust in 2017. Sukuk issuance in 2017 has already outgrown the strong growth seen in 2016. The total issuance through September 2017 was USD 20.25 billion, representing a 20% increase from the year before. In fact, sukuk issuance has continued to record double-digit growth since the slump in 2015. In 2017 YTD,¹ we have seen the highest issuance since 2012.

As tracked by the index, the Gulf Cooperation Council (GCC) countries continued to be the most active issuers of U.S. dollar-denominated sukuk and contributed over 80% of the new issuances. Saudi Arabia debuted its first U.S. dollar-denominated sukuk and attracted strong market participants demand; it raised USD 9 billion in sukuk, equally split into 5- and 10-year tranches. Other returning issuers like Indonesia and Oman raised USD 3 billion and USD 2 billion, respectively. Hong Kong also came back to the market and launched a 10-year sukuk, which extended the yield curve from its two previous five-year sukuk.

Looking at overall country exposure in the Dow Jones Sukuk Total Return Index (ex-Reinvestment), the GCC currently represents 65%, and among the GCC, Saudi Arabia has the largest exposure, at 34%, followed by United Arab Emirates, at 20%. Sukuk issued from Malaysia and Indonesia constitute around 10% and 17%, respectively.

Research - Jul 11, 2018

Corporate Climate Competitiveness: Growing Your Business, Optimizing Investments, and Managing Costs

EXECUTIVE SUMMARY

There is a transition underway to a greener, low-carbon economy. Businesses that successfully decarbonize their operations in line with global energy transition commitments may be more likely to protect their license to grow and avoid increased costs from carbon pricing.
Current standard practice is to measure the financial return of project investments. Best practice during this transition, however, could be to prioritize investments that meet science-based targets (SBTs) and decarbonize operations.
Companies could evaluate investments for financial and environmental performance to achieve carbon targets and mitigate risks associated with hidden future carbon prices.
Reporting that is aligned with the recommendations of the Task Force on Climate-related Disclosures (TCFD) increases transparency with internal and external stakeholders for financially material climaterelated risks and opportunities.
Trucost’s analysis of four publicly disclosed investments intended to deliver environmental and financial returns reveals that three of them could fail to meet either or both performance targets. For example, investment in coal storage, meant to improve the condition of the coal and reduce the amount purchased and combusted, was found to have significant hidden carbon emissions. The Green Transition Tool demonstrates that this supposedly green investment turns out to be brown.
Trucost’s Green Transition Tool scenarios enable businesses to prioritize investments, consider environmental and financial performance, and report in line with TCFD recommendations.

INTRODUCTION

There is a transition underway to a greener, low-carbon economy. As companies navigate the complexities of this shift, many could grapple with complex investment decisions—What to invest in? Where? How much to invest? Some may want to incorporate low-carbon technology in their operations or substitute greener materials in their products. Others may want to improve process and product designs, enhance management practices, or adopt different business models.

Conventional business practice considers the financial returns of capital investments, but does not typically factor in hidden financial and environmental benefits, such as reduced carbon taxes, penalties, and emissions. Better-informed investment decisions consider environmental and financial returns side by side.

Companies have many possible pathways to reduce energy consumption and transition to low-carbon business. Businesses must determine the optimal pathway that minimizes environmental impacts, while delivering acceptable financial returns. For most companies, this can be challenging because it requires robust environmental data at a local level.

Companies are under increased pressure to address climate-related issues. For example, customers want to understand how companies’ business practices are aligned with their climate goals. Investors want to understand how companies are managing material climate risks, and if they will be realized as financial costs. The TCFD recommends disclosing clear, comparable, and consistent information using scenario analysis as a tool for assessing those transition and physical risks and opportunities.^¹

As customers, investors, and policymakers impose new expectations about climate-related activities, it is vital for businesses to consider the climaterelated implications of their investments if they want to maintain carbon competitiveness.

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Research - May 18, 2018

Carbon Scorecard: May 2018

S&P Dow Jones Indices is committed to providing transparency to markets and publishing relevant environmental metrics on indices. A range of metrics reveals the carbon footprint of each index, alongside exposure to fossil fuels, stranded assets, and renewable energy. A new metric has been added this year: carbon price risk exposure. This metric, developed by Trucost, helps investors understand how companies, and ultimately portfolios and indices, are exposed to the risk of governments imposing a price on carbon emissions.

KEY FINDINGS

Absolute emissions decreased for the S&P Asia 50 , S&P Europe 350 , S&P Global 1200 , S&P Latin America 40 , S&P/ASX All Australian 50 , and S&P TOPIX 150 .
In 2017, all indices increased their share of renewable power generation and decreased their share of fossil fuel power generation, with the exceptions of the S&P/ASX All Australian 50 and S&P Asia 50.
The S&P/TOPIX 150 had the smallest coal exposure score and is well positioned in the face of punitive climate legislation.
The carbon intensity of every index assessed increased in 2017, except for the S&P Asia 50, which decreased its carbon intensity by 26%.
In 2017, the index with the highest carbon intensity was the S&P/TSX 60 whereas in 2016 it was the S&P Asia 50.
Within the S&P/IFCI , 26% of earnings of the index’s listed companies were at risk from 2030 carbon pricing regimes according to the Trucost carbon pricing model.
S&P Dow Jones Indices is committed to providing index solutions that provide choices and reflect low-carbon options. When we compare indices with their carbon-focused counterparts, the low-carbon versions actually outperformed the benchmark over a five-year period in most cases.

INTRODUCTION

The S&P Dow Jones Indices Carbon Scorecard stands as a barometer for the carbon intensity of financial markets today and its relation to the direction of the economy

As regulators strengthen policies that support the growth of “sustainable” economies, the investment community will rely on transparent markets to manage risk and capitalize on sustainable development opportunities. How companies can adapt their products and services to changing consumer demands and how they are exposed to regulations that seek to put a price on carbon are among the key questions to which shareholders, lenders, and insurers now seek answers.

In addition, financial regulators are moving to embed sustainable finance at the core of capital markets. Earlier this year, the EU High Level Expert Group on Sustainable Finance, which S&P Global was proud to be a member of, recommended a wide range of policy interventions. In response, the EU published its Action Plan on Sustainable Finance, which introduced a raft of proposed regulatory measures that will, if implemented, impose greater emphasis on investor duties and transparency in markets.Such moves are mirrored across the world. For example, the U.S.Department of Labor recently updated its guidance on the integration of ESG in the investment process, and the UK is seeking to strengthen pension regulations. As such, we have seen increasing market participant interest in understanding the exposure of their investments to a range of carbon indicators.

Understanding carbon risks and their potential financial impact is crucial if we are to avoid sudden and inconsistent write-downs of assets and redirect capital toward activities that are aligned with global climate commitments. Mandatory and voluntary guidance have acted as a crutch to encourage behavioral change, and it is now considered best practice to report on portfolio exposure to carbon even in markets where guidance is lacking. Investors with over USD 60 trillion in AUM now report their carbon exposure.^¹

S&P Dow Jones Indices published its Carbon Scorecard for the first time in 2015 to show the exposure of major global benchmarks to carbon risks. Subsequent publications show how quickly the market (measured as the largest companies in each region) is transitioning to a lower-carbon economy.

For the first time, we have added two fixed income benchmarks to the 10 equity benchmarks assessed by the Carbon Scorecard to provide a broader perspective on the carbon exposure of global financial markets.

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