In an interview with The Asset, Mona Naqvi, senior director, ESG Indices at S&P Dow Jones Indices, explains how converting the popular S&P 500 into an ESG index known as the “S&P 500 ESG Index” can help fast-track ESG investing.
Q. What makes the S&P 500 ESG Index unique compared to other ESG indices?
A. The S&P 500 ESG is the sustainable alternative to a most iconic and widely used benchmark. So for the first time ever, investors who use the S&P 500 can actually switch to this version and make good on their ESG values without compromising their investment objectives. By mirroring the risk and return profile of the S&P 500, we’re really dispelling the myth of an ESG performance tradeoff and allowing investors to integrate ESG into the core of their portfolios at very little cost in terms of low tracking error and with comparable returns.
The other thing that makes the index unique compared to other alternatives out there is the quality of the underlying data, our S&P Dow Jones Indices ESG Scores, which have been calculated by our partner SAM, part of Robecosam, with whom we have a partnership for over 20 years since launching the world’s first ever global sustainability benchmark, the Dow Jones Sustainability Index.
And what’s really unique about these data is because it has been calculated by the Swiss sustainable asset manager (ROBECO) it has been carefully honed over two decades of a real investment decision-making process as opposed to a purely theoretical or academic approach to ESG.
Q. Why was the S&P 500 used as the basis for this ESG index and how broad will the eventual S&P ESG Index Series be?
A. Well this is about bringing ESG into the mainstream with our flagship index. There are more assets invested in products tied to S&P indices than any other provider in the world and 70% of those assets are tied to the S&P 500. The S&P 500 is widely regarded as the single best gauge of large cap US equities and so it’s used by investors not only in the US but all over the world who are looking to gain core US exposure. And we’re not just talking about the S&P 500. Over the coming months we will be launching a global family of ESG benchmarks of our most widely tracked regional and country specific indices including the Americas, Europe, the Middle East, and Africa as well as the Asia-Pacific region. So we’re really giving global investors the opportunity to get in in terms of ESG once again without compromising their investment strategy.
Q. What is the S&P DJI ESG Score? How do S&P DJI ESG Scores fit into the S&P ESG Indices?
A. The index essentially works by targeting the top 75% of market cap within each industry group on the S&P 500 ranked by our new S&P DJI ESG scores. We’re also excluding companies involved in the production of tobacco, controversial weapons, and any companies with a low UN Compact Global Score. So by working with SAM, the data unit within Robecosam, the methodology has been carefully constructed over 20 years of real life investment decision-making to determine what are the most financially material and relevant ESG signals within each specific industry as opposed to just an academic approach to the problem.
And the data collection process through SAM’s corporate sustainability assessment is widely regarded as one of the most rigorous surveys of company corporate sustainability performance in the world and purportedly takes companies around 200-300 hours on average to complete it. And it really affords us an unparalleled level of insight into corporate sustainability performance much more so than simply relying on public disclosures as is typical with other ESG data sets.
Q. Can the S&P 500 ESG Index be used as a building block for ETFs and other passive products?
A. Absolutely. The index servesnot only as a performance tracking tool but also as the building block for the basis of multiple ESG index-linked ESG investing products as well as passive solutions such as ETFs. And just like any of our indices, we’re really giving financial services firms across the globe the blueprint to create their own ESG index-linked products. We are actually in discussions with multiple ETF providers all over the world who plan to launch such products and actually just a week after launching the S&P 500 ESG index, our partner UBS Asset Management announced that they were launching multiple ETFs across several stock exchanges in Europe.
Q. How can investors use ESG indices and data to help them build their ESG portfolio?
A. Well, as investors throughout the world are becoming increasingly aware of the need to measure and manage the ESG impact of their investments, at S&P we’re continuing to innovate to supply the market with a choice of ESG index solutions to suit all different types of diverse investment objectives. So whether by defining the investible universe for investors looking to gain exposure to certain regions, or by providing benchmarks for tracking performance for actively managed portfolios, or providing intellectual property as the basis for passive portfolios, we’re really giving investors all over the globe the option to integrate ESG into the core of their portfolios without having to compromise on their investment strategy.
Q. Is the use of indexes for building ESG-focused portfolios increasing particularly among Asian investors?
A. Absolutely. The demand for ESG investing is growing all over the world, not just in the region. I think a good example of this is GPIF, the Government Pension Investment Fund of Japan, which recently selected our S&P Carbon Efficient Index Series for a US$10.6 billion allocation. What they’re doing is signaling to the global investment community that they have high conviction in the returns to low carbon and ESG investing more broadly. And a lot of investors around the world are following suit.
It’s worth mentioning also that ESG issues tend to be intrinsically linked to big macro-economic shifts unfolding in the global economy. Take climate change, for example, whether or not you believe in the catastrophic impacts of man-made climate change, the fact is that policy-makers around the world are implementing strategies and regulations to address the problem. For instance, carbon taxes which are serving as a transmission mechanism to translate these real economy impacts into a financially material and relevant set of issues through rising cost for companies for example. Investors all over the world are addressing this problem by addressing ESG in their portfolios.