With a suite of more than 150 headline ESG benchmarks and two decades of experience in this universe, S&P Dow Jones Indices is a leader in sustainable indexing solutions. Priscilla Luk, managing director and head of Asia Pacific global research and design, outlined how climate change data is fuelling investors’ decision-making process.
Q. WHY ARE INVESTORS, SUCH AS JAPAN'S GPIF, INTERESTED IN ESG?
ESG issues can affect the performance of investment portfolios across the board. How those ESG principles are incorporated is gaining significant importance for investors, owners and creditors, as reflected by the number of signatories to the United Nations Principle of Responsible Investment, the global standard for responsible investment – growing from 100 companies in 2006, to more than 2,300 in 2019, with more than 86 trillion assets under management.
Today, the sustainable investment industry is driven by the availability of better corporate sustainability data. To meet this need, S&P DJI offers a full spectrum of ESG benchmarks for diverse investment and objectives with ESG data that is transparent, flexible, and backed by two decades of investment decision-making experience.
Asia Pacific global research
and design, S&P DJI
Japan’s GPIF, the world’s largest pension fund, promotes ESG investment to improve long-term return by using S&P Carbon Efficient Indices to reduce exposure to high-carbon companies in a systemic way while maintaining a risk/return profile similar to that of their benchmarks. To address environmental concerns like climate change, GPIF selected two environmental indices, the S&P/JPX Carbon Efficient Index and the S&P Global Ex-Japan LargeMidCap Carbon Efficient Index, and now invests and tracks these indices.
S&P DJI offers full transparency in its methodology, together with underlying quantitative environmental data from Trucost. GPIF felt these indices helped to achieve its goal of encouraging corporations to actively seek solutions to environmental issues through a combination of Trucost’s expertise in data relating to the hidden costs associated with unsustainable resource use within companies, and S&P DJI’s independent and transparent index investment solutions.
Q. HOW HAS ENVIRONMENTALLY CONSCIOUS INVESTING AFFECTED RETURNS?
Historically, the S&P Carbon Efficient Indices reduced carbon footprints by between 20%-50% on average, compared with their respective market-cap-weighted benchmark indices with a historical tracking error of under 80 basis points. These significant reductions are obtained by combining S&P’s extensive coverage of more than 15,000 companies, with Trucost carbon data period and direct engagement with every company covered in the indices. For example, the five year annualised return of the S&P 500 Carbon Efficient Index was 35% more carbon efficient than the S&P 500, and performed 0.04% better than the S&P 500.
Q. HOW DOES S&P DJI’s APPROACH TO ESG DIFFER FROM OTHERS?
We offer an extensive range of indices to fit varying risk/returns and ESG expectations, from core ESG and low-carbon climate approaches, to thematic and fixed ESG strategies. As investors’ demand for indices that are aligned with their investment objectives is rising, we launched the S&P DJI ESG Index Series in January 2019.
Unlike many ESG indices that preceded it, which were thematic or narrow in their focus, the new series is a set of market-cap-weighted broad indices constructed to be part of the core of an investor’s portfolio. By targeting 75% of the core benchmark market capitalisation, industry by industry, the S&P DJI ESG Index Series offers industry diversification, and a return profile in line with the core market-cap-weighted benchmark indices, while also delivering improved composite ESG scores for the portfolio.
Q. CAN S&P DJI’s ESG SOLUTIONS BE CUSTOMISED?
S&P DJI offers off-the-shelf ESG indexing solutions, plus additional custom index capabilities covering exclusions, tilts, optimisations, and other bespoke strategies. For example, we recently launched the S&P/Drucker Institute Corporate Effectiveness Index, which tracks stocks in the S&P 500 that consistently rank highly on proprietary management criteria. These companies create value through excellence in employee engagement and development, customer satisfaction, social responsibility, innovation, and high-quality earnings.