S&P Dow Jones is one of the largest providers of indexes for use by issuers of exchange traded funds and index funds, and that dominance extends to the world of environmental, social, and governance (ESG) funds.
Owing to the proliferation of ESG ETFs and issuers realizing that end users want exposure to indexes from well-known providers, S&P is behind a growing number of ESG funds. So when the index giant makes changes, it’s noteworthy.
The index sponsor recently concluded its S&P DJI stakeholders’ consultation on the S&P ESG Indices, and there are some alterations that advisors and investors may want to take note of.
Those include “quarterly eligibility checks instead of annual to incorporate the latest available information on a more timely basis and to avoid including companies that violate eligibility criteria for a longer period,” according to S&P Dow Jones Indices. “Additionally, an expanded and revised list of product involvement exclusions, including oil sands, small arms and military contracting exclusions.”
The index sponsor is also moving to Sustainalytics for United Nations Global Compact (UNGC) data. The S&P ESG index consultation also turned up the need for some reforms regarding the treatment of controversial companies that are usually excluded from ESG benchmarks.
“For companies involved in tobacco, thermal coal, oil sands, controversial weapons, small arms or military contracting, the consultation results have further defined certain maximum revenue thresholds. If a company generates revenue exceeding these thresholds, it will be excluded at the quarterly index eligibility review,” adds the index provider. “Companies with business practices out of alignment with the UNGC will also be excluded at the quarterly index eligibility review.”
Interestingly, casino operators — another group banned by most ESG benchmarks and funds — weren’t mentioned. However, additional exclusions will pertain to oil sands, controversial weapons, small arms, and military contractors.
“Companies whose revenues from the retail or distribution of small arms are above or equal to 5%. Companies with significant ownership (above or equal to 25%) of companies that manufacture or sell small arms,” notes the index provider in describing new treatment of small arms makers.
Among the ESG ETFs following S&P indexes are the SPDR S&P ESG ETF (EFIV), the SPDR S&P SmallCap 600 ESG ETF (ESIX), the SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX), and the SPDR S&P Kensho Clean Power ETF (CNRG).
For more news, information, and strategy, visit the ESG Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.