While there are plenty of similarities between various equity-based environmental, social, and governance (ESG) indexes, there aren’t many, if any twins, in this universe.
That is to say, asset allocators need to be selective when evaluating ESG benchmarks while not assuming that simply because index names are similar, investment methodologies mirror each other. Advisors looking for a potential standout among ESG benchmarks may want to evaluate the S&P 500® ESG Leaders Index, which debuted earlier this year.
“The S&P 500 ESG Leaders Index sits between the less prohibitive exclusions of the S&P 500 ESG Index and the stricter exclusion criteria of the S&P 500 ESG Elite Index. Some may consider it Goldilocks’ choice of the S&P ESG index offerings—not too hot, not too cold, but just right,” according to S&P Dow Jones Indices.
The S&P 500 Leaders Index is similar to other benchmarks in this category in that its exclusions are familiar and sensible. For example, the gauge excludes alcohol and tobacco stocks, civilian firearms makers, casino operators, and fossil fuels and nuclear power firms. Still, what’s left out of the leader’s index is rooted in a rules-based methodology.
“The April 2022 rebalance resulted in roughly one-fifth (21%) of companies within the S&P 500 being excluded from the S&P 500 ESG Leaders Index. Of those excluded, 45% were removed due to having an ineligible S&P DJI ESG Score. This is because the S&P 500 ESG Leaders Index removes the companies in the bottom 25% by S&P DJI ESG Score in the global GICS industry group. By implementing this screen, the index removes global ESG laggards when compared to their industry group peers,” adds S&P Dow Jones.
Interestingly, some fossil fuels and gambling stocks, as just two industry examples, appear in the S&P 500 ESG Index but are excluded from the leader’s benchmark, indicating the latter’s methodology is arguably more stringent when it comes to ESG purity.
“Unlike the S&P 500 ESG Index, the S&P 500 ESG Leaders Index includes screens for shale energy and nuclear power. Of the exclusions, 8% were due to these screens, resulting in companies such as ConocoPhillips, Marathon Oil, Occidental Petroleum, and NextEra Energy all being removed,” concludes S&P Dow Jones. “Gambling is another screen within the index, resulting in the removal of three companies: MGM Resorts International, Las Vegas Sands, and Caesars Entertainment.”
Bottom line: The S&P 500 ESG Leaders Index focuses on the top half of companies as measured by the S&P DJI ESG Score, confirming it gives advisors and money managers a clean view of stocks with ESG credibility.
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.