With more advisors and investors embracing environmental, social, and governance (ESG) investing concepts, it pays to look at how some of the indexes and funds providing exposure to this segment operate.
Take the case of the Xtrackers S&P 500 ESG ETF (SNPE), which tracks the S&P 500 ESG Index, the environmental, social and governance derivative of the widely followed S&P 500 Index. The S&P 500® ESG Index is one of the stricter ESG benchmarks and has a history of removing well-known companies, such as Facebook (NASDAQ: FB) last year.
“The S&P 500 ESG Index aims to retain as many companies from the S&P 500 as possible (and thus closely replicate the risk/return), after removing certain companies—based on ESG principles—and re-weighting those that remain by market capitalization. Companies are excluded if they have a low ESG score relative to global industry peers, are involved in controversial weapons or tobacco, perform poorly on the principles of the UN Global Compact, or are involved in controversies deemed material to their ESG performance,” said S&P Dow Jones Indices in a recent note.
Latest Additions, Exclusions
“As of the 2020 rebalance, 311 constituents made it into the S&P 500 ESG Index, with 56 companies classified as ineligible and 138 as eligible but not selected,” according to S&P Dow Jones.
The ESG theme is also not some fringe or niche investment that is relegated to a satellite portfolio position. Over one-quarter of assets under management globally, or more than $22 trillion, are now being invested according to the premise that environmental, social and governance factors can materially affect a company’s performance and market value. ESG integration has been growing at 17% per year.
Some familiar names are now on the outside looking in when it comes to SNPE’s underlying index, including Dow component Walmart (NYSE: WMT), the largest retailer.
“Other household names that were dropped from the index include Clorox, Twitter, Equifax, Ford Motor Company, ViacomCBS, Nordstrom, and Southwest Airlines,” said S&P Dow Jones. “These were mostly eligible but simply not selected. However, Equifax and ViacomCBS were excluded for ranking in the bottom 25% of their industry group S&P DJI ESG Scores, globally, while Twitter was ineligible due to a low UNGC score.”
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