SPDR ETFs offers both US and European broad equity exposures which use ESG screens to exclude companies which are involved in controversial industries. These ETFs may provide a transparent, efficient and cost-effective way to create greener portfolios.
The S&P 500 ESG Leaders Index has proven itself a favourite among investors. Hear Rebecca Chesworth, SPDR ETFs and Stephanie Rowton, S&P Dow Jones Indices discuss two common questions about the index: how it aims to match the risk and return of its parent, and how a certain large energy company can be included in an ESG index.
Rebecca: We're seeing a return of inflows into ESG ETFs, which is great news. So we thought we'd take a look at one of our investors' favorite indice, which is the S&P 500 ESG Leaders Index. The methodology of this index is a wide range of exclusions and then taking the eligible stocks and comparing them against their peers on ESG ratings. So I thought I'd ask Stephanie two questions which I commonly receive from clients about this index. The first one of those is given so many exclusions and we're running at over 250 at the moment, how is it that the ESG Leader's Index still manages to have a risk and return, which is similar to the S&P 500?
Stephanie: Yes. So whilst the S&P 500 Leaders Index is selective, it's designed to represent the overall characteristics and industry group weights of the parent index. This is quite a delicate balancing act. A sector underweights are relatively small compared with competing ESG strategies. And this broad sector neutrality has been particularly important, things like the energy sector and has helped maintain performance close to the parent index, particularly in this last very volatile year.
Rebecca: And of course, energy has been very important to the market and to ESG investors. And this really prompts my second question cuz when we look at Exxel, which is one of the largest fossil preop producers in the world, I often get asked why is this not excluded?
Stephanie: So the index has defined rules for excluding companies with certain business activities. So even though Exxon is a large oiling gas corporation, it does not generate revenues which exceed the 5% revenue threshold from certain business activities. So for example, thermal coal oil, sand sha or Arctic optic oil and gas in May's rebalance, Exxon's S&P DGI ESG score was within that 50% selection target within its global gigs industry group. And actually it scored above average on various social metrics. As a result, Exxon was deemed eligible for index inclusion where it replaced Chevron, an oil and gas competitor, which presented a lower ESG score.
Rebecca: Thank you for that explanation, Stephanie. If you've got interest in SPDR's ESG strategies, please do reach out to your local representative or have a look at our website. Thank you.
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SPDR S&P 500 ESG Leaders UCITS ETF
The S&P 500® ESG Leaders Index is a best-in-class ESG index that is designed to measure the performance of securities with stronger than average ESG characteristics while excluding controversial business activities with negative social or environmental impacts. The S&P 500® ESG leaders index was constructed to provide a risk/return profile similar to that of the S&P 500, while greatly improving ESG characteristics. The index targets 50% of the float-adjusted market capitalization of each GICS® industry group within the S&P 500 using the S&P DJI ESG scores for constituent selection. A significant amount of exclusions are also made based on criteria detailed in the methodology.
SPDR STOXX Europe 600 SRI UCITS ETF
The SPDR STOXX Europe 600 SRI UCITS ETF aims to track the performance of the popular STOXX Europe 600 Index after a set of emission intensity, compliance, involvement and ESG performance screens are applied. Companies that rank in the highest 10% in terms of their emission intensities are not eligible for selection. Thereafter, exclusion filters screen out companies for compliance based on the Sustainalytics Global Standards Screening assessment and involvement in controversial weapons, tobacco, alcohol, adult entertainment, gambling, weapons (small arms and military contracting), thermal coal, oil and gas, and nuclear power. In order to integrate best-in-class scoring, the remaining securities are ranked in descending order of their ESG scores within each of the 11 ICB Industry groups. The STOXX SRI indices select the top-ranking securities in each group until the number of selected securities reaches a third of the number in the parent index. These exclusion screens and best-in-class ranking result in an index of 200 stocks.
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Previous to 1 December 2021, the Fund was known as SPDR® STOXX Europe 600 ESG Screened UCITS ETF (Acc), tracking the STOXX Europe 600 ESG-X Index.
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