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Examining the Exclusions: SPDR S&P 500 ESG Leaders UCITS ETF

When returning to equities after the significant market falls this year, many ETF investors have continued to choose an ESG fund for core US equity exposure. SPDR S&P 500 ESG Leaders UCITS ETF has a methodology that combines exclusions and ranking by ESG ratings, which maintains broad allocation and similar industry group weights to the S&P 500, the most popular investor benchmark.

Here we answer some of the most common questions from clients on exclusions.


Senior ETF Strategist

Differentiating methodology

The S&P ESG Leaders methodology starts with exclusions before all eligible stocks from the S&P 500 universe are considered on relative ESG ratings versus peers.

Stocks are deemed ineligible for inclusion in the index, and thus the SPDR ETF, based on three areas:

  • Negative screening on business activity
  • Behavioural issues
  • Low ESG score 

The best-in-class ESG scoring involves ranking all eligible securities in descending order of their S&P DJI ESG score. This is an aggregation of environmental, social and governance scores that measure ESG risk and performance factors with a focus on financial materiality. Stocks that are thereafter selected for index inclusion constitute the top 50% by float-adjusted market cap within each industry group, with any ranking lower also excluded.

Selected exclusions by category

Selected exclusions by category

1. Why is Exxon, the largest quoted fossil fuels company, not excluded?

Exxon* entered the S&P 500 ESG Leaders index at the annual rebalancing at the start of May 2022. In terms of business activity, Exxon* is a fossil fuel producer, but does not have operations in oil sands, shale or Artic oil and gas exploration that exceed the 5% revenue threshold.

As for the stock’s S&P DJI ESG score ranking, it was above the 75% threshold in its global GICS industry group (Oil & Gas Upstream & Integrated), which includes S&P Global LargeMidCap and S&P Global 1200 constituents. Even though the score was reduced given low levels of data disclosure, Exxon* did achieve well above the industry average on certain social measures, including community relations.

Thus Exxon* was deemed eligible for index inclusion on both counts. It replaced Chevron*, an oil and gas competitor, which presented a lower S&P DJI ESG score, below the 75% threshold. Of note, Exxon* is excluded from the competing MSCI USA ESG indices.

2. Why is Tesla, the leading producer of electric vehicles, excluded?

Tesla* was dropped from the index at the start of May 2022. Even though the company is well known for clean energy solutions, it was ineligible for index inclusion because of its low S&P DJI ESG ranking within its global GICS industry group (Automobiles & Components). While Tesla’s* score had remained fairly stable year on year, the average for the industry group increased. 

According to S&P Dow Jones Indices, Tesla’s* relatively low score was not helped by the lack of a low carbon strategy and codes of business conduct. Furthermore, S&P’s Media & Stakeholder Analysis, a process that seeks to identify current and potential future exposure to risks, flagged Tesla’s* handling of the official investigation into deaths and injuries linked to its autopilot vehicles as well as claims of racial discrimination and poor working conditions at its Fremont factory. 

This example shows the impact of a wide ESG lens that includes social and governance issues.

3. Given the nearly 300 stock exclusions, how is tracking error kept so low?

While the S&P 500 ESG Leaders Index is highly selective, it is designed to reflect the overall characteristics and industry group representation of its parent S&P 500 index. It retains representation across all 11 GICS sectors. 

Sector underweights are relatively small compared with competing ESG strategies. This has been particularly important for the energy sector and has helped keep performance close to the parent index in the past year, even amid the heightened volatility. 

Learn more

To learn more about the SPDR S&P 500 ESG Leaders UCITS ETF, and to view its performance history, please visit its fund page.


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