Investing in Broad Equity ESG ETFs

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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