19 Oct 2021
19 Oct 2021
We have a guest blog to share with you this week. Originally published in September 2021 by S&P Dow Jones Indices, this article explains how the S&P Paris-Aligned & Climate Transition (S&P PACTTM) Indices have evolved to take into account ESG considerations, following market demand.
This development means that investors no longer need to choose between climate transition benchmarks and broad ESG indices – the S&P PACT indices address not only Net Zero 2050 objectives, but also broader Environmental, Social and Governance issues.
Ben Leale-Green of S&P Dow Jones Indices provides an overview of these enhancements.
Senior Analyst, Research & Design, ESG Indices
S&P Dow Jones Indices
Over the year since the launch of the S&P PACT Indices, the market has pushed for an index methodology evolution: the addition of an S&P DJI ESG Score improvement, further exclusions, a buffer rule, and revised stock capping (see Exhibit 1). The series comprises two types of indices: the S&P Climate Transition (CT) Indices and their more ambitious cousins, the S&P Paris-Aligned (PA) Indices. Both of these index series are aligned with the EU’s minimum standards for low carbon benchmarks under the EU Benchmark Regulation, which follow a 1.5°C scenario toward net zero by 2050, thus the name change to include “Net Zero 2050.” These methodology changes mean investors no longer need to choose between broad ESG indices and net zero/1.5°C-compatible indices—a first for the market.
In this paper, we outline how these methodology enhancements modify the index composition and the differences between the S&P CT and PA Indices, compare to the previous methodology, and provide a brief analysis of exposures and historical performance.
Climate forms a key pillar within Lyxor’s ESG strategy. We launched the world’s first Green Bond ETF back in 2017, and more recently we were the first ETF provider in Europe to launch a comprehensive range of climate equity ETFs designed to meet the requirements of EU Climate Transition Benchmarks, and EU Paris-Aligned Benchmarks.
With these funds, you can do your part to help limit global warming to 1.5°C, the most ambitious scenario of the Paris Agreement.
S&P DJI Performance Disclosure
The S&P 500 Paris-Aligned Climate Index and the S&P Developed Ex-Korea LargeMidCap Paris-Aligned Climate Index were launched June 1, 2020. The S&P Europe LargeMidCap Paris-Aligned Climate Index was launched May 4, 2020. The S&P Eurozone LargeMidCap Paris-Aligned Climate Index was launched April 20, 2020. All information presented prior to an index’s Launch Date is hypothetical (back-tested), not actual performance. The back-test calculations are based on the same methodology that was in effect on the index Launch Date. However, when creating back-tested history for periods of market anomalies or other periods that do not reflect the general current market environment, index methodology rules may be relaxed to capture a large enough universe of securities to simulate the target market the index is designed to measure or strategy the index is designed to capture. For example, market capitalization and liquidity thresholds may be reduced. Complete index methodology details are available at www.spglobal.com/spdji. Past performance of the Index is not an indication of future results. Back-tested performance reflects application of an index methodology and selection of index constituents with the benefit of hindsight and knowledge of factors that may have positively affected its performance, cannot account for all financial risk that may affect results and may be considered to reflect survivor/look ahead bias. Actual returns may differ significantly from, and be lower than, back-tested returns. Past performance is not an indication or guarantee of future results. Please refer to the methodology for the Index for more details about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations. Back-tested performance is for use with institutions only; not for use with retail investors. S&P Dow Jones Indices defines various dates to assist our clients in providing transparency. The First Value Date is the first day for which there is a calculated value (either live or back-tested) for a given index. The Base Date is the date at which the index is set to a fixed value for calculation purposes. The Launch Date designates the date when the values of an index are first considered live: index values provided for any date or time period prior to the index’s Launch Date are considered back-tested. S&P Dow Jones Indices defines the Launch Date as the date by which the values of an index are known to have been released to the public, for example via the company’s public website or its data feed to external parties. For Dow Jones-branded indices introduced prior to May 31, 2013, the Launch Date (which prior to May 31, 2013, was termed “Date of introduction”) is set at a date upon which no further changes were permitted to be made to the index methodology, but that may have been prior to the Index’s public release date. Typically, when S&P DJI creates back-tested index data, S&P DJI uses actual historical constituent-level data (e.g., historical price, market capitalization, and corporate action data) in its calculations. As ESG investing is still in early stages of development, certain datapoints used to calculate S&P DJI’s ESG indices may not be available for the entire desired period of back-tested history. The same data availability issue could be true for other indices as well. In cases when actual data is not available for all relevant historical periods, S&P DJI may employ a process of using “Backward Data Assumption” (or pulling back) of ESG data for the calculation of back-tested historical performance. “Backward Data Assumption” is a process that applies the earliest actual live data point available for an index constituent company to all prior historical instances in the index performance. For example, Backward Data Assumption inherently assumes that companies currently not involved in a specific business activity (also known as “product involvement”) were never involved historically and similarly also assumes that companies currently involved in a specific business activity were involved historically too. The Backward Data Assumption allows the hypothetical back-test to be extended over more historical years than would be feasible using only actual data. For more information on “Backward Data Assumption” please refer to the FAQ. The methodology and factsheets of any index that employs backward assumption in the back-tested history will explicitly state so. The methodology will include an Appendix with a table setting forth the specific data points and relevant time period for which backward projected data was used. Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices maintains the index and calculates the index levels and performance shown or discussed but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the Index or investment funds that are intended to track the performance of the Index. The imposition of these fees and charges would cause actual and back-tested performance of the securities/fund to be lower than the Index performance shown. 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