State Street SPDR ETFs: S&P 500 ESG leaders explained

State Street SPDR ETFs: S&P 500 ESG leaders explained

15 december 2023

ESG
Duurzaam (24) ESG

The S&P 500 ESG Leaders index tracks the performance of the leading S&P 500 Index after a set of exclusion and ESG performance screens are applied. This methodology results in an index of just over 200 stocks, with index constituents weighted by their market capitalisation.

Stocks are deemed ineligible for inclusion in the index on a basis of:

  • negative screening on business activity
  • behavioural issues
  • low ESG score

The exclusions on business activities include controversial weapons, military contracting, tobacco, alcohol, gambling, civilian firearms, nuclear power, thermal coal and unconventional oil & gas (namely Artic exploration, oil sands and fracking). Companies with disqualifying UNGC Scores are also ineligible for the index.

Thereafter, companies with S&P DJI ESG scores in the bottom 25% of each GICS Industry Group are also excluded. S&P Global calculates these scores and derives them from their Corporate Sustainability Assessment, using either company-provided data, publicly available information, or a combination thereof. They are an aggregation of environmental, social, and governance scores that measure ESG risk and performance factors with a focus on financial materiality.

In addition, controversies are identified through Media & Stakeholder Analysis which involves daily filtering, screening, and analysis provided by RepRisk.

This methodology results in an index of just over 200 stocks, with index constituents weighted by their market capitalisation. Looking at actual and back-tested figures, the S&P 500 ESG Leaders index has achieved higher returns than the parent index in all periods featured in the figure below. Once the slightly higher volatility is taken into account, risk-adjusted returns are very similar for the two indices.

Excluding 300 stocks from the S&P 500 index could potentially have a big impact on relative performance (both positive and negative). However as mentioned above, risk-adjusted returns have been similar and the tracking error kept to approximately 2%. The exclusions have actually been beneficial to relative returns in recent years, albeit have resulted in the higher volatility of returns.

Rebecca Chesworth, Senior Equity Strategist at SPDR’s ETF Strategy & Research team: 'The index methodology has resulted in overweight exposure to some of the largest stocks in the market, including Alphabet, Amazon, Microsoft and Apple. This has given S&P 500 ESG Leaders index a significant performance boost year to date. These stocks, part of the Magnificent Seven, have dominated the US stock market this year on excitement over the potential for AI adoption, alongside rapid growth in cloud computing and automation.'

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