julia kochetygova
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Agenda
• Role of the ESG Indices in impact investing
• ESG Indices space and variety
• Index philosophy and selection of parameters
• Relevance versus reliability (S&P Approach)
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Why ESG Indices?
• ESG index investing is a viable option for “active passive”
investors who want to make an impact
– They can generate enhanced financial returns
– Simultaneously promote corporate citizenship
– It is a relatively simple, cost-effective and objective tool
– Moreover, as market participants incorporate the ESG
information, the impact on returns will increase going
forward
– The indices also provide investors with a powerful
engagement platform
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Rapid Expansion of ESG Indices Globally
Launches of emerging markets sustainability indices1
(Total number = 19**)
Source: Esty Environmental Partners’ Research
**See full list in the Appendix
• 26 Global ESG Index families
• 8 regional ESG Index families
• 35+ country‐specific ESG indices*
*See some examples in the Appendix
Investments into ESG Indices are rapidly growing, but sEll small: less than $40 billion, or 0.5% of the esEmated AUMs of passively managed funds
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Sustainability Index Market Challenges:
the “Leaky Pipe”
Potential
Investor
Value
1 2 3 4
Investor
Sustainability
Framework
and Metrics
Data Sourcing Data Analysis
Investor
Intent & Index
Communication
Investor
Value
Index
providers ESG data providers Companies Investors
Market Challenges
While Sustainability Indices have the potential to deliver value to investors,
market challenges along the value chain can cause value to leak out
Sustainability Indices Value Chain
Source: Esty Environmental Partners’ Research, S&P Indices
ESG Indices Philosophies & Technologies
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Ethical
Environmental
Composite
ESG
Va
rio
us P
ers
pe
ctive
s
Negative
screening
Tilting
based on
analytical
criteria
Various Approaches
Selecting
sectoral
Best-in-
Class
IncorporaEng factor analysis or not
Investors need to carefully differenEate between philosophies of various ESG indices in order to choose the one capturing tangible
factors that really lead to sustainable performance!
Normalizing
within
industries or
not
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6
ESG Parameters’ Dilemma: Relevance vs. Reliability
Type of Parameter
Relevance Reliability Measurability
Performance High Low Low/Moderate
Policies Moderate Moderate Moderate
Disclosure Low/Moderate High High
Environment Social
Responsibility Governance
ESG Parameters measure the companies’ performance in the areas of:
ESG Score Weights
Weights
Weights
What Relevance of Parameters Means
Capturing ability to mitigate risks Unveiling growth potential
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Financial
Legal
ReputaEonal
OperaEonal
Product innovaEon
Labor ProducEvity
Resource efficiency
Brand recogniE
on
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Relevance: S&P ESG India Historical Performance
“Source: S&P Indices and India Index Services & Products. Data as of May 31, 2011. Charts are provided for illustrative purposes only. This chart may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more
information regarding the inherent limitations associated with back-tested performance.
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Relevance: S&P/Hawkamah ESG Historical
Performance
“Source: S&P Indices and India Index Services & Products. Data as of May 31, 2011. Charts are provided for illustrative purposes only. This
chart may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more
information regarding the inherent limitations associated with back-tested performance.
Relevance: Transparency and Market Value
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R 2 = 0.18
0
1
2
3
4
5
6
7
20% 30% 40% 50% 60% 70% 80% 90% T&D Score
P/B
Ratio
Source: Standard & Poor’s Transparency & Disclosure Study of Russian Companies, 2009
Transparency & Disclosure (T&D) of ESG parameters measure the level of awareness which
markets and companies possess on important issues. Information for analysis is obtained from public sources such as annual reports and other disclosures
R2 - Determination Coefficient
Examples of Parameters: Environment
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Parameter Type of Parameter
Relevance
Reliability
Measurability
Amount of waste produced, in relaEon to revenue
Performance 3 1‐2 2
Amount of environment‐related R&D expenses per year
Performance 3 1 2
Voluntary reducEon requirements for gas emissions and waste disposal
Policies 2 2 2
Disclosure of absolute and relaEve numbers of GHG emissions and other polluEons
Disclosure 1 3 3
3 = High; 2 = Moderate; 1 – Low
The methodology is the property of S&P Indices, Standard & Poor’s and will be published along
with the launch of the S&P ESG Global BMI Index series
Examples of Parameters: Social
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Parameter Type of Parameter
Relevance
Reliability
Measurability
Whether the company's acEviEes generate posiEve externaliEes for the community
Performance 3 1‐2 2
Rates of injury, occupaEonal diseases and other work‐related fataliEes
Performance 3 1 2
Procedures in place to receive, record and address stakeholder demands
Policies 2 2 2
Disclosure of rates of accidents and professional diseases
Disclosure 1 3 3
3 = High; 2 = Moderate; 1 – Low
The methodology is the property of S&P Indices, Standard & Poor’s and will be published along
with the launch of the S&P ESG Global BMI Index series
Examples of Parameters: Governance
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Parameter Type of Parameter
Relevance
Reliability
Measurability
Percent of non‐execuEve and non‐affiliated directors
Performance 3 2 3
Existence of large shareholders’ related business interests
Performance 3 1 2
Whether internal audit department reports to the audit commifee of the board
Policies 3 2 3
Disclosure of management remuneraEon policy and levels
Disclosure 1 3 3
3 = High; 2 = Moderate; 1 – Low
The methodology is the property of S&P Indices, Standard & Poor’s and will be published along
with the launch of the S&P ESG Global BMI Index series
Summary: Index Setup for Impact Investing
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Index philosophy /Scoring guidelines
Eligibility / weighEng criteria
Back‐tesEng to prove Alpha
Communi‐caEon to investors
ETFs / Mutual funds launch
Engagement with
companies
Impact
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Performance Disclosure
• The inception date of the S&P ESG India Index was January 31 2008 , at the market close. All information presented prior to the index inception date is back-tested.
The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Complete index methodology details
are available at www.indices.standardandpoors.com.
• The inception date of the S&P ESG Pan Arab Index was February 1 2011, at the market close. All information presented prior to the index inception date is back-
tested. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Complete index methodology
details are available at www.indices.standardandpoors.com.
• Past performance is not an indication of future results. Prospective application of the methodology used to construct the S&P ESG India Index, S&P ESG Egypt Index
and S&P ESG Pan-Arab Index may not result in performance commensurate with the back-test returns shown. The back-test period does not necessarily
correspond to the entire available history of the index. Please refer to the methodology paper for the index, available at www.standardandpoors.com for more
details about the indices, including the manner in which they are rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations. It is not possible to invest directly in an Index.
• Also, another limitation of hypothetical information is that generally the index is prepared with the benefit of hindsight. Back-tested data reflect the application of the
index methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in actual
trading. For example, there are numerous factors related to the equities (or fixed income, or commodities) markets in general which cannot be, and have not
been accounted for in the preparation of the index information set forth, all of which can affect actual performance.
• The index returns shown do not represent the results of actual trading of investor assets. Standard & Poor’s maintains the indices 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 would pay
to purchase the securities they represent. The imposition of theses fees and charges would cause actual and back-tested performance to be lower than the
performance shown. In a simple example, if an index returned 10% on a US $100,000 investment for a 12-month period (or US$ 10,000) and an actual asset-
based fee of 1.5% were imposed at the end of the period on the investment plus accrued interest (or US$ 1,650), the net return would be 8.35% (or US$ 8,350)
for the year. Over 3 years, an annual 1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US$ 5,375, and a cumulative net return of 27.2% (or US$ 27,200).
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General Disclaimer
• This document does not constitute an offer of services in jurisdictions where Standard & Poor’s Financial Services LLC (“S&P”) or its affiliates do not have the necessary licenses. All information provided by S&P is impersonal and not tailored to the needs of any person, entity or group of persons. S&P receives compensation in connection with licensing its indices to third parties. Any returns or performance provided within are for illustrative purposes only and do not demonstrate actual performance. Past performance is not a guarantee of future investment results.
• It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. S&P and its affiliates do not sponsor, endorse, sell, promote or manage any investment fund or other vehicle that is offered by third parties and that seeks to provide an investment return based on the returns of any S&P index. There is no assurance that investment products based on the index will accurately track index performance or provide positive investment returns. S&P is not an investment advisor, and S&P and its affiliates make no representation regarding the advisability of investing in any such investment fund or other vehicle. A decision to invest in any such investment fund or other vehicle should not be made in reliance on any of the statements set forth in this document. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other vehicle. Inclusion of a security within an index is not a recommendation by S&P to buy, sell, or hold such security, nor is it considered to be investment advice.
• S&P does not guarantee the accuracy and/or completeness of any S&P index, any data included therein, or any data from which it is based, and Standard & Poor’s shall have no liability for any errors, omissions, or interruptions therein. S&P makes no warranties, express or implied, as to results to be obtained from use of information provided by S&P, and S&P expressly disclaims all warranties of suitability with respect thereto. While S&P has obtained information believed to be reliable, S&P shall not be liable for any claims or losses of any nature in connection with information contained in this document, including but not limited to, lost profits or punitive or consequential damages, even if it is advised of the possibility of same.
• S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process. S&P and its affiliates provide a wide range of services to, or relating to, many organizations, including issuers of securities, investment advisers, broker-dealers, investment banks, other financial institutions and financial intermediaries, and accordingly may receive fees or other economic benefits from those organizations, including organizations whose securities or services they may recommend, rate, include in model portfolios, evaluate or otherwise address.
• Copyright © 2011 by Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies. All rights reserved. Redistribution, reproduction and/or photocopying in whole or in part is prohibited without written permission. S&P, S&P INDICES, and STANDARD & POOR’S are registered trademarks of Standard & Poor’s Financial Services LLC.
Analytic services and products by Standard & Poor’s are the result of
separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poor’s has established policies and
procedures to maintain the confidentiality of non-public information received during each analytic process.
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Thank you.
For questions, please contact:
Julia Kochetygova
Senior Director
S&P Indices
+7-495-783-4025
Julia_kochetygova@standardandpoors.com
Appendix: the ESG Index Universe
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ESG Indices Coverage
26 Global Index families Dow Jones
Sustainability World Index
FTSE4Good Global Benchmark Index
MSCI ESG Indices
S&P ESG Indices (underway)
8 Regional Index families Dow Jones
Sustainability Asia‐Pacific Index
S&P Pan‐Arab ESG Index
FTSE4Good Europe Index
MSCI Pacific ESG Index
35+ Country Indices
S&P ESG India Index
SSE Social Responsibility
Index
Australian SAM Sustainability
Index
KRX SRI Index
… … …
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Geographic Coverage of Emerging Markets
Sustainability Indices
Global (2 indices)
• ECPI Ethical Emerging Markets
Tradable Equity Index
• S&P/IFCI Carbon Efficient Index
Country Specific: Central and South
America (3 indices)
• BM&FBovespa Corporate
Sustainability Index (ISE) – Brazil
• Brazil Carbon Efficient Index – Brazil
• BMV Sustainability Index – Mexico2
Regional (2 indices)
• CEE Responsible Investment Universe
Index
• S&P/Hawkamah ESG Pan-Arab Index
Country Specific: Asia (9 indices)
• OWW Responsibility SRI Index Series – Malaysia (and other countries)
• S&P ESG Indi Index – India
• Dow Jones Sustainability Korea Index – South Korea
• SRI‐KEHATI Index – Indonesia
• SSE Social Responsibility Index – China
• CSI ECPI ESG China 40 Index – China
• Hang Seng Corporate Sustainability Indexes China
• Bursa Malaysia ESG Index – Malaysia1
Country Specific: Middle East/Africa
(3 indices)
• Johannesburg Stock Exchange Socially
Responsible Investment Index - South Africa
• S&P/EGX ESG Index –Egypt
• Istanbul Sustainability Index – Turkey1
Source: Esty Environmental Partners’ Research
1. Index in development, as of June 2011
2. Index is launched, but not published,
as of June 2011
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