News: The (Re)Balancing Act of the S&P 500 ESG Index

19/05/2022

Press Release - It is that time of year yet again: the seasons are changing, spring is in the air and the S&P 500® ESG Index has undergone its fourth annual rebalance. Just as it has in years past, the changes of the 2022 rebalance reflect the delicate balancing act of providing for broad-based market exposure but with meaningful and measurable sustainability-focused enhancements.

Without further ado, let's spring into some of those changes.

The Results

It is important that the methodology of the S&P 500 ESG Index reflect the evolving sentiments of a sustainability-minded investor. These views were voiced in the results of a recent market consultation that led to a revised and expanded list of exclusions based on a company's involvement in certain business activities such as small arms, military contracting and oil sands. The consultation also addressed several other relevant updates, including more frequent eligibility check for business involvement and UNGC exclusions.1 Even with these enhancements, the S&P 500 ESG Index design still retains its main objective, which is to maintain similar overall industry group weights to the S&P 500 while enhancing the overall sustainability profile of the index. The index has indeed been able to accomplish this delicate balancing act, exhibiting a similar historical risk/return profile to that of the S&P 500.

Who's In and Who's Out

Of the 308 constituents that were selected for inclusion in the S&P 500 ESG Index, names like Apple, Microsoft, Amazon, and Alphabet once again made the cut.

First and foremost, the GICS industry group in which Tesla is assessed (Automobiles & Components) experienced an overall increase in its average S&P DJI ESG Score. So, while Tesla's S&P DJI ESG Score has remained fairly stable year-over-year, it was pushed further down the ranks relative to its global industry group peers.4 A few of the factors contributing to its 2021 S&P DJI ESG Score were a decline in criteria level scores related to Tesla's (lack of) low carbon strategy5 and codes of business conduct.6 In addition, a Media and Stakeholder Analysis,7 a process that seeks to identify a company's current and potential future exposure to risks stemming from its involvement in a controversial incident, identified two separate events centered around claims of racial discrimination and poor working conditions at Tesla's Fremont factory, as well as its handling of the NHTSA investigation after multiple deaths and injuries were linked to its autopilot vehicles. Both of these events had a negative impact on the company's S&P DJI ESG Score at the criteria level, and subsequently its overall score. While Tesla may be playing its part in taking fuel-powered cars off the road, it has fallen behind its peers when examined through a wider ESG lens.

Onward and Upward

So, while Tesla and others may not have been included in the index this year, the beauty of the annual rebalance is that they will once again have an opportunity to be reviewed for inclusion in years to come. For now, the (re)balancing act of the S&P 500 ESG Index has once again been achieved.

More information about the S&P 500 ESG Index methodology can be found here.