RESEARCH
ESG

CONTRIBUTOR
Emily Ulrich
Senior Product Manager
Sustainability Indicesemily.ulrich@spglobal.com

Social Themes in Index-Based
Investing: Human Capital
Environmental, social, and governance (ESG) as an investment theme has
held some clout in the market for a while, but it continues to evolve as an
asset class. Historically, market participants either took a holistic view of
the three combined factors or simply focused on the environmental
component (e.g., low carbon). However, as sustainable investing is
expanding into the mainstream, market participants have started looking at
the governance and social elements.
Governance emerged as a key investment factor when the stock market
crashed in 2008—illuminating the risks associated with poor governancepolicies. This theme has continued to grow as an investment factor andexpand across asset classes. This has been illustrated by the launch of the
S&P Long-Term Value Creation (LTVC) Global Index in 2016, which
incorporates both governance and quantitative considerations into its
methodology.

The social aspect of
ESG includes
criteria such as
human capitaldevelopment,
corporate
citizenship, andoccupational healthand safety.

The social aspect, however, has been less thoroughly examined. This
theme measures mentalities in the workplace (e.g., diversity management,
human rights, etc.), relationships surrounding the community (e.g.,
corporate citizenship and philanthropy), and stakeholder analysis(customers, employees, all those affected by the presence of the entity). It
includes criteria such as human capital development, corporate citizenship,
and occupational health and safety.
Given the elements it covers, it’s easy to see how the social area can bechallenging to measure. While environmental factors can be captured
through quantitative metrics such as carbon emissions, and analyses ofgovernance can incorporate data required by regulations, the social
component has neither clear metrics nor mandatory data associated with it.
S&P Dow Jones was able to capture at least one part of the social
element—human capital—through collaboration with its research partner,
RobecoSAM.
In response to increasing demand in the Japanese market, S&P Dow Jones
Indices launched the JPX/S&P CAPEX & Human Capital Index in April
2016. The index is designed to measure the performance of companies in
the Japanese equity market that meet certain liquidity thresholds and leadin capital expenditure efficiency and growth, as well as human capital
investments.

Social Themes in Index-Based Investing: Human Capital

March 2017

HOW DO WE MEASURE HUMAN CAPITAL?
To measure human capital, S&P Dow Jones Indices uses metrics from
RobecoSAM’s Total Sustainability Score that encompass human capital,
including talent attraction & retention, labor rights, employee development,
human rights, and employee turnover. These criteria address specifictopics as they relate to human capital, such as the following:






To measure humancapital, S&P Dow
Jones Indices uses
metrics from
RobecoSAM’s Total
Sustainability Score
that encompass
human capital.

Ability to quantify and proactively manage investments in humancapital;Gender equality;
Companies’ commitment to the human rights of their employees;
Measurement of employee performance;
Low employee turnover rates; andImplementation of long-term incentives.

INDEX METHODOLOGY
The constituent selection is as follows:






Scores based on capex, R&D growth, capex revenue effect, andhuman capital are calculated for each company in the underlying
universe and ranked in descending order;
The top 180 companies are selected;
Existing constituents ranked 181-200 are selected until the target
count of 200 is reached; andIf the target is still not met, then non-constituent companies are
selected until the target is reached.

SECTOR BREAKDOWN
The sector breakdown of this index is somewhat in line with the Japanesemarket. For example, consumer discretionary and industrials tend to be thedominating sectors in the Japanese market and in the index. Interestingly,
financials, which tends to be one of the largest sectors in Japan, has one of
the smallest sector weights in the JPX/S&P CAPEX & Human Capital Index(see Exhibit 1).

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Social Themes in Index-Based Investing: Human Capital

March 2017

Exhibit 1: Sector Breakdown

Financials
5%

Other
5%

Materials
5%

Consumer
Discretionary
21%

Telecomm.
7%

Health Care
10%
I.T.
11%

Industrials
21%
Consumer
Staples
15%

Source: S&P Dow Jones Indices LLC. Data as of Jan. 31, 2017. Chart is provided for illustrative
purposes.

RISK/RETURN ANALYSIS
Exhibit 2 compares the JPX/S&P CAPEX & Human Capital Index with its
benchmark, the TOPIX. The human capital index demonstrated higher
annualized returns and lower annualized risk than the benchmark across all
periods studied.
Exhibit 2: Risk/Return Analysis

The index
demonstrates ahigher annualized
return across alltime periods, inaddition to lower
risk, whencompared with thebenchmark.

TOPIX (TR)JPX/S&P CAPEX AND HUMAN
CAPITAL INDEX (TR)

3-Year

9.84

10.29

5-Year

17.46

17.55

7-Year

10.06

10.27

10-Year

0.75

1.97

3-Year

16.47

14.35

5-Year

18.27

16.07

7-Year

18.03

15.97

10-Year

19.39

17.79

PERIOD
ANNUALIZED RETURN (%)

ANNUALIZED RISK (%)

TRACKING ERROR (%)
3-Year

2.99

5-Year

3.28

7-Year

3.21

10-Year

3.61

Source: S&P Dow Jones Indices LLC. Data as of Jan. 31, 2017. Past performance is no guarantee of
future results. Table is provided for illustrative purposes and reflects hypothetical historicalperformance. 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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Social Themes in Index-Based Investing: Human Capital

March 2017

Tracking error was high, but this is unsurprising, as the index is notdesigned to closely track the benchmark and does not have any caps.
While the JPX/S&P CAPEX & Human Capital Index has historically
mimicked the movements of the Japanese market (as illustrated by
TOPIX), it has consistently outperformed its benchmark (see Exhibit 3).
Exhibit 3: Overall Performance
140
130
120
110
100
90
80
70
60
50
40

One of the main
reasons ESG
investing has
become so popular
is because manymarket participants
view it as a riskhedge.

JPX/S&P CAPEX & Human Capital Index (TR)TOPIX (TR)

Source: S&P Dow Jones Indices LLC. Data as of Jan. 31, 2017. Past performance is no guarantee of
future results. Chart is provided for illustrative purposes and reflects hypothetical historicalperformance. Please see the Performance Disclosure at the end of this document for more information
regarding the inherent limitations associated with back-tested performance.

One of the reasons ESG investing has become so popular is because
many market participants view it as a risk hedge. This is illustrated in
Exhibit 4, which highlights the low volatility of the index relative to theJapanese market.
Exhibit 4: Annualized Volatility

Annualized Volatility (%)

25
20
15
10
5
0
3-Year
5-Year
7-Year
10-Year
JPX/S&P CAPEX & Human Capital Index (TR)TOPIX (TR)
Source: S&P Dow Jones Indices LLC. Data as of Jan. 31, 2017. Past performance is no guarantee of
future results. Chart is provided for illustrative purposes and reflects hypothetical historicalperformance. 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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Social Themes in Index-Based Investing: Human Capital

March 2017

CONCLUSION

The JPX/S&P
CAPEX & Human
Capital Index has
behaved similarly to
the TOPIX, but it
has exhibited
greater returns
coupled with lower
volatility.

RESEARCH | ESG

As ESG investing continues to gain popularity, market participants havestarted to focus on the three underlying themes—environmental, social,governance. The social factor has proven to be the most challenging tomeasure, though parts of it are tracked by the JPX/S&P CAPEX & Human
Capital Index, which is designed to measure the performance of leading
companies in the Japanese market, based on capital expenditure growthand efficiency, along with human capital using data provided by
RobecoSAM.
The index has behaved similarly to the TOPIX, but it has exhibited greater
returns coupled with lower volatility—a winning combination for manymarket participants. Going forward, we expect to see further exploration of
the specifics of ESG-themed indices, in addition to a focus on the holistic
factors.

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Social Themes in Index-Based Investing: Human Capital

March 2017

PERFORMANCE DISCLOSURE
The JPX/S&P CAPEX & Human Capital Index was launched on April 27, 2016. All information presented prior to an index’s Launch Date ishypothetical (back-tested), not actual performance. The back-test calculations are based on the same methodology that was in effect on theindex Launch Date. Complete index methodology details are available at www.spdji.com.
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 at a fixed value forcalculation purposes. The Launch Date designates the date upon which 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
datafeed 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, butthat may have been prior to the Index’s public release date.
Past performance of the Index is not an indication of future results. Prospective application of the methodology used to construct the Index
may not result in performance commensurate with the back-test returns shown. The back-test period does not necessarily correspond to theentire available history of the Index. Please refer to the methodology paper for the Index, available at www.spdji.com 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 allindex calculations.
Another limitation of using back-tested information is that the back-tested calculation is generally prepared with the benefit of hindsight. Backtested information reflects the application of the index methodology and selection of index constituents in hindsight. No hypothetical record cancompletely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the equities, fixedincome, 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 investable assets/securities. S&P Dow Jones Indices LLC maintains
the Index and calculates the Index levels and performance shown or discussed, but does not manage actual assets. Index returns do notreflect 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 ofthe securities/fund to be lower than the Index performance shown. As 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% was imposed at the end of the period on theinvestment plus accrued interest (or US $1,650), the net return would be 8.35% (or US $8,350) for the year. Over a three year period, anannual 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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Social Themes in Index-Based Investing: Human Capital

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