ESG Data Signals
S&P Global ESG Scores

HighlightsAuthors• Using the S&P Global ESG score, investors can optimize
the environmental, social and governance tilts of portfolios.

Liam Hynes• Using the S&P Global ESG Score as a constraint in portfolioalignment the weighted S&P Global ESG Score of an ESG Tilted
S&P 500 and ESG Tilted S&P Global 1200 portfolio increases
by an average of 24% and 22% respectively, as compared tothe benchmark, whilst still largely maintaining the underlying
benchmark characteristics.
• From January 2014 to July 2020, the S&P 500 went up 113%.
In that same time period, our ESG titled S&P 500 portfolio
increased 121%, a difference of 8.5% over that time. Since theCovid outbreak in March 2020, the S&P 500 is up 13.2%, while
the ESG tilted S&P 500 portfolio grew 15%, a difference of 1.8%.

EMEA Head,
Capital Markets
Product Specialists
S&P Global
Market Intelligence
Ruben Falk
Global Head,
Investment Management
Product Management
S&P Global
Market IntelligenceEnvironmental, social and governance considerations

Environmental, social andgovernance considerationsThe trend towards increasing integration ofEnvironmental, Social and Governance (ESG)
considerations in investment decision making is a
growing feature of financial markets. Total assets
invested using ESG principles globally has risen by 34%
from 2016 to 2018, amounting to approximately $30.7
trillion at the start of 2018.1

A further benchmark of growing commitment to ESG
factors in investment decision making and ownership,
is found in the number of organizations signing up to
the United Nations backed Principles for Responsible
Investment (PRI). As of September 2020, the PRI counts>3,000 signatories with USD 103 trillion assets undermanagement (AUM), up from just 63 signatories withUSD 6.5 trillion AUM in 2006 (Figure 1).

Figure 1: PRI Growth: 2006-2020
3,250
3,000
2,750

100

2,500
2,250

80

2,000
1,750

60

1,500
1,250

40

1,000
750

20

Number of signatories

Assets under Management (AUM)
USD trillion

120500250002006

2007

2008

2009

Total signatories

2010

2011

2012

2013

2014

Number of asset owner signatories

2015

2016

Total AUM

2017

2018

2019

2020

Asset Owner AUM

Source: PRI, 2020. Data accessed at Sept, 2020.

The implications of the global pandemic
The global pandemic put a spotlight on the value of ESG
considerations in capital markets. Global sustainability
indices outperformed mainstream market benchmarks
and between April and June, ESG investments achieved
record inflows, pushing assets under management toa new high of more than $1tn.2 Through September,the S&P 500 ESG Index outperformed the S&P 500 by
2.5% and the S&P 500 Paris-Aligned Climate Index
outperformed the S&P 500 by 5.57% in that same time.

12
3

2

The global pandemic highlighted the importance ofbusinesses who accounted for ESG factors, as they werelikely better prepared to both weather such crises andoperate in a post-crisis world. These businesses tend tobe better-managed companies, with stronger competitive
advantages, healthier balance sheets, and a better social
license to operate than their non-ESG peers.3

Global Sustainable Investment Alliance. Trends Report 2018. Retrieved from GSIA website: http://www.gsi-alliance.org/trends-report-2018/
Morningstar, August 4 2020: Sustainable Fund Flows Hit Record in Q2
Dornau, Robert. S&P Global: The Evolution of Sustainable Investing Rewards, 2020

S&P Global ESG Scores

S&P Global
ESG Scores
The S&P Global ESG Scores were made accessible to theglobal investment community on 18th May 2020.
Powered by the SAM Corporate Sustainability
Assessment, acquired by S&P Global at the end of 2019,
S&P Global ESG Scores are based on a methodology thatwas built by investment practitioners with investment
processes in mind. In SustainaAbility’s Rate the Raters
2019 report, companies rated the CSA as the most useful
ESG assessment thanks to its high level of transparency,
its sector-specific view of material ESG issues, and its
forward-looking incorporation of emerging sustainability
risks and opportunities.4 In the 2020 report, which lookedat the investor perspective, the CSA came out top among
the highest-quality ratings and was cited as a “strongsignal of sustainability.”5

The approach of S&P Global ESG Scores focuses on
financially relevant material factors in each industry
drawing on more than two decades of engaging withthousands of companies through the CSA. With coverageof 7,300 companies representing approximately
95% of global market capitalization, S&P Global ESG
Scores give financial institutions the flexibility to drill
down into three underlying Environmental, Social andGovernance & Economic Dimension Scores, and an
average of 23 Criteria Scores. A 100-question exploration(average), guided by 61 industry-specific approaches,
informs each criteria score. The ESG Scores are from
1 to 100, with 100 being ranked the best.

Aligning portfolios
with S&P Global ESG Scores
Can we use S&P Global’s ESG Score as the objective bywhich to optimize a portfolio to generate greater ESG
alignment whilst still maintaining the characteristics ofthe underlying benchmark?

We constructed ESG tilted portfolios based on
the S&P 500® and the S&P Global 12006 using thefollowing parameters:

Those characteristics namely being:

Maximize portfolio weighted average ESG Score
subject to the constraints of:

Sector & Country Exposures

Sector & Country Exposure Neutrality

Beta Exposure

Beta Neutrality
50% – 200%

4563

Individual Holding Weights
Relative to the Benchmark

Wong, Christina, et al. Rate the Raters 2019: Expert Survey Results. SustainAbility, an ERM Group company, 2019, pp. 1–39
Wong, Christina, and Erika Petry. Rate the Raters 2020: Investor Survey and Interview Results. SustainAbility, an ERM Group company, 2020, pp. 1–54
The S&P Global 1200 captures approximately 70% of global market capitalization, it is a composite of 7 headline indices - the S&P 500® (US), S&P Europe 350,
S&P TOPIX 150 (Japan), S&P/TSX 60 (Canada), S&P/ASX All Australian 50, S&P Asia 50 and S&P Latin America 40.

ESG Portfolio Results

ESG Portfolio
Results

Similarly, the ESG titledportfolio constructed from theS&P Global 1200 maintains theunderlying S&P Global 1200
characteristics8 without any
significant impact on the return
profile. The realized tracking
error of the portfolio
is just 1.3%.

Figure 3: S&P Global ESG Scores Tilted S&P 500 Portfolio vs S&P 500® Returns

0.2

Indexed Returns

0.15
0.1
0.05
0-0.05
-0.1

04

01
/0

1/
2

01

4/0
1/
20
07
14/0
1/
20
10
14/0
1/
20
01
14/0
1/
20
04
15/0
1/
20
07
15/0
1/
20
10
15/0
1/
20
01
15/0
1/
20
04
16/0
1/
20
07
16/0
1/
20
10
16/0
1/
20
01
16/0
1/
20
04
17/0
1/
20
07
17/0
1/
20
10
17/01/2001
17/0
1/200418/0
1/200718/0
1/20
1018/01/2001
18/0
1/200419/0
1/2007
19/0
1/20
10
19/0
1/200119/0
1/200420/0
1/20
2007/01/20
20-0.15

S&P Global ESG Scores Tilted S&P 500 Portfolio

S&P 500

Source: S&P Global ESG Scores. Current as at October 2020.
Indices are unmanaged, statistical composites and their returns do not include the payment of any sales charges orfees an investor would pay to purchase the securities they represent. It is not possible to invest directly in an index.
Past performance is not a guarantee of future results.

Figure 4: S&P Global ESG Scores Tilted S&P Global 1200 Portfolio vsS&P Global 1200 Returns
180.00170.00160.00Indexed Returns

The ESG titled portfolio weconstructed from the S&P 500
maintains the underlying S&P
500 characteristics7 without
significantly differing from thereturn profile of the benchmark.
The realized tracking error of
the portfolio is 1.6%. FromJanuary 2014 to July 2020,the S&P 500 went up 113%.
In that same time period, ourESG titled S&P 500 portfolio
increased 121%, a difference of8.5% over that time. Since theCovid outbreak in March 2020,
the S&P 500 is up 13.2%, while
the ESG tilted S&P 500 portfolio
grew 15%, a difference of 1.8%.

150.00140.00130.00120.00110.00

51/
20
01
15/0
1/
20
04
16/0
1/
20
07
16/0
1/
20
10
16/0
1/
20
01
16/0
1/
20
04
17/0
1/
20
07
17/0
1/
20
10
17/0
1/
20
01
17/0
1/20
04
18/0
1/20
07
18/0
1/20
10
18/0
1/200118/0
1/2004
19/0
1/20
07
19/0
1/20
10
19/0
1/20
01
19/0
1/2004
20/0
1/20
20
07
/0
1/20
20

501
1/2/010501
1/2/007
/0

401
1/204

401
1/2/001
/0

401
1/207
/0

1001

01

04

/0

1/2

1/2

4

100.0001/0Please note that all historical back-test
performance figures in this brief exclude fees
and transaction costs.

ESG Portfolio

S&P Global 1200

Source: S&P Global ESG Scores. Current as at October 2020.
Indices are unmanaged, statistical composites and their returns do not include the payment of any sales charges orfees an investor would pay to purchase the securities they represent. It is not possible to invest directly in an index.
Past performance is not a guarantee of future results.

784

Beta & Sector Neutral, Tracking Error: 1.57%
Beta, Country & Sector Neutral, Tracking Error: 1.3%

ESG Characteristics

ESG
Characteristics

ESG Active Score

60
10.5
55
1050
9.5
45
940

8.5

35

ESG Titled S&P 500 Portfolio: S&P Global ESG Score

0002021/21/2/007
/0

9

001

02
1/2

04

1/2/001
/0

9901

1/2

10901
1/2/007/0

801
1/204

801
1/2/0
1001
/0

801

01

1/2

1/2/004

07/0

7

801

01

1/
2

1/2/0
1001
/0

7

701

01

1/
2

1/2/004

07/0

6

701

01
1/2

1/2/0

1001
/0

6

601

01

1/2

07/0

1/
2

5601

1/2/0
04

501

1/
2/0

1001
/0

501

01

1/2

1/2/0

07
/0

4

5
01

1/2

04

401

1/2/01001/040101

1/21/2/007/0

1/201

4801
/0

Average S&P Global ESG Score

6511S&P 500: S&P Global ESG Score

ESG Active Tilt (LHS)

Source: S&P Global ESG Scores. Current as at October 2020.
Indices are unmanaged, statistical composites and their returns do not include the payment of any sales charges
or fees an investor would pay to purchase the securities they represent. It is not possible to invest directly in anindex. Past performance is not a guarantee of future results.

Figure 6: ESG Active Tilt – Portfolio vs S&P Global 1200
751312.570

1265

11.5601155

ESG Score

The S&P Global 1200 over thepast 6 years had an average
ESG Score of 50.611 whereas
the average score of the ESG
tilted S&P Global 1200 stood at
61.8,12 an average increase in
the ESG Score of 11.2 or 22%
as compared to the benchmark
whilst still largely maintaining
the underlying S&P Global 1200
characteristics.

11.504The S&P 500 over the past 6years had a weighted average
ESG Score of 43.49 whereas
the average score of the ESG
tilted S&P 500 stood at 53.7,10
an average increase in theESG Score of 10.3 or 24% ascompared to the benchmark
whilst still largely maintaining
the underlying S&P 500
characteristics.

Figure 5: ESG Active Tilt – Portfolio vs S&P 500®

Active ESG Score

Knowing that we can use theESG Score as the objective inthe portfolio alignment and that
we still track the respective
benchmarks quite closely, what
are the resulting ESG profiles ofthe ESG tilted S&P 500 & S&P
Global 1200 portfolios?

10.5501045

9.540

S&P 1200 Portfolio – ESG Score

S&P Global 1200 – ESG Score

2020

1/20/004

07/0

1/
20

20

19

1/20/001
/0

1/
20

901

19

1/2

10/007
/0

1/
20

901

18

1/2

04/0
1001
/0

1/
20

18

801

1/
20

1/207
/004

/001

8

701

1/
2

01
/0/0
10

1/
2

17

17

1/
20

1/
20/00407/001

7

601

1/
2

1/2

01
/0

10/001

6

601

1/
2

1/
2

07
/0

1/
2

04/001

6

501

1/2/0

1001
/001

5501

1/2/007
/0

1/2

504

1/201

401

/01001/01/2

401

401

1/21/2/007/00401/01/201

49

ESG Active Tilt (LHS)

Source: S&P Global ESG Scores. Current as at October 2020.
Indices are unmanaged, statistical composites and their returns do not include the payment of any sales charges
or fees an investor would pay to purchase the securities they represent. It is not possible to invest directly in anindex. Past performance is not a guarantee of future results.

9SPGMI Weighted average S&P 500 ESG Score, The overall drop in scores between 2017 and 2018 is the result of a major review of the CSA Media and Stakeholder
Analysis (MSA) approach that considers the impact of corporate controversies in the ESG score calculation. For more information click here.
10 SPGMI Weighted average ESG Constructed S&P 500 Portfolio ESG Score
11 SPGMI Weighted average S&P Global 1200 ESG Score
12 SPGMI Weighted average ESG Constructed S&P Global 1200 Portfolio ESG Score

5SummarySummary
We illustrate a sample framework for aligning
ESG factors into the portfolio construction process,highlighting that these ESG considerations neednot necessarily be distinct from thinking about
portfolio performance.

The framework outlined here shows that it is possible toincorporate ESG scores into the portfolio construction
process while not sacrificing the desired portfolio
characteristics. This can likely be extended to using
ESG as an overlay to other existing strategies.

When applying an ESG framework to the portfolio
construction process, the initial reaction may be toscreen out the worst scoring companies and constructa portfolio from the remaining universe. However thisexclusionary process can cause the resulting portfolio todrift from the benchmark’s characteristics.

References
1. Global Sustainable Investment Alliance. Trends Report 2018.
Available at: http://www.gsi-alliance.org/trends-report-2018/
2. Morningstar, August 4 2020: Sustainable Fund Flows Hit Record in Q2
3. Dornau, Robert. S&P Global: The Evolution of Sustainable Investing Rewards, 2020
4. Wong, Christina, et al. Rate the Raters 2019: Expert Survey Results. SustainAbility, an ERM Group company, 2019
5. Wong, Christina, and Erika Petry. Rate the Raters 2020: Investor Survey and Interview Results. SustainAbility, an ERM
Group company, 2020
6. MSA Methodology Guidebook 2020: SAM Corporate Sustainability Assessment (CSA).
Available at: https://portal.csa.spglobal.com/survey/documents/MSA_Methodology_Guidebook.pdf

For more information visit
www.spglobal.com/marketintelligence/esg

6

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