The S&P Europe 350® ESG Index: A Broad, Sustainable Index Solution

by Reid Steadman, Global Head of ESG & Innovation, S&P Dow Jones Indices

Spanning the 11 GICS® sectors, the index provides insights into a wide range of sustainability issues, such as governance, gender diversity, the environment, human rights, risk culture, cyber security, tax strategy, and many others.  

THE INDEX FOUNDATION 

The natural starting point to the S&P Europe 350 ESG Index is the S&P Europe 350.  The European counterpart to the S&P 500, this index is a float-adjusted, market-capitalization-weighted index that includes the largest and most liquid stocks from developed Europe.  

Exhibit 1 provides a brief methodology overview with comparisons to MSCI Europe, STOXX Europe 600, and Euro STOXX 50, three widely used European equity indices.

When comparing this index to its peers it’s important to note that the S&P Europe 350 is inclusive of both the eurozone and non-eurozone, which allows the index to provide a more comprehensive view of the region.

THE S&P DJI ESG SCORES

The second key component of this index is the data, particularly the S&P DJI ESG Scores, which determine the index composition.

The S&P DJI ESG Scores are based on data gathered over two decades by S&P Global Sustainable1,[1] which publishes ESG scores based on data collected through the S&P Global Corporate Sustainability Assessment (CSA).  The CSA has become a leading standard in its own right as the definitive guidebook and grading system for corporations, quantifying their progress on sustainability topics and their ESG performance in relation to their peers.

Because S&P Global Sustainable1 directly interacts with companies, it is able to collect 600-1,000 data points per company.   These data points are then transformed into four levels of scores (see Exhibit 2).  The top score, the overall ESG score, is used to construct the S&P Europe 350 ESG Index.

Exhibit 2: S&P DJI ESG Scores

[1]   S&P Global acquired SAM in 2020.  SAM was originally part of RobecoSAM, an active investment manager, and gathered ESG data to inform RobecoSAM’s portfolio managers’ investment decisions.

BUILDING A BROAD EUROPEAN ESG BENCHMARK

The index has two primary objectives; first, to provide a true representation of the large-cap European equity market and second to exclude companies that are not managing their businesses in line with ESG principles, according to their S&P DJI ESG Scores and other relevant ESG data, while including companies that are doing so. These objectives work together to create an index with an ESG tilt that historically reflects the risk/return profile of its underlying index.[1]

[1]             S&P Global acquired SAM in 2020.   SAM was originally part of RobecoSAM, an active investment manager, and gathered ESG data to inform RobecoSAM’s portfolio managers’ investment decisions.

[2]   For more information on the index construction, please see the Index Methodology.

Key Benefits

Realized ESG Potential: A useful metric to consider is the “realized ESG potential” of the index.  This depicts how much of an S&P DJI ESG Score improvement was achieved by the ESG index, relative to the maximum possible improvement that could have been attained by investing solely in the single highest-ranked company in terms of S&P DJI ESG Score.  According to this measure, the S&P Europe 350 ESG Index realized more than 38.8% of the ESG potential of the benchmark, representing a meaningful boost for an ESG index that still provides benchmark-like returns.[1]

Real-World Benefits: Perhaps more interesting still are the real-world benefits represented by the enhanced sustainability profile.  Indeed, the S&P DJI ESG Scores account for myriad underlying sustainability metrics, driven by up to 1,000 real-world data points per company assessed.  The sustainability benefits of the S&P Europe 350 ESG Index are thus simply too numerous to convey in a single white paper.   Nevertheless, a small sampling of these enhancements is highlighted in Exhibit 3.  

Exhibit 3: Benefits of the S&P Europe 350 ESG Index versus the S&P Europe 350

Risk/Return Profiles: The objective of the S&P Europe 350 ESG Index is to enhance allocation to companies with improved sustainability characteristics while maintaining broad and diversified exposure, in an effort to provide benchmark-like returns. As the risk/return metrics over a
1-, 3-, 5-, and 10-year time horizon demonstrate (see Exhibit 4), the index has indeed delivered on its objective—with realized tracking errors between 1.01%-1.09%, and almost identical volatility.

[1]   This realized ESG potential is calculated as the percentage difference between the aggregate S&P DJI ESG Scores of the S&P Europe 350 ESG Index and the S&P Europe 350, relative to the strategy’s maximum potential ESG improvement based on investing only in the single highest-ranked ESG scoring company in the benchmark.  The S&P Europe 350 ESG Index represents 38.8% ((6.87)/(99.41-81.69)) of the possible ESG improvement that the index could achieve (99.41 is the highest score in the S&P Europe 350).

Exhibit 5 further illustrates the return profile of the S&P Europe 350 ESG Index relative to the S&P Europe 350 over a 10-year timeframe.  The latter time period shows some of the live performance record, given that the S&P Europe 350 ESG Index launched in 2019.  Despite excluding more than 26% of the constituents according to rules-based eligibility and selection criteria, the S&P Europe 350 ESG Index achieved a similar return profile to the S&P Europe 350, along with a myriad of sustainability enhancements.

CONCLUSION

The S&P Europe 350 ESG Index fulfills the most important requirements of market participants seeking a broad, European benchmark incorporating sustainability principles.  By employing leading ESG scores and the most common ESG exclusions, while providing benchmark-like risk/return characteristics, the S&P Europe 350 ESG Index can serve as a common starting point for the growing market focused on sustainability.

For a more in-depth look at this index, see The S&P Europe 350 ESG Index: Defining Europe’s Sustainable Core and S&P Europe 350 ESG Index.

Disclaimers: https://www.spglobal.com/spdji/en/disclaimers.