S&P rebuffs Buffet, eschews Alphabet in ESG index

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by David Chaplin

Google, Netflix and Warren Buffet’s Berkshire Hathaway are among a group of 150 plus top US companies to miss the cut in the recently-released S&P 500 ESG (environmental, social and governance) index.

S&P, which built the new ESG benchmark in cahoots with Swiss fund manager RobecoSAM, excluded Netflix and Berkshire Hathaway from the index based on the firms’ ultra-low scores in the United Nations Global Compact (UNGC) rankings.

According to the S&P factsheet, the ESG index process eliminates companies lurking in the “bottom 5% of [UNGC) scores in the eligible universe”.

Berkshire Hathaway and Netflix are the only two companies excluded on the grounds of poor UNGC ratings but S&P scratched a further 54 companies from the index for ranking in the bottom quartile of ESG scores in their respective global sectors (as categorised by Global Industry Classification Standard – or GICS).

Google parent Alphabet (combined A- and C-class shares) is the biggest single company cut from the index based on low ESG scores. Alphabet shares the dubious honour with an eclectic group of businesses including Harley Davidson, two toy firms (Hasbro and Mattel) and a handful of financials such as Moody’s, Bancorp and Willis Towers Watson.

S&P also blocked out a further nine companies involved in controversial weapons and three tobacco-related stocks from the new ESG index.

However, the indexer cut 86 stocks (of the total 154 exclusions) after initially screening out the bottom 25 per cent (by market cap) of companies in each GICS with the lowest ESG scores.

In total, the ESG index excludes over 23 per cent of the S&P 500 as measured by market cap.

“By targeting 75% of the S&P 500’s market capitalization, industry by industry, the S&P 500 ESG Index offers industry diversification and a return profile in line with the U.S. large-cap market,” the S&P factsheet says. “… Eliminating companies from the S&P 500 necessarily changes its performance. But with further methodological adjustments, the industry composition of the S&P 500 ESG Index is brought back into general alignment with the S&P 500.”

The ESG index deviated from the main S&P 500 index by between 0.72 per cent to 0.81 per cent over one-, three- and five-year periods while maintaining similar risk profiles. Over five years the ESG index slightly underperformed (down 0.03 per cent) relative to the S&P 500 but was up 0.43 per cent in the 12-month back-testing period.

S&P released the ESG index in April with UBS debuting a string of exchange-traded funds (ETFs) in Europe tied to the new benchmark in the following week.

Mona Naqvi, senior director, ESG Indices at S&P Dow Jones Indices, told US publication The Asset that the group was “actually in discussions with multiple ETF providers all over the world who plan to launch such products”.

“Over the coming months we will be launching a global family of ESG benchmarks of our most widely tracked regional and country specific indices including the Americas, Europe, the Middle East, and Africa as well as the Asia-Pacific region,” Naqvi said.

– Investment News NZ

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