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

The 2022 annual rebalancing of the S&P 500 ESG Index resulted in the exclusion of Tesla, world’s largest electric car maker. The process aims to balance broad-based market exposure with meaningful and measurable sustainability-focused enhancements.

Summary

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. 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 as well as an improvement in S&P DJI ESG Score—even achieving a bit of welcomed outperformance over the past one year.