TMX POV - TSX Launches Six New ESG Indices to Help Investors See the Market Through an ESG Lens
New ESG indices join the suite of S&P/TSX indices that measure the market through many lenses, based on investor needs
Growing investor focus on sustainability and environmental, social and governance (ESG) topics is driving demand for ESG investment products and has investors looking for more sophisticated methods to measure ESG metrics.
ESG funds have led the way in fund flows into thematic ETFs, with net flows reaching $1.2 billion, or 75% of the category's starting assets as of June 30, 2020.
As investors look increasingly through an ESG lens, TSX and S&P Dow Jones Indices launched six new ESG indices this past summer, which will help investors benchmark through an ESG lens, execute ESG mandates and measure the sustainability of their portfolios. The indices replace previous ESG indices and use the most advanced methods of measuring and scoring ESG across listed issuers and within industry groups.
Issuers in the S&P/TSX ESG indices include S&P/TSX Composite and S&P/TSX60 constituents that also meet the indices' stated criteria using: i.) an ESG filter; ii.)a carbon price risk filter; or iii.) a greenhouse gas (GHG) emissions to revenue filter. For a growing number of ESG-conscious investors, these index levels, constituents and weightings prove valuable tools for asset allocation and portfolio construction. Direct investment in the indices will be available as well, via products that track and derivatives that offer effective exposure to the index.
The full TSX ESG Index* suite now includes:
- S&P/TSX Composite ESG Index (NEW)
- S&P/TSX Composite Carbon Price Risk Index (NEW)
- S&P/TSX Composite Carbon Efficient Index (NEW)
- S&P/TSX 60 ESG Index (NEW)
- S&P/TSX 60 Carbon Price Risk Index (NEW)
- S&P/TSX 60 Carbon Efficient Index (NEW)
- S&P/TSX Renewable Energy and Clean Technology Index
- S&P/TSX 60 Fossil Fuel Free Index
The complete suite of S&P/TSX ESG indices allows investors to focus on varying sustainability and ESG goals for their portfolios, with similar or improved risk/return profile as the underlying index.
Using these indices, investors can:
- Hedge against climate-related risk as governments increasingly implement policies to slow climate change, minimize exposure to fossil fuel transporting, burning or holding of reserves
- Focus specifically on companies that are developing green technologies
- Focus on companies that have lower GHG emissions relative to their peers
- Invest in renewable energy
- Minimize investment in tobacco or weapons
- Invest in companies that exhibit a focus on ESG initiatives, and report on their work in this area
- Invest in top ESG performers in each industry group, thereby comparing companies to others with the same ESG risks and opportunities
New ESG Investment Products Coming
Over the coming months, we expect to see new products launched — including ETFs, structured products and index futures — that directly track the new indices. Already, in October, Invesco Ltd launched a TSX-listed ETF tracking the S&P/TSX Composite ESG Index, while Montréal Exchange announced plans to launch S&P/TSX 60 ESG Index Futures. These new indices and related ESG index investment products further TMX's commitment to providing global investors with the most up-to-date tools to participate in the growth of our listed companies.
ESG Indices Show Strong Returns
Over the past five years, S&P/TSX Composite Carbon Price Risk 2030 Adjusted Index has outperformed S&P/TSX Composite Index by 49 basis points:
| Index Name | 5 Yr Returns |
|---|---|
| S&P/TSX Composite Carbon Price Risk 2030 Adjusted Index (CAD) TR | 8.41% |
| S&P/TSX Composite Index (TR) | 7.92% |
| S&P/TSX Composite Carbon Efficient Index (CAD) TR | 7.70% |
| S&P/TSX Composite ESG Index (CAD) TR | 6.47% |
* As of November 19, 2020. Note: The index Launch Dates were Q3 2020. All information for an index prior to its Launch Date is back-tested, based on the methodology that was in effect on the Launch Date.
Over the past five years, both S&P/TSX 60 ESG Index and S&P/TSX 60 Carbon Price Risk 2030 Adjusted Index had a better performance compared to S&P/TSX 60 beating the benchmark by 21 basis points and 13 basis points, respectively:
| Index Name | 5 Yr Returns |
|---|---|
| S&P/TSX 60 ESG Index (CAD) TR | 8.57% |
| S&P/TSX 60 Carbon Price Risk 2030 Adjusted Index (CAD) TR | 8.49% |
| S&P/TSX 60 (TR) | 8.36% |
| S&P/TSX 60 Carbon Efficient Index (CAD) TR | 7.28% |
* As of November 19, 2020. Note: The index Launch Dates were Q3 2020. All information for an index prior to its Launch Date is back-tested, based on the methodology that was in effect on the Launch Date.
This article is provided for information purposes only, is not intended to provide any type of advice. This article is not an endorsement or recommendation of any securities or industry referenced herein. Views, comments or opinions expressed in this article are those of their respective contributors only, and are not necessarily endorsed by TMX Group Limited, any of its affiliates or their respective management or employees.
* ESG index inclusion and weighting are determined by S&P DJI ESG Scores and Trucost carbon data, forecasts and insights. S&P/TSX ESG indices are rebalanced annually, with eligible companies being those that are included in the underlying index as of the same date. Companies that are removed from the underlying index throughout the twelve-month period following annual rebalance are also removed from the corresponding ESG index. Certain qualifications can preclude a company from being considered for the ESG indices, such as involvement in controversial weapons, sales of tobacco products and services exceeding stated thresholds or a very low United Nations Global Compact (UNGC) score. Complete methodologies for ESG indices are available here.
The S&P/TSX Composite Index, the S&P/TSX Venture Composite Index and all other S&P/TSX Indices referred to herein are products of S&P Dow Jones Indices LLC or its affiliates ("SPDJI") and TSX Inc. ("TSX"). Standard & Poor's® and S&P® are registered trademarks of Standard & Poor's Financial Services LLC ("S&P"); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"); and TSX® is a registered trademark of TSX. SPDJI, Dow Jones, S&P, their respective affiliates and TSX do not sponsor, endorse, sell or promote any products based on the S&P/TSX Indices and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions or interruptions of the S&P/TSX Indices or any data related thereto.
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