Ben Leale-Green, Senior Analyst, Research & Design, ESG Indices
Barbara Velado, Senior Analyst, Research & Design ESG Indices
Equal-weight indices can have many benefits, notably long-term outperformance—largely driven by exposures to small size and value, along with their associated risk premia—as well as reduced concentration in the largest names. However, in accessing compensated factors and reducing concentration, the S&P 500® Equal Weight Index could elicit some undesirable ESG consequences.
With many investors looking to integrate ESG considerations into their portfolios, we ask whether it is possible to gain the benefits of equal weighting while incorporating ESG criteria. This raises three sub-questions.
- What ESG benefits can be gained relative to the S&P 500 Equal Weight Index?
- Can the factor exposures associated with equal weighting be gained within an ESG framework?
- Can we reduce concentration in a few names, while excluding companies that are undesirable from an ESG standpoint?
Over the back-tested history, the S&P 500 Equal Weight ESG Leaders Select Index reduced exposure to many undesirable business activities and displayed a range of ESG improvements (see Exhibit 1), while having similar factor exposures and reduced concentration relative to cap weighting. The result: a comparable pattern of returns between the S&P 500 Equal Weight Index and the S&P 500 Equal Weight ESG Leaders Select Index, while adopting a best-in-class ESG framework.