By Mark Barnes, head of investment research (Americas)
In Part 1 of this two-part blog post, we highlighted the findings from our recently published research paper, focusing on the performance statistics of an index-based solution employing a rigorous, rules-based ESG-centric screening and exclusion process. Here we show the impact of that process in more detail, again using the FTSE US All Cap Choice index to illustrate.
As this case study shows, the results are intuitive in that the screening can have a significant impact on specific industries or sectors directly related to the screened products and activities. However, the overall composition of the index is not greatly affected.
While the screening process varies across the Global Choice series, the FTSE US All Cap Choice Index excludes stocks using the entire suite of product- and conduct-related screens. These range from such vice products as gambling and tobacco, to weapons manufacturing to governance issues such as a company’s diversity and anti-corruption policies and procedures, as detailed in our research paper.
As shown in the charts below, while the number of stocks in the US Choice index fell across industries (light blue bars) compared to that in the benchmark (black bars), industry weights were fairly similar between the two.
Number of stocks – FTSE USA All Cap benchmark vs FTSE US All Cap Choice Index
Source: FTSE Russell. Data based on monthly returns from April 1, 2015, through March 31, 2021. Past performance is no guarantee to future results. Please see the end for important disclosures.
Industry weights – FTSE USA All Cap benchmark vs FTSE US All Cap Choice Index
Source: FTSE Russell. Data as of March 31, 2021. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
As expected, the biggest changes were in industries most closely related to the excluded products. For example, Energy went from 63 stocks to eight stocks and ended up with a weight close to zero. Of course, other industry weights will tend to rise: In this example, the US Choice exposures to Technology, Consumer Discretionary and Health Care stocks increased modestly versus those of the benchmark.
A look at the more granular sector classification level shows that the Oil, Gas and Coal sector was completely eliminated, while the Alternative Energy sector dropped by only one stock. The only other sector that was eliminated was Tobacco, which is part of the Consumer Staples industry.
Weights and number of stocks – Energy sectors, before and after exclusions
Source: FTSE Russell. Data as of March 31, 2021.Past performance is no guarantee of future results. Please see the end for important legal disclosures.
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