Performance of S&P 500 ESG Indices: The Impact of Weighting Methodologies and ESG Ratings

Posted: 16 Mar 2020

See all articles by Benjamin Hübel

Benjamin Hübel

HUK-COBURG Asset Management

Hendrik Scholz

Friedrich-Alexander-Universität Erlangen-Nürnberg

Nicolas Webersinke

Friedrich-Alexander-Universität Erlangen-Nürnberg

Date Written: September 30, 2019

Abstract

Index providers increasingly offer sustainable stock indices based on ESG (Environmental, Social, and Governance) ratings of firms. The performance of such indices with ESG tilts is driven by the impact of the applied weighting methodology and by the ESG firm ratings. In this paper, we focus on the S&P 500 ESG Factor Weighted Index, which outperforms the conventional S&P 500 index in terms of raw returns. Based on a simulation analysis, we find the ESG ratings to contribute little to the index return. Rather, the used weighting methodology mainly causes this outperformance which is connected to exposures to the well-established size, investment and momentum factors. Interestingly, the S&P 500 Equal Weighted Index shows comparable exposures to these factors. The weighting methodologies of both indices result in a relative high weighting of smaller stocks with similar return characteristics. Thus, our key finding is that the weighting methodologies of sustainable indices can be a main return driver, which has to be taken into account by investors evaluating the risk and return profile of stock indices with ESG tilts.

Keywords: ESG; Indices; S&P 500 ESG Indices; Returns; Equal Weighting

JEL Classification: G11, G12, G14, G23

Suggested Citation

Hübel, Benjamin and Scholz, Hendrik and Webersinke, Nicolas, Performance of S&P 500 ESG Indices: The Impact of Weighting Methodologies and ESG Ratings (September 30, 2019). Available at SSRN: https://ssrn.com/abstract=3528309

Benjamin Hübel

HUK-COBURG Asset Management ( email )

Germany

Hendrik Scholz

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Lange Gasse 20
Lange Gasse 20,
Nürnberg, 90403
Germany

Nicolas Webersinke (Contact Author)

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Lange Gasse 20
Lange Gasse 20,
Nürnberg, 90403
Germany

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