Executive Summary
  • An ESG lens may help tease out risks that might not necessarily be apparent in conventional financial analysis.
  • CME Group E-mini S&P 500 ESG Index futures (Globex code: ESG) have become one of the most liquid ESG Equity Index futures contracts globally, enabling investors exposure to U.S. large-cap stocks with stronger sustainability credentials.
  • Through strong index methodology, the S&P 500 ESG Index, on which the futures contract is based, has achieved an ESG Score improvement of nearly 12% and outperformance compared to its benchmark, the S&P 500 of a cumulative 15.1% over five years.

The term ESG – environmental, social and governance – investing first came to prominence 20 years ago in a report titled “Who Cares Wins” by then UN Secretary-General Kofi Annan. 

Since then, ESG investing has been growing at pace, with recent economic and social trends leading to higher prioritization by investors to include ESG-focused firms in their portfolios. It is estimated that global sustainability-linked assets could reach $50 trillion by 2025. 

What does an ESG lens offer?

Looking through an ESG lens may help tease out risks that might not necessarily be apparent in conventional financial analysis. By deliberating, excluding the low-scoring ESG companies relative to their peers, some risk is managed out of the index.

S&P 500 ESG Index is a broad-based index, measuring the performance of S&P 500 companies that meet sustainability criteria while maintaining similar industry group weights, and similar risk and return profile as the S&P 500.

How does an investor go about participating in sustainable investments?

One way is with CME Group E-mini S&P 500 ESG Index futures, which are designed to integrate ESG factors into investment portfolios while providing a similar risk and return profile to the S&P 500.

A clear sign of increased investor adoption is the growth of the E-mini S&P 500 ESG Index futures, which have become one of the most liquid ESG Equity Index futures contracts globally. Open interest (OI) has reached record levels this year, of approximately $4.6B notional value (~20,000 contracts), as investors are using these products as a way of achieving exposure to U.S. large-cap stocks with stronger sustainability credentials.

Q1 2024 daily volume (ADV) averaged over 1.7K contracts, a 30% increase over the same period in 2023.

The underlying index, which has a meaningful filtering methodology and a significant ESG boost, gives investors the option to integrate ESG into the core of their portfolios while still achieving a tight tracking error to S&P 500. The 10-year tracking error comes in at 111 bps, and the five-year tracking error is 134 bps (horizons ending April 30, 2024), thus allowing clients S&P 500-like performance but in an ESG positive manner.

Most importantly, there is high correlation with other ESG-based indices (typically 99.5%), meaning clients benchmarked to those indices are likely adopting this product for its liquidity characteristics.

Indeed, if one looks at the activity overall in the product, 72% of all trades in 2024 have been on the Globex orderbook, 10 % via Basis Trade at Index Close (BTIC) and only 18% via blocks. This split between screen and block activity is a strong indicator liquidity is available. Explore a list of BTIC and block liquidity providers.

Clients with large S&P 500 exposure who are interested in migrating to a more S&P 500 ESG exposure have often used the quarterly roll to allocate an amount to the ESG contract and scale up over time.

It is worth noting the daily correlation of the S&P 500 Index and the S&P 500 ESG Index is 99.9%, according to Bloomberg, and thus the liquidity found in the E-mini S&P 500 futures can be easily transferred into the S&P 500 ESG futures variant. This makes hedging easier, as investors can take the opposite position on the parent index if needed, which is more liquid than the ESG version.

Read about three ways to transition to the E-mini S&P 500 ESG futures.

Which nations are the most ESG hungry?

The main source of early adopters into the futures contract comes from EMEA, with interest coming from both the U.S. and Asia. For Asia, the interest had originally been confined to a couple of countries such as Australia and Japan, but there is now more engagement throughout the region. Correspondingly, volume traded in non-U.S. hours has grown from 6% in Q3 2023 to 16% in Q2 2024 – representing 10% growth. 

Strong index construction of the S&P 500 ESG Index

Many observers believe that screening for companies with high ESG scores is a way to find companies with a strong climate strategy, thoughtful executive teams, foresightful risk management, strong governance, a focus on supply-chain transparency and robust information and cybersecurity among other things.

The S&P 500 ESG Index applies business-activity screening, achieved primarily by avoiding or underweighting the lowest ESG-scoring constituents through exclusions based on a company’s involvement in areas such as thermal coal, tobacco, small arms, military contracting, controversial weapons, oil sands, as well as companies classified as noncompliant with the United Nations Global Compact. Furthermore, companies that are in the bottom quartile by ESG score within their respective sector are excluded.

The S&P 500 ESG is a potential solution for those seeking to adopt an index product to meet the requirements of regulations such as Article 8 of the EU Sustainable Finance Disclosure Regulation.

Metrics of S&P 500 ESG vs. S&P 500 parent index as of May 1, 2024.

Index

S&P 500 ESG

S&P 500

Number of stocks

324

503

Weight of top 10 constituents

40.11%

33.8%

ESG score improvement vs. parent

11.87%

-

Weighted average carbon intensity

109.72

134.31

Carbon efficiency (tC02e/mnUSD)

131.38

154.85

Carbon footprint (tC02e/mnUSD)

38.17

44.42

Fossil fuel reserves

447

445

Source: S&P Dow Jones Indices LLC

Five-year (out)performance

Now in its fifth anniversary since launch, the S&P 500 ESG Index has outperformed its benchmark, the S&P 500, by a cumulative 15.1% from its launch date five years ago through May 1, 2024.

Despite the recent market volatility, including two bear markets on either side of a growth boom, the rules-based and beta-like S&P 500 ESG Index – driven by ESG principles – has delivered some welcome upside performance. This is a positive outcome given the objective of the S&P 500 ESG Index is not to outperform the benchmark, and that the S&P 500 Index is notoriously difficult to beat.

Until the third quarter of 2021, the S&P 500 and the S&P 500 ESG Index exhibited similar performances. By the fourth quarter of 2021, the S&P 500 ESG Index began to steadily outperform the S&P 500 by four points on average. The major differences between the two indices is that the S&P 500 ESG Index is skewed towards firms with higher ESG scores. In short: The S&P 500 ESG Index consistently benefited from avoiding the worst-scoring constituents.

Index risk profile

One might assume that this outperformance has come at the expense of an increased risk profile for the index. The risk/performance profile of the S&P 500 ESG Index was significantly better than the S&P 500 over the one, three- and five-year timeframes.

Performance and risk profile of S&P 500 ESG vs. S&P 500 parent index as of May 1, 2024.

Index Annualized returns (%) Annualized risk (%) Return/risk

1-Year

3-Year

5-Year

3-Year

5-Year

3-Year

5-Year

S&P 500 ESG

23.29

9.49

14.75

18.00

18.58

0.53

0.79

S&P 500

22.66

8.06

13.19

17.65

18.48

0.46

0.71

Source: S&P Dow Jones Indices LLC.

Avoiding the worst but keeping all sectors

At first glance, it may appear that the outperformance is due to the ESG selection criteria excluding companies in the energy, oil and gas sectors; naturally more polluting sectors. However, the S&P 500 ESG Index has maintained similar sector exposure to the S&P 500 since its launch, in line with its main objective, which is to maintain overall industry group weights similar to the S&P 500, while enhancing the overall sustainability profile of the index.

The S&P 500 ESG Index: sector breakdown

This is further evidenced by examining the performance attribution of the S&P 500 ESG Index. Over the five year history, excess returns have been primarily driven by stock selection rather than differences in sector exposure. This is by design, as the methodology lends itself to a broadly sector-neutral outcome and underweighting the lowest ESG-scoring constituents contributed the most to the S&P 500 ESG Index’s outperformance.

Five-year performance attribution of the S&P 500 ESG Index versus the S&P 500

Evolving sustainability landscape – 2024 rebalance

The S&P 500 ESG Index celebrated its fifth birthday on Jan 28, 2024. Over the past five years, the index has continually been refined to reflect the sentiments of a sustainability-minded investor. The annual rebalance, this year on May 1, 2024, provides direct insight into factors that are in and out of favor. The updates to exclusions and eligibility requirements reflect the growing need for index providers to properly account for companies’ business activities, which ultimately ensures ESG investors can accurately assess the behavior of those companies within the index.

At this year’s rebalance, among the biggest names moving out were Amazon and Netflix, and moving in were Exxon Mobil Corp and Costco Wholesale Corp. Based on the 2023 S&P 500 ESG Index of 314 stocks, 57 stocks were added and 47 removed, bringing the number of components in the rebalanced index to 324.

Biggest additions and exclusions to the S&P 500 ESG Index in the 2024 annual rebalance

Top 10 biggest additions

Top 10 biggest exclusions

Exxon Mobil Corp

Amazon.com Inc

Costco Wholesale Corp

Netflix Inc

Accenture plc A

Thermo Fisher Scientific

Intl Business Machines Corp

Intuit Inc

Danaher Corp

Verizon Communications Inc

Uber Technologies Inc.

ConocoPhillips

Stryker Corp

Texas Instruments Inc

Marsh & McLennan Companies

Progressive Corp

Fiserv Inc

Vertex Pharmaceuticals Inc

T-Mobile U.S. Inc

EOG Resources

Source: S&P Dow Jones Indices LLC. Data as of April 30, 2024

Largest S&P 500 companies not in S&P 500 ESG

Among the S&P 500's top 10 holdings, Amazon, Meta, Berkshire Hathaway and Broadcom are absent in the ESG version.

Top 10 biggest deletions

Reason for exclusion

Amazon.com Inc

Disqualifying S&P Global ESG score

Intuit Inc

Eligible but not selected

Netflix Inc

Disqualifying S&P Global ESG score

Thermo Fisher Scientific

Eligible but not selected

Berkshire Hathaway

Disqualifying S&P Global ESG score

Broadcom Inc

Disqualifying S&P Global ESG score

Johnson & Johnson

Disqualifying S&P Global ESG score and Controversies Monitor Violation

Meta Platforms, Inc.

Eligible but not selected

Oracle Corp

Eligible but not selected

Wells Fargo & Co

Controversies Monitoring Violation

Source: S&P Dow Jones Indices LLC. Data as of April 30, 2024

The events faced by Amazon and Netflix leading to their expulsion from the index serve as a compelling illustration of the ongoing challenge of aligning large tech companies’ operations with robust ESG standards. As these companies illustrate, integrating ESG principles into business practices is not only crucial for maintaining regulatory standards but also for ensuring sustainable and responsible business operations.

Exxon Mobil Corp was re-added to the index. Exxon has a 2.61% revenue exposure to oil sands/tar sands, lower than prior years. Exxon achieved an ESG score of 41 out of 100, compared to the industry average score of 35. For Exxon, the most material drivers for the five point score improvement were in corporate governance, climate strategy and business ethics. Exxon also had high data availability relative to peers for disclosures.

2024 ESG catalysts

Important ESG-related catalysts in 2024 will be the development of EU regulation that imposes parameters surrounding sustainable finance. From a regulation standpoint, advisors will have to ask clients about their sustainability preferences; there are more disclosure requirements on companies, and asset managers must state how they are managing ESG risks. Together, these requirements aim to reduce opaqueness and will help to move the industry.

Finally, with more than half of the world's population voting this year, election results may bring new policies to address climate change and a potential to see more widespread ESG adoption in 2024, and this could be a pivotal year for ESG policy and regulation. In all scenarios, E-mini S&P 500 ESG Index futures are crucial for investors aiming to leverage the strength of the S&P 500 while incorporating meaningful and measurable sustainability-focused enhancements.


More on ESG futures

Discover an efficient way to integrate environmental, social, and governance (ESG) exposure into your investments.



All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

CME Group is the world’s leading derivatives marketplace. The company is comprised of four Designated Contract Markets (DCMs). 
Further information on each exchange's rules and product listings can be found by clicking on the links to CME, CBOT, NYMEX and COMEX.

© 2024 CME Group Inc. All rights reserved.