The underlying index to the futures, the S&P 500 ESG Index, also celebrated its fifth anniversary in May. Since its inception more than five years ago, the S&P 500 ESG Index has had a tracking error of 1.33%, outperformed the S&P 500 by 1.62% on an annualized excess total return basis and a cumulative outperformance of 17.5%¹. This is impressive given the objective of the ESG Index is not to outperform the benchmark.

 The performance of the S&P 500 ESG Index was driven by an array of factors:

1. Sector neutrality and stock selection

One common critique of sustainability indices is their tendency to underweight or overweight certain sectors, which potentially skews performance outcomes. Intentionally broad, the S&P 500 ESG Index includes over 300 companies from the underlying S&P 500 and seeks to reflect many of the attributes of the S&P 500 itself to offer benchmark-like performance, while providing an improved ESG profile, while keeping in sectors like oil and gas.

A closer examination shows 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.

Source: S&P Dow Jones Indices LLC. Data from Jan. 28, 2019, to June 28, 2024. Past performance is no guarantee of future results. Table is provided for illustrative purposes

To emphasize the relative impact of sector weighting and stock selection effects, the performance attribution shows the proportion of the total impact. Since its inception, the S&P 500 ESG Index has posted a cumulative outperformance of 17.5% against the S&P 500. Nearly 61% of this outperformance was driven by the stock selection effect. Of the 11 sectors, the sector weighting effect exceeded the stock selection effect in just three: utilities, materials and information technology. This finding is in line with the S&P 500 ESG Index’s methodology, as it targets 75% of the float market cap of each industry group in the S&P 500.

2. Electing constituents with high human capital development and talent attraction and retention scores, which make up the social pillar within ESG.  

The social pillar within the ESG framework is often perceived as more nebulous than the Environmental and Governance pillars. The social pillar refers to how a company and its products affect and are affected by the world around it, and selecting constituents with high human capital development and talent attraction and retention scores boosts performance.

3. ESG attributes and momentum  

Moving beyond static ESG scores, ESG momentum is the measure at the company level of the year-over-year absolute change in the ESG score. The performance of the S&P 500 ESG Index was also driven by seeking the best ESG-scoring constituents with medium ESG momentum scores, while also avoiding the worst ESG-scoring constituents with high ESG momentum scores.

A clear sign of current increased investor adoption is the growth of our E-mini S&P 500 ESG Index futures (ESG), which have become the most liquid ESG Equity Index futures contracts globally. Average daily volume (ADV) in ESG futures has steadily grown since the contract’s launch, and open interest (OI) reached record levels of approximately $4.6 billion notional value earlier in 2024, as investors used these products to achieve exposure to U.S. large-cap stocks with stronger sustainability credentials.

The interest in these futures is global, with EMEA as a region driving the most interest. Clients include banks, asset managers, pension funds and hedge funds. Given the daily volume traded, the top-of-book bid/offer spreads have become increasingly tighter over the course of 2024.

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

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 (ES) can be easily transferred into the S&P 500 ESG futures variant. This makes hedging easier, as market makers can easily provide liquidity in the ESG version and can take the opposite position on the parent index if needed, which is more liquid than the ESG version.

There is also 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.

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

S&P 500 ESG futures are becoming crucial for investors aiming to leverage the strength of the S&P 500 while incorporating meaningful and measurable sustainability-focused enhancements, to aid this momentum. The S&P 500 ESG Index has experienced significant growth in various exchange traded funds (ETFs) tied to it. Having both ETFs and futures linked to the S&P 500 ESG Index, investors have multiple avenues to access the underlying assets. This can increase liquidity in the market, as investors can trade ETF shares or futures contracts.

Compared with ETFs, futures do not attract an annual management fee and can have significantly lower fees. Initial margin on a long position in E-mini S&P 500 ESG futures is currently approximately 4.5%. CME Clearing provides margin offsets of approximately 70% between the E-mini S&P 500 futures and the E-mini S&P 500 ESG futures.

The equivalent ETF is fully funded, so futures offer 95.5% capital savings compared to the equivalent ETF. Some fully funded investors may choose to hold stocks in a margin account, but that would require a minimum of 50%. In this scenario, futures offer 45.5% capital savings.

Futures offer around-the-clock access nearly 24 hours a day, 6 days a week and includes Basis Trade at Index Close (BTIC) or block trades, which offer multiple ways to find liquidity.

Compared to ETFs, futures offer pure price exposure to the underlying and are designed to tightly track the underlying index. ETFs have funding costs and fees that can affect the price as well as replication differences leading to tracking errors.

Tax efficiencies can be gained on a blended 60% long-term, 40% short-term U.S. capital gains treatment depending on the holding period and time horizon (and subject to the particular tax position of the participant), whereas ETFs could trigger relatively expensive short-term capital gains tax implications.

Find out more about capital efficiencies on ESG futures and use CME CORE tool to examine hypothetical or real portfolios.

The European Securities and Markets Authority (ESMA), published guidelines on the use of ESG and sustainability-related terms in fund names. The guidelines aim to improve the level of transparency around investment products, protect investors, prevent misleading claims about the sustainability credentials of funds and promote market integrity. Fund providers must provide clear and accurate information to investors and ensure consistency and reliability in ESG-related fund names.

As a result of the regulatory guidance and following a market-wide consultation, S&P Dow Jones Indices (S&P DJI) shall rename the S&P 500 ESG Index to S&P 500 Scored & Screened Index, effective on Monday, February 10, 2025. There will be no changes to the index methodology. More details can be found on the S&P FAQ.

In the aftermath of the crucial COP29 climate talks and with key sustainability targets becoming more of a priority, ESG criteria have moved to the forefront of fund managers’ decisions. 

As sustainable investments grow, so too does the need for risk management solutions that are specifically tailored to ESG criteria. Our S&P 500 ESG futures are becoming crucial for investors aiming to leverage the strength of the S&P 500 while incorporating meaningful and measurable sustainability-focused enhancements.

With more investors and traders managing their exposure to ESG trends or the transition to more forms of renewable energy, these assets are positioned to take on a larger role in global economic outcomes.

¹ https://www.spglobal.com/spdji/en/documents/research/research-charting-new-frontiers-sp-500-esg-index-performance-beyond-sp-500.pdf