Maintaining Low Tracking Error: The Construction Of The S&P 500 ESG Index

Summary

• When it comes to integrating ESG factors into investment strategies, market participants may be interested in deviations from the benchmark.
• Improving the ESG profile of a composition often means accepting a higher tracking error due to screening or selection processes.
• The S&P 500 ESG Index reduces deviations from the S&P 500 through its methodology.
• The S&P 500 ESG Index’s construction maintains similar sector and industry weights as the benchmark, allowing the integration of ESG scores while maintaining similar sector exposures, which has resulted in a relatively low tracking error, even without using an optimizer.

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By Maria Sanchez

When it comes to integrating environmental, social and governance (ESG) factors into investment strategies, market participants may be interested in deviations from the benchmark. Tracking error is a widely used metric that helps measure the size of these deviations. Improving the ESG