From Large Cap To All Cap: Introducing The S&P MidCap 400 ESG And S&P SmallCap 600 ESG Indices

Whoever said size doesn’t matter, wasn’t talking about ESG. For years, we’ve known that larger companies tend to fare better when it comes to sustainability.1 But thanks to the launch of the S&P MidCap 400® ESG Index and S&P SmallCap 600® ESG Index, that may be about to change.

As per the S&P ESG Index Series Methodology, the indices aim to offer benchmark-like returns and improved sustainability profiles relative to their benchmarks (see Exhibits 1-3). Above all, however, they represent a new sustainable frontier in a space left largely untouched by ESG indexing to date. Indeed, scant reporting of sustainability metrics among smaller-sized firms has thus far dampened ESG efforts below a certain capsize. But thanks to the rules-based selection process and direct company engagement of our annual Corporate Sustainability Assessment (CSA), the methodology is uniquely positioned to:

  1. Educate smaller firms on sustainability topics of growing importance to investors;2 and
  2. Raise the bar on sustainable business practices as companies compete to join the ranks of the ESG indices.

Perhaps the biggest contribution these indices may make, then, is to influence greater reporting and sustainability standards among medium and small-sized firms—beyond just the typical titans of the S&P 500®.

However, the fact remains that there is relatively less disclosure of ESG topics among smaller firms at present,3 and that larger companies tend to perform better on these issues (i.e., size really does matter).4 This positive correlation between ESG performance and firm size means that the standard ESG score exclusion criteria would likely result in an eligible universe that is simply too narrow to maintain a broad and diversified index.5 To remedy this, we apply minor adjustments to the methodology for the 400 and 600 versions to ensure the indices can satisfy the S&P ESG Index Series objective. For instance, screening out companies at lower ESG score thresholds where necessary and at the local index level, rather than among global industry group peers.6

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