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Social Themes in Index Investing: Human Capital How are market participants looking at and defining the social elements of ESG as it expands into mainstream investing?
BY Emily Ulrich

Environmental, social, and governance (ESG) as an investment theme has held some clout in the market for a while, but it continues to evolve as an asset class. Historically, market participants either took a holistic view of the three combined factors or simply focused on the environmental component (e.g., low carbon). However, as sustainable investing is expanding into the mainstream, market participants have started looking at the governance and social elements.


Governance emerged as a key investment factor when the stock market crashed in 2008—illuminating the risks associated with poor governance policies. This theme has continued to grow as an investment factor and expand across asset classes. This has been illustrated by the launch of the S&P Long-Term Value Creation (LTVC) Global Index in 2016, which incorporates both governance and quantitative considerations into its methodology.


The social aspect, however, has been less thoroughly examined. This theme measures mentalities in the workplace (e.g., diversity management, human rights, etc.), relationships surrounding the community (e.g., corporate citizenship and philanthropy), and stakeholder analysis (customers, employees, all those affected by the presence of the entity). It includes criteria such as human capital development, corporate citizenship, and occupational health and safety.


Given the elements it covers, it’s easy to see how the social area can be challenging to measure. While environmental factors can be captured through quantitative metrics such as carbon emissions, and analyses of governance can incorporate data required by regulations, the social component has neither clear metrics nor mandatory data associated with it.


S&P Dow Jones was able to capture at least one part of the social element—human capital—through collaboration with its research partner, RobecoSAM. In response to increasing demand in the Japanese market, S&P Dow Jones Indices launched the JPX/S&P CAPEX & Human Capital Index in April 2016. The index is designed to measure the performance of companies in the Japanese equity market that meet certain liquidity thresholds and lead in capital expenditure efficiency and growth, as well as human capital investments.

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