CME Group Inc. (CME) Earnings Call Transcript & Summary

Hello, everyone, and welcome for today's webinar. My name is Esther Whieldon, I'm a Senior Writer on the ESG thought leadership team at S&P Global Sustainable 1. It is my pleasure to moderate today's webinar titled Beyond ESG with Understanding the S&P 500 ESG Index Ecosystem. Today's webinar is part of a series titled Beyond ESG, taking the conversation beyond the traditional ESG topics. Before I introduce today's guests, I have a few housekeeping items. We recognize that the topic of today's webinar is of great interest to you. We want this to be an interactive session and encourage you to submit your questions for discussion. At the bottom of your screen, you will see a row of widget icons. These icons will allow you to interact with us throughout the session. I would like to point out the Q&A widget, which can be used to submit questions to the panelists as well as the survey widget. Please take the time to fill out our short survey after the webinar. We really value your insight. Now this webinar is being recorded, and an on-demand version will be available shortly after we conclude. If you encounter technical issues during the program, please try refreshing your browser. And if issues persist, please use the Q&A widget to contact us and a member of our technical team will assist you. Now to the topic of today's webinar. As investor priorities for sustainability evolve globally, S&P Dow Jones Indices has a broad lineup of indices measuring the world's largest equity market, including the S&P 500 through a sustainability lens. Today, we'll be exploring these indices, digging into the liquidity ecosystem, which includes funds and futures and taking a look at recent trends in investor sentiment. Helping us explore these topics today are Paul Woolman, Managing Director, Global Head of Equity Index Products at CME Group; Olivier Souliac, Managing Director, Head of Indexing at Xtrackers by DWS; and Stephanie Rowton, U.S. Equity Product Management at S&P Dow Jones Indices. So let's just start off with a question for all 3 of you. Can you briefly tell us what should our audience know about your organization and your role there as it relates to the topic of today's webinar? Stephanie, do you want to start us off?

Of course. So my name is Stephanie Rowton. And as Esther said, I'm a Product Manager for S&P Dow Jones Indices. S&P or SPDGI is a global leader in providing financial market data, analytics and indices. We provide a wide range of indices that serve as benchmarks for investment performance across various asset classes. As a product manager, my role is to position, shape and communicate our U.S. equity index offerings. And this includes things like monitoring performance, assessing positioning and driving enhancements to ensure that our offerings align with market demands and regulatory requirements.

Olivier. Do you want to go next?

Hi, everyone. Thank you, Stephanie. And my role here at Xtrackers is to work together with index providers to develop passive investment products and solutions in ETF and the institutional clients sphere globally. Xtrackers is a passive asset management arm of DWS. We have a bit more than EUR 300 billion of assets managed globally.

Paul?

Yes, thanks for inviting me today. My name is Paul Woolman. I head up the equity products team at CME Group. That involves listing futures and options across various equity index benchmarks, including the S&P 500, Dow Jones, Russell 2000, NASDAQ 100 to name a few. And CME Group more broadly is an organization which actually is the world's leading derivatives marketplace, and we offer products across all the major asset classes.

Great. Thank you. So Stephanie, I think the first question I have is for you, earlier this month on February 10, the S&P 500 ESG Index changed its name to the S&P 500 Scored & Screened Index. So curious what prompted this? And will it result in any changes to the methodology?

Yes. So the European Securities and Markets Authority, also called ESMA is the EU's financial markets regulator. And in 2024, they issued guidelines on the use of ESG or sustainability-related terms in fund names. These guidelines require European UCITS and alternative funds providers to offer clear and accurate information, ensuring consistency in ESG-related fund names. With these -- while these guidelines don't necessarily apply to our indices or to index providers, they do have a bit of an indirect impact on SPDGI, given the close relationship between index names and those funds which track them. So to assist our clients in adhering to these guidelines, we updated the names of certain ESG indices used with funds in the EU. So for example, the S&P 500 ESG Index is now called the S&P 500 Scored & Screened Index. I think you're right in that it's crucial to note that this is a change in name only. The index methodology, the surrounding ecosystem, historical performance and the data used for the indices all remain unchanged.

Thank you. So can you tell us a little bit about the methodology for the index and how it's performed recently?

Yes. So we look at the first slide, it's just an overview, which shows the S&P Scored & Screened Index and how the objective is, is to integrate sustainability criteria into the S&P 500 whilst capturing the performance characteristics of the broader U.S. equity market. If we skip another slide and another one, this takes us to the methodology. And the methodology is really simple. We take the S&P 500 as the underlying index. We then apply various exclusions to create the eligible universe. The remaining constituents are then ranked by S&P Global ESG scores, and we select the top ranked constituents targeting 75% of market cap in each S&P 500 GICS industry group. Finally, we weight the companies by float adjusted market cap. This methodology enables us to meet 2 core objectives. First, it aims to maintain similar overall industry group weights as the S&P 500. And if we look at the next slide, we can see the sector breakdown. It's this alignment, which has historically resulted in comparable risk-adjusted performance. Secondly, the objective -- or the second objective the index seeks is to reduce exposure to companies that do not manage their businesses in line with ESG principles. This is determined through the integration of S&P Global Business Involvement Screens, S&P Global ESG scores and other relevant data such as the UNGC or controversy monitoring. Looking at the index metrics, what you can see is that the S&P Scored & Screened Index maintains a broad number of constituents at just over 300 companies. This broad representation provides investors with both diversification while still focusing on companies that adhere to ESG principles. And I think it's really interesting to note that the energy sector is not excluded. This is because of the first objective I mentioned, to maintain that similar overall industry group weight to the S&P 500. This allows the index to include companies that demonstrate strong ESG practices whilst allowing for a bit more of a nuanced approach to sustainability. If we look at the next slide, we can see our performance. And we can see that the S&P 500 Scored & Screened Index has historically provided very similar performance to the S&P 500 and actually historically outperformed on 1, 3, 5 and 10 years, whilst exhibiting similar levels of risk and a tracking error of around 1.3%. This highlights that whilst the index is focused on sustainability, it closely mirrors the broader market without sacrificing performance or diversification. This desire to integrate certain sustainable values into broad core beta market benchmark exposure has been a real area of growth and resulted in the evolution of our scored and screened index family. So we now include other core U.S. equity indices such as the S&P 500 Equal Weight Scored & Screened Index and for example, indices that include things like factors such as value and growth.

Thank you. So my next question is to Paul and Olivier. Turning to both. Can you talk about the advantages of the kind of ecosystem Stephanie just described of ESG or sustainable products as it relates to the S&P 500 Scored & Screened Index?

Yes, sure. So obviously, it's important to have the index methodology out there and the index in existence. But for investment purposes, people need to access that index via products or by replicating the index by buying all the stocks that are underlying it. And for many clients, buying an index-based product is an easy and accessible way to get exposure to this particular index. In terms of ourselves, we launched futures on the E-mini S&P 500 ESG Index as it was back in 2019. And so that future has now been existent a little over 5 years. After initially launching that product, it quickly established itself as the most liquid ESG or sustainable-based equity future on the globe in -- if we look at last year in 2024, it traded about 1,100 contracts per day. What does that mean in notional terms? It was trading about $260 million or more per day during 2024. That's important to try and put that liquidity in some kind of context. And what's important here on the screen, as you can see this slide is actually that tracking error that Stephanie spoke to is important because we do have the E-mini S&P 500 Futures listed at CME. They are the most liquid equity benchmark on the globe. And what's important here is this tracking error because it's so close, allows liquidity in that parent ecosystem of parent S&P 500 Index to be easily transferred into the ESG version or the scored and screened version as it is now. That's important because clients can feel that they can source liquidity easily, whether that be on the order book of the futures or via block and both methods are very popular in terms of how clients are accessing the product. If we look at open interest, which is a measure of trying to just gauge how many clients have active open positions in the futures, it averaged around 15,000 contracts during 2024. And in notional terms, that's approaching about $4 billion. Now in terms of clients who we've seen accessing this product, it's been a broad variety of clients. So we see asset managers, insurers very active and holding a lot of the open interest, but we also see other participants be active in the product. So banks are often providing liquidity via blocks, and we see on-screen market makers providing liquidity on the order book. The other thing is as it got to a critical mass in terms of the future itself, we've seen more systematic accounts, so hedge funds and CTAs be active in this product, too, as it met the thresholds where they could start to get involved in the product. We've seen them be active over the last couple of years. The other thing I'd mention is the geography of clients. We see clients active all over the globe in terms of -- in this product. Predominant interest in ESG or sustainability does come out of EMEA. And so that does -- that is probably the highest weight of geography that we see in terms of client base, but we do see clients active out of the U.S. and also out of APAC. Lastly, before I pass it over to Olivier to also discuss other things in the ecosystem such as ETFs, I think what's important here is the way that clients can access the product. So I mentioned you can trade via on the order book or via blocks, but we also have a couple of other functionalities which allow clients to trade the futures and not everyone might be aware of these. So one methodology is called BTIC, which stands for Basis Trade at Index Close. And what that allows clients to do is trade a -- agree to a basis intraday. And then wherever the cash index closes tonight or later that day, basically that basis gets added to that official cash index close, and that's where a client can buy or sell a future at. Why is that important? It's because the cash index close is the most liquid part of the day. And a lot of clients want to target the close. And if we think about the ecosystem, that's where a lot of liquidity interacts. If you think about ETF NAVs, they're often benchmarked to the close. And so if you're moving between ETFs and futures or other products into cash baskets, a lot of trading is done against that closing point. And so be able to trade futures against the official cash index flows is very useful. So that functionality is called BTIC. Lastly, the last thing I want to mention is we also introduced another functionality called Derived Blocks. And what a derived block allows clients to do is very similar to BTIC, you agree a basis with a liquidity provider upfront. But then the liquidity provider can work a related -- hedging related market, such as the underlying cash stocks or even an ETF to source liquidity from elsewhere in the ecosystem. And once that hedge has been completed, the basis gets added to that hedge and essentially, it gets blocked. And we call this functionality a derived block. Now this was only introduced at the end of last year, but we're already seeing clients start to use this functionality very actively. And this is another way that the sort of ecosystem around the scored and screened index can be accessed and be more interactive between the underlying stock market, ETFs and futures. I'll pass it over to Olivier.

Thank you very much, Paul. And to me, I can only complement what you said because clearly, for an index that is live to be actually investable and invested and actually part of an ecosystem like that is something relatively rare. So I think we have to go as well back to the success of ESG-related indices as a whole as a way to provide ESG-related exposures to clients as really the foundation of the success of an ecosystem based on an ESG index. And of course, like the predictability of index rules, the transparency of the application of index rules and the data used in there, maybe the fact that it is sometimes cold hearted in its discipline have been historically great success factors for ESG-related indices to actually gain investors' traction and eventually have a whole ecosystem around them. And it's actually a great thing for ETF investors to know that there is an ecosystem around the index because they just have a wider choice that's available to them for the same exposure, and we see it with derivatives, you can actually complement a certain beta exposure with those instruments, which really makes the use case as well for the ETF pretty compelling. And beyond the success in the ecosystem, the success of the index also lies in the fact that it remains a strong benchmark for many ESG investors, especially in the U.S., but also for a lot of European investors who want to invest into ESG equities.

Thank you. So I think you both touched on this. But as a follow-up, I'm just -- how would you say the S&P 500 Scored & Screened Index aligns with the objectives of investors who may be looking for sustainable investment options?

I think it aligns very well. I mean, in terms of the slides and the way that Stephanie introduced the product, the idea behind this index is that ultimately, it replicates S&P 500 in terms of trying to deliver S&P 500 like returns, but achieve it in a more sustainable or ESG-compliant manner. And if we look at the actual composition of the index, it has about 300 or so names in it as opposed to 500 like the parent S&P 500. And from that perspective, it is really doing a lot of filtering under the bonnet of the methodology behind the index. And I think that's important because we've seen other indices out there, which have ESG-type labels, but really don't do much compared to the parent index. Here, there's a really discernible methodology, which is very robust in nature and is giving clients exposure in an ESG or sustainable manner. The other thing I think that is important is that, that tracking error is low. And finally, if we look at how it's performed, while it's not designed to outperform the parent S&P 500 Index, over the last few years, we can see actually that the ESG version has actually outperformed the S&P 500 parent index. And so some of those objectives of trying to filter out the least ESG-compliant names does seem to be working and having a positive impact from a performance aspect. The final thing I'd say on this is we're seeing clients use this in order to obtain their objectives in 2 ways. So one, clients who have an ESG mandate are using this future in lieu of the parent E-mini S&P 500 Futures or other index products on the parent in order to be compliant to their ESG needs. The second way that we see clients using the product is really from a top-down portfolio construction manner, whereby they're using futures to -- the ESG future to overlay their current portfolio and thus, they give their portfolio an ESG lens and a look through from a top-down perspective. So there's really 2 ways that we see clients using this to meet their objectives, one more bottom-up fundamental and one top-down overlay approach.

Thank you, Paul. And I can only complement from here. I mean, I do agree with you, Paul, that the index is actually pretty conveniently positioned between those lower tracking error products with very little tracking error, but also very few ESG characteristics built into the products that these are called screened. They can be appealing to certain investors who are willing just to remove certain companies that are involved in activities that they consider are controversial, such as tobacco or, of course, controversial weapons. But if you look at the other side of the spectrum, right, when you look at ESG investment, especially in Europe, you have way more orthodox products that are even quite successful as well, which would, of course, have a broader range of activities that are excluded as being potentially controversial, combined with additional selection criteria on ESG-related risk management. And here, S&P to us has been really playing in that golden middle, trying to integrate from both the screened side of things with a number of activities that have been screened that have been also elected in consultation with European and American investor communities to ensure that this is representative of investors' preferences in terms of sustainability. And it is combined with a more ESG risk related scoring approach, which for us is interesting because it enables for the index to avoid certain companies that are not necessarily able to manage their ESG-related risks properly. And we think it could be a potential explanation for the performance in the past. And let's see what it brings to us. But we think that there's also one thing that is pretty unique about the S&P 500 Scored & Screened, which is that it has really a dual use case where you'll have investors, especially in the U.S., where the mix is between investors looking at slightly enhanced risk return metrics versus their traditional index at the price of relatively moderate tracking error, as you were mentioning, Paul. And then the second use case is maybe something that we see more in Europe and certainly also with certain American investors who may want to remain anonymous in the current environment, but whose agenda is more a sustainability-driven agenda, where certain sustainability preferences are fundamentally anchored in the investment process and where the S&P 500 Scored & Screened does provide the exposure that corresponds to a majority of those investors with a sustainability agenda. So to us, it's a very unique situation where both S&P as an index provider, and we're happy about it, have been able to consult with the marketplace, including, of course, asset managers, but also asset owners to really look regularly at investors' preferences on sustainability agenda. But at the same time, they have been able to create an index that is actually becoming a benchmark for those investors where we've seen certain investors willing to adapt to the sustainability metrics that are in the index in order to be able to invest into that index specifically because they consider it as one beacon of -- one reference in terms of ESG metrics and agenda in the market and in the ESG space, every beacon of light is more than welcome because the devil is in the detail.

Indeed, it seems like that is always the case with the devil being in the detail. Now earlier, Stephanie mentioned the term equal weight, and I'm not as familiar as our 3 panelists with that term. Olivier, can you briefly define what equal weight involves? And tell us a little bit about that ecosystem, please? And then Paul, maybe you can answer as well.

Yes. Equal weight is really a very large, very big topic. It's very important for investors. It's a large trend that has started 10 years ago for U.S. -- for European investors looking to invest in the U.S., probably even 20 years ago for American investors, and it's equally a solution for many investors in Europe, especially to address concentration concerns, especially as European investors have been gradually increasing their exposure to U.S. equities. And so what is equal weight? Equally consistent just weighting stocks in the S&P 500 Index in this example in an equal fashion. So typically for 500 stocks, you would have a weight of 20 basis points, 0.2% upon a rebalancing date. This index rebalances on a quarterly basis. And as the stocks in the index outperform the index, for example, their weight would actually go up in that index. So they are naturally brought down to 0.2% upon the next rebalancing. And for that, of course, that excess weight is sold. So we like to say it's a kind of buy low where you purchase those stocks that underperform the index, sell high where you sell those stocks that have actually outperformed the index. So here, it's really interesting. We've been the first provider in Europe to capitalize on this Americanization trend of European portfolios and launched this exposure 10 years ago. We were actually the largest provider of this exposure in Europe. But here, it's actually a -- the charm of this for a lot of our investors is that for many, it's really a simple solution to a pretty complex problem. You have a -- thanks to the -- or due to the Americanization of investors portfolio, it's already there in Asia. It's coming in Europe as well. Due to that Americanization, investors have onboarded increasing Magnificent Seven and increasing concentration exposure onto their global equity portfolio. And one way of solving this pretty complex problem was just to apply this exposure increment into U.S. equities into an equal weight index such that they do not have this not necessarily well asked for and well-desired concentration on the mega cap side.

Paul?

I'll add to that. I think we've seen a real interest in equal weight as a theme. As Olivier said, equal weight is not particularly new in terms of a notion in terms of index is being re-strucken to be equal weight. However, in the last 12 to 18 months, I think equal weight has become much more into focus. And the reason for that really has been the -- in the U.S., the mag seven's outperformance of the rest of the index the top names within the S&P 500 have considerably outperformed. And what that meant is in a market cap-weighted index such as the parent S&P 500 index here, the concentration has become more extreme. So if we take the top 7 holdings now, they equate to over 30% of the S&P 500. And now not everybody wants to have as quite as concentrated exposure as that through the S&P 500 index. And so an equal weighted version where you're still getting exposure to the top 500 names, but in a more equal weighted fashion is, as Olivier said, quite an elegant way to get that exposure in a more equal diversified way. Now that's for each investor to decide which way is best for them, and that obviously also depends on their objectives within their portfolio. But certainly, S&P 500 equal weight has become much more popular with investors. We launched a future about a year ago on this particular index and seeing great success straight out the gate. So we've seen open interest climb to about 17,000 contracts now. That's roughly about $2.5 billion. We're seeing trades actively through the order book and via block every day pretty much. So popular theme, popular index. And the next obvious question is probably going to be what's the -- scored and screened a sustainable way to get access to this. And I'll leave that to you.

Well, yes, do you have an answer to that?

There is the scored and screened index, I think Stephanie mentioned that at the top of the presentation. And we don't offer a product at this point in time, but I know that Olivier does. So he's probably best to expand what's out there right now.

I see.

I will try to convince you, Paul. No, absolutely. Indeed, there's a unique scenario that you guys at S&P created, Stephanie, where there's the rule set of the ESG-related rules on the S&P 500 Scored & Screened has been really elaborated in constant dialogue with clients and index users. And of course, the index could adapt to market expectations. And we found that so interesting and powerful that we said, well, if really, especially our European investors are interested in ramping up their U.S. exposure, they are, of course, bound to having a certain sustainability agenda. They already know the rule set of the S&P 500 Scored & Screened. Why not do an equal version of that? So this is what we did with S&P a few years ago. And now, of course, we are the proud owner of the largest equal weight ESG/Scored & Screened ETF in Europe. But it was really a logical step for us, right, to develop that version. And I think it's really interesting that we have now more than EUR 5 billion invested, almost EUR 10 billion invested across The Street in Europe throughout all of the different ESG shades of the S&P 500 equal weight and where we think that it's really a very useful tool for investors who have an ESG agenda in order to exert this call to increase diversification in their U.S. exposure. So where we see the trend is that the ESG adoption is -- in Europe is usually contractual. So it cannot be unwound so easily. And we see this where investors who are onboarding on an investment journey towards certain sustainability criteria are not willing to take a step back. So we do not see investors really going in arrears. And therefore, for that investor community, which we estimate is going to grow to around 1/4 of all the ETF assets in Europe, it is very good to have an ecosystem around a kind of ESG integrated version of their equal weight exposure as the equal weight indices and this S&P 500 equal weight gains in success overall. So to us, it was a logical step. I think going forward, the assets in S&P 500 Scored & Screened equal weight will grow as the acceptance of the -- of ESG characteristics continue to take on, especially in Europe, also in Asia, but also as investors also continue to increase their U.S. exposures and have certain concerns for some of them around the Magnificent Seven and around diversification in both their U.S. dollar non-ESG sleeve and their U.S. equities ESG sleeve. So I think that that's important to have that tool in our toolbox.

So you mentioned that investors are not going back that they're wanting more, more and more, right, in these areas. What is driving that, both for you and Paul.

So the more and more -- and I'd say that investors can do less and less. It's very difficult for investors to take a step back and really go reverse on their sustainability agenda. The speed of the ESG integration journey has definitely slowed down in the last 3 years now, 2.5 years. I believe that for us as a product provider, I said this in 2021, peak ESG in terms of us providing ESG-related exposures has been reached in 2023, which means that we are still launching ESG-related products, but not necessarily at the as high pace as we have been in the past. But what I can tell you is that for existing products in ESG, we have not been in a position to scale back certain of the sustainability-related commitments made in a product because it is for investors, very difficult to convince themselves, their stakeholders that certain decisions on the sustainability agenda may not be adapted to the current environment. ESG is a little bit of a cold-hearted exercise. I was discussing that earlier on. And this is potentially a reason why the only way is forward.

I agree in that, I don't think the theme of sustainability or ESG is going away. I think that the objectives it's trying to achieve in terms of what investors want and what clients ultimately want to be provided by their investment vehicles is going to have a sustainable tilt to it. And thus, we need a variety of things in the toolkit that Olivier spoke to. So for us, at CME, we have quite a high threshold to launch a futures product. There needs to be a suitable ecosystem and AUM tracking in a given index or demand for a given index in order for us to do that. But I think in terms of the journey here, we're seeing that demand in the regular equal weight, S&P 500 equal weight index and ecosystem. And as that evolves, I think it's a natural step that later down the line with enough validation, there can be demand for a scored and screened version. And the other thing that I'd add is across these indices, in general, it has not been a static picture. What we've seen is that even in terms of the main S&P 500 Scored & Screened Index that we started with at the top of this webinar, we've seen it evolve. So S&P have listened to feedback from clients around what their ESG or sustainable needs are, and they've made the index methodology evolve over time. So for example, initially, it didn't exclude thermal coal names. Now it does. And oil sands and other topics have also been entered into the filtering system behind the index methodology. And so I think that as things evolve in terms of what clients actually want in terms of ESG and sustainability, we'll see more products and indices on the table for them to choose from. But there is a trade-off in that you still want some standardization around these things because ultimately, what investors want is liquidity. And if you have too many choices and you don't have enough standardization, then that liquidity pool can be hard to achieve and thus trying to have assets coalesce around a few key ESG or sustainable benchmarks is actually very helpful for investors because it allows them to benefit from the liquidity pools that will be available rather than a lot of fragmented offerings in terms of liquidity and choice. So that's important to note as well.

Thank you. And now a note to our -- those attending this webinar, please do submit questions you may have. We've got some wonderful ones coming in. I'm going to transition to a few of them. Stephanie, we've had a number of questions coming in around what are the nonfinancial impacts of the S&P 500 Scored & Screened Index. Can you answer that?

Sure. So the S&P 500 Scored & Screened Index utilizes various ESG data sets. And one of them is the S&P Global ESG scores. Now these scores consider a wide range of sustainability metrics, and they incorporate up to about 1,000 real-world data points for each assessed company. So what the index does is what we've seen is it increases index exposure to various ESG themes, and that's calculated using the question level data in our S&P Global ESG scores. So for example, the index provides 11% increased exposure to companies who have a strong climate strategy versus the S&P 500. So for example, those companies who have reported on emission reduction activities or have targets in place to reduce emissions. The index also provides 9% higher exposure to companies that ensure effective governance of health and safety performance indicators than those in the S&P 500. So it's these types of benefits that then can enable our market participants to comfortably align their investments with their values without necessarily compromising their overall index objective.

Thank you. That's helpful to understand. We also had a question come in Stephanie on asking you to comment on the performance for the period ending at the end of the year, 12/31/24 said that performance ends on slide on April 30, '24.

Yes, I apologize. The index rebalances annually. So I used our annual performance metrics, rebalances annually at the end of April. So I apologize for the slightly dated performance. I was looking at the performance earlier today, and there has been ever so slight underperformance lately. So for example, the 500 scored and screened, 1-year performance is 24.2% versus the 500 at 26.4%, 3-year, 11.8% versus the 500, 11.9%. But I think the key point here is it remains in that the index enables you to integrate certain sustainable values into core beta-like exposure or core beta benchmarks without really sacrificing on performance or diversification. Yes.

And maybe if I can jump on there, right, as an index user and to jump on what you said, Stephanie, on like the use cases, right? We spoke about those kind of ESG-constrained investors, those who cannot invest into the benchmark and will maybe choose the S&P 500 Scored & Screened as their new benchmark. So they will completely shut their eyes on the S&P 500 itself and consider the new benchmark being the scored and screened. So I think it's always the largest number of questions that we have from ESG-related investors is indeed like how much are they losing out or gaining from being invested according to the agenda that they have for them to forward on the information to their Board who make the decisions on sustainability agenda and report back to them how it looks like. But we have now a couple of cycles of under and outperformance of ESG behind us, right? If you think of Nordic investors here in Europe, they have been invested in ESG-related investments for more than 10 years. So it comes and goes, and we have a lot of our investors who are asking definitely for performance attribution, but are also a little bit more relaxed with regards to the long-term returns, especially if you have like 1% or 2% under overperformance against your benchmark index at a 1% tracking error, then you're perfectly in line with the statistical noise that you could expect from such a tracking error. So as long as things do not run out of control, which has not been the case for these indices, we think that investors are relatively relaxed on the short-term excess returns positive or negative. I wanted to also mention this not so fund naming guidelines from the ESMA because it is really interesting that the plus for investors that has to be set against the excess returns positive or negative, the tracking error that they take into consideration. The plus is really that they have an investment that is labeled. Here, it is labeled scored and screened. The ESMA guidelines come with a lot of different reporting guidelines in Europe, which I would take more than an hour to discuss. But I think on the plus side, investors can -- especially in Europe, can really see which are the sustainability agenda criteria in the index, how does the index compare against the traditional index and really try and select their investments in ESG-related indices and ETFs according to those guideline requirements, and I was mentioning, it's not so fun because there's a lot of work for us to report on those. But I think this is great transparency offered to ultimate investors for us tracking this index with regards to the benefit that those indices have against a sustainability agenda.

Yes. I'll add a couple of things on to what Olivier is saying there. Really, when we've been speaking to investors, they need the toolkit that we are speaking about available to them. So some -- in terms of their individual portfolio, if they're putting stocks in their portfolio, they can do that and tailor that to their ESG needs as they see fit. But when it comes to index-based products, sometimes there needs to be some pragmatism to what's available and how they're going to invest because there's a trade-off there between that liquidity pool that may be available versus having a very customized solution. And really, with this, there's a degree of other tools available, certainly when it comes to futures based on some of these indices, are they good enough for the way that clients use derivatives inside their portfolio. So is that overlay? Is that cash equitization, what is the reason for using a product such as a future inside the portfolio. And there, what we've seen is that clients have become increasingly pragmatic about using those tools that are available, whether it be futures, ETFs, other things. So I think there is a wide disparity in terms of the way that clients can choose to try and invest in a sustainable way. But all these things in the toolkit in terms of instruments being available, futures, ETF swaps, other things, they all need to complement and be accessible to investors so that they can actually achieve their objectives of the way that they want to invest.

Stephanie, we had a question come in about SDGs and how -- the extent to which, if at all, S&P Dow Jones Indices thinks about SDGs or looks to integrate them into its methodologies. Can you talk about that?

Yes, sure. I think I did see the question. First of all, the Scored & Screened Index is to allow investors to align their values with their investments. It's not necessarily to stop people from doing certain activities. And that's what we were looking to achieve. That's the objective of the index to allow that alignment. With regards to the SDGs, we actually launched the S&P 500 SDG Index about -- I'm going to say about a year ago now. It uses different data sets. We use an SDG-specific data set. And yes, I can talk more about that separately. But SDGs and ESG are slightly different frameworks. So for example, with an SDG framework, you're looking at how -- I'm trying to think how to do. You'd be -- yes, you're looking more at what the company is actually doing itself through its revenues and how it's operating, whereas with, for example, an ESG data set, you're looking more at policies and what's going on within the company. But yes, I can speak more broadly to the SDGs going forward in a separate call.

Great. Thank you. So I think we've heard a little bit from Olivier and Paul about sort of the evolution thus far of the whole market and the ecosystem. What do you -- how do you see it evolving going forward?

I can go first. So I think we will see people revisit this area. There is a lot of interest. We can see that by all the questions that are incoming today. So I think there will be further evolution in terms of the products that are made available, which are trying to enable clients to achieve ESG or sustainable outcomes. The -- I think there will be more and more assets which coalesce around key benchmarks though, and that will be really noticeable on the go forward. I think that's already started to happen over the last few years, even though we're still at relatively early stages of some of this trend. But I do think there are going to be some key benchmarks which are going to be the ones which are ultimately the winners and see assets coalesce around them in the same way that you see that on main parent benchmarks such as the S&P 500 Parent Index.

Yes. Thank you, Paul. I see it exactly the same way. I think ESG is an addition to an existing relatively broad range of indices and products available to investors. Investors need that increasing granularity in the way that they choose their investments. We've seen it with thematic investing with factor-based indices. All of these investments are actually fundamentals based. So ESG is a type of fundamentally based investment. Most of the ESG-related figures and even SDG-related figures actually relate to the fundamentals of the company, how it is organized from a governance perspective, but also what type of revenues are made? Are these activities actually positively contributing to an SDG agenda or actually, are they meant to be potentially controversial for certain investors. All of these different shades of fundamental investments are pretty interesting because they pertain to the use of data where indices are perfectly positioned to make use of them and where really these different solutions for investors they illustrate how well set up a passive investment can be to answer certain of the investors' constraints. So we are on this journey with -- this journey started, I'd assume around the 2012 with the -- especially in Europe with what I call factor investing, but of course, it started way earlier in the U.S. with growth and value, where fundamental investing has always been there, but that additional level of granularity is something that we will continue seeing in the future, and we're pretty excited to work with index providers to accompany that future.

Great. Well, I think we're getting close to time here. Is there anything else any of you would like to talk about on the topic that we weren't able to get to?

No, I think it's been a good discussion. I've enjoyed it. And I look forward to speaking more on this and seeing the assets and AUM grow in this space.

Great. Thank you so -- go ahead.

No. So I just wanted to say that ESG is definitely a topic where the devil is in the detail. We see a lot of questions around the details of ESG. It is very important for investors to engage with data providers, with asset managers like us, with index providers like you guys to discuss and define the exact sustainability preferences of an investor, whether those preferences are enshrined in an investment codex or those preferences are potentially more driven by performance where they think that this sustainability metric can be a driver of performance. It's very important for us in the investment community to understand what investors have in mind when they discuss ESG, again, because the devil is in the detail and we're looking forward to do that in the years to come as well.

Stephanie, do you want to close this out with any final thoughts?

I think we're going to see increased scrutiny in ESG, and this will lead to increasing changing market regulation. This is particularly evident in Europe as we've seen things like the implementation of SFDR, ESMA name changes, et cetera. However, I think regulation also brings opportunities. So for example, the EU Sustainable Finance Regulation, we designed and launched our Paris Aligned and Climate Transition Indices in 2021. So as an index provider, we are just focused on creating indices which meet their market objectives, are clear and transparent so that our investors can understand what is the index is trying to achieve and align their needs with the indices.

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