The new Mexican ESG index

This week I want to give an overview of the new S&P/BMV Total Mexico ESG Index which just launched.

Some of you may remember the Mexican Stock Exchange (BMV) used to have a sustainability index before – the IPC Sustentable. In March this year the IPC Sustentable became obsolete, and the BMV, together with S&P, announced a new index would be created following a similar methodology to other S&P ESG indices globally (fed by data coming from the corporate sustainability assessments done by SAM, previously known as RobecoSAM and now part of S&P Global). Then COVID came and altered the timing for many things, including the launch of this index. Well, finally this week we saw the formal launch of it, and so we would like to explain the basics of what goes into building it. Some key pointers:

• Constituents must be members of the S&P / BMV Total Mexico Index and be covered by Sustainalytics.
  To be a part of the S&P / BMV Total Mexico Index, issuers must, among other things:

1. 1. Not be a FIBRA-E.
   2. Have a float-adjusted market cap of at least 10 billion pesos (US$445m) or an investable weight factor of at least 0.2.
   3. Trade at least 90% of the trading days available over the past 12 months.

• There are exclusions for the tobacco and controversial weapons industries, as well as for companies that are non-compliant with the UNGC.
• All eligible companies are ranked by S&P DJI ESG Score (in other words, from the SAM corporate sustainability assessment), and the top 80% is selected. This 80% is then split into GICS sectors and ranked again by ESG score. The top 75% for each sector is selected and goes into the index.
• The index rebalances annually in June and is re-weighted quarterly.
• Constituents are weighted by S&P DJI ESG Score, with 2 constraints: (1) the largest 5 stocks can’t weigh more than 60% and (2) the maximum weight of each security is the lower of 25% and 4x its liquidity weight (considering its six month median traded value).

To read more on the methodology, click here.

Considering all of this, the constituents of this year’s new S&P/BMV Total Mexico ESG Index are: ALFA A, ALSEA, AC, BSMX B, CEMEX CPO, KOF UBL, VESTA, CREAL, FUNO 11, FEMSA UBD, LAB B, GENTERA, OMA B, GAP B, ASUR B, BIMBO A, GFNORTE O, HERDEZ, AGUA, TLEVISA CPO, PE&OLES, IENOVA, KIMBER A, NEMAK A, ORBIA, FIBRAPL 14, Q, RA, WALMEX.

It is worth saying the biggest difference with the previous version of this index, is what data is used to assess the ESG credentials of companies. The older index used ratings from institutions tasked specifically with grading if a company was considered sustainable or not (just a yes or no flag really), whereas the new one uses as said before the SAM CSA.

Finally, as companies evolve and improve their ESG practices, it is more likely than not that their CSAs improve over time. As the new index does rank companies and only includes the top performers within each industry, this will create the incentive for companies who wish to be a part of the index (or remain in the index) to: (1) regularly go through SAM’s CSA assessment and (2) optimize their results in this assessment. This in turn will hopefully lead to more and better disclosure of ESG factors in Mexico.

So, for a company trying to make it into the index, the key things to consider are:

1. Free float adjusted market cap matters (but the hurdle is relatively low below US$450m).
2. Stocks need to trade 90% of the trading days (doesn’t seem like a pretty tough hurdle either).
3. You need to be rated by Sustainalytics and S&P DJI (in other words, go through the SAM CSA).
4. Target the top 75% within your sector (depending on the sector, this may be more or less difficult).

Will ETFs that track this index become big enough? Or is this index only good for PR? Only time will tell really, but ESG ETFs have grown significantly globally, and eventually Mexico should follow suit.

Also worth mentioning today is this article from The Economist on how much the financial world can really do about climate change. For it, the team of The Economist analyzed emissions disclosures from 5000 companies globally which account for ~90% of the global market cap. With this they estimate publicly traded companies emit 10bn tons of carbon dioxide annually (scope 1). Removing government-controlled entities, this goes down to 8bn tons. Then they show this is just 14% of the world’s total emissions. Then the article goes to explain where the rest of the emissions are (hint: scope 3 emissions is the key) and who owns the biggest emitters. In the end, the article mentions the structure of the financial system may need to change for climate change to be properly addressed, but it also mentions finance will probably not be the driver behind the change, it will be the enabler.

Marimar

Partner, Miranda ESG