Starting Universe. The starting universe is constructed by selecting the top 86% of large- and mid-cap stocks by cumulative fundamental weight within each of six individual regions (United States, United Kingdom, Japan, Developed Europe, Other Developed, and Emerging Markets), where fundamental weight is defined by the average of adjusted sales, cash flow, dividends + buybacks, and book value.
Security Selection. Each company's overall ESG score is determined by five signals: environment (E), social (S), governance (G), diversity (D), and financial discipline (FD). Data used for determining E, S, G, and D signals are supplied by Vigeo Eiris; the FD signal is determined by RAFI Indices, LLC. Individual signals are calculated for each company within each region. Companies are then sorted in descending order by each of the aforementioned scores. The bottom 10% by fundamental weight for each respective score is excluded from each region.
Exclusions. Exclusions are then applied to remove any remaining tobacco, weapons, gaming, and fossil fuels companies. Fossil fuels companies include stocks in the industries of coal extraction, oil/gas exploration, and extraction and petroleum refining.
Weighting. The remaining securities are each assigned an aggregate ESG score, which is calculated by taking the average of its E, S, G, D, and FD signals within its respective region. Portfolios are tilted toward the highest-ranked ESG companies by fundamental weight: Weight Tilt = RAFI Weight (1 + ESG Rank).
Liquidity Screen and Rebalancing. A liquidity screen and minimum/maximum weight constraints are applied. Individual company weights are capped at 5% (10% for UK) with a minimum weight of 5 bps. The indices are rebalanced on a quarterly staggered basis.
For a complete description of the process see the rulebook which can be found here.
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