Stance Equity ESG Large Cap Core is constructed using three independent processes.
The first process applies a rules-based methodology to a large cap index and identifies companies that successfully manage sustainability-related key performance indicators (KPIs) such as energy productivity, carbon intensity, water dependence, and waste profile. Additional KPIs relating to governance include capacity to innovate, unfunded pension fund liabilities, CEO/average worker pay, safety performance, employee turnover, leadership diversity, percentage tax paid, and % bonus linked to sustainability performance. Excluded from consideration are companies engaged in weapons, tobacco, or thermal coal, as well as companies where women are not meaningfully employed in senior management and board positions.
The second process within Stance Equity tests fundamental financial and risk factors for statistical significance as generators of alpha. The factors compete for inclusion on an annual basis and are adjusted based on accumulated learning. By example, in 2015 top factors included skewness, EBITDA, and historical alpha. The resulting portfolio represents the intersection of the first two processes.
The final process optimizes the portfolio to maximize diversification and reduce correlation. The portfolio is re-balanced quarterly.