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Methodology
Index Construction
The KLD Small-Mid Cap SocialSM Index (SMSI) is one of two composite indexes in the KLD Broad Market Social Index series, which includes a benchmark index (KLD Broad Market Social Index), three sub-indexes (KLD Large Cap Social Index, KLD Mid Cap Social Index, KLD Small Cap Social Index) and two composite indexes (KLD Large-Mid Cap Social Index, KLD Small-Mid Cap Social Index).
The SMSI holds companies with the highest environmental, social and governance (ESG) rankings in each sector of 2,600 small and mid cap U.S. equities. KLD ranks companies by sector peer group according to ESG performance ratings. For each sector, key ESG performance indicators are identified and are given more weight in the rating process.
The SMSI favors corporations that are:
- Strong stewards of the environment;
- Devoted to serving local communities and society generally;
- Committed to high labor standards for their own employees and those in their supply chain;
- Dedicated to producing high quality and safe products;
- Managing their company in an exemplary and ethical manner
All companies selected for the SMSI must meet minimum ESG performance standards, as determined by KLD’s Sector Teams and BMSI Committee. KLD recognizes that many companies will have some ESG concerns and gives careful consideration to how companies address the risks and opportunities they face in the context of their sector or industry and relative to their peers.
KLD’s objective is to select the highest-ranked companies targeting 65% of the market capitalization of each sector. This process provides the constituents for the SMSI.
Index Reconstitution
The SMSI reconstitutes every year on the third Friday of June to reflect changes to the U.S. equity market and changes to companies’ ESG performance.
Index Maintenance
The BMSI Committee, which covers all indexes in the series, is responsible for all changes to the Index and is committed to keeping turnover on the Index as low as possible and in line with general market turnover. To that end, the Committee attempts to minimize the number of discretionary changes to index holdings between annual reconstitutions. KLD continually monitors the BMSI series for events that would require changes to index composition. These events include: corporate actions, changes in ESG performance and deteriorating financial quality. For all non-ESG related removals KLD follows the procedures employed by Markit Group Limited, the Index calculator.
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