As the Environmental, Social, and Governance (ESG) approach is becoming a global trend, the stock market has struggled in the construction of indexes that consider ESG values. That’s why Standard & Poors has launched a new ESG index: the ASX 200 ESG.
This index is a variation of one of S&P’s headline indexes, the ASX 200. The ESG variation uses the same universe as its predecessor; with a three-step process of screening, sorting, and selecting companies to make up the actual S&P/ASX 200 ESG.
According to S&P report, “the screening process removes any companies involved in the production or sale of tobacco, controversial weapons, and thermal coal; as well as those ranked among the lowest 5% of UN Global Compact scores.”
They also remove companies with an S&P Dow Jones ESG score that is in the 25% bottom of scores within their GICS industry group globally.
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New index methodology and design
Then S&P sorts the stock from best to worst according to their S&P DJI ESG Score within each GICS industry group. Finally, they select stocks “top-down” in each CIGS industry group seeking to capture 75% of the market capitalization.
They repeat all the process for each industry group. Currently, the S&P/ASX 200 ESG has 119 companies in it, with 81 already removed through the previously described process.
The new index is designed to be core to investor’s portfolios. As the methodology used in it seeks to achieve a risk/return profile than any other one; while also providing the certainty that any bad-performing companies, within the ESG perspective, are left out from the index itself.
“In this way, market participants can be assured that they are not increasing risk, or foregoing returns, while also investing in a way that aligns with their values,” the report says.
This index will provide further momentum to the ESG perspective, which is most needed in the energy and overall industry investment world; especially after the covid-19 pandemic and other climate-related phenomena, such as the fires in Australia.
In this sense, S&P/ASX 200 ESG seeks to provide “a diversified, transparent, flexible, and cost-efficient way to incorporate ESG into core investments.”