he launch of the S&P 500 ESG Index in April 2019 signaled an evolution in sustainable investing. Indices based on environmental, social, and governance (ESG) data were no longer simply a means for companies to declare their sustainability credentials or tools to manage tactical investments playing a minor role in investors’ portfolios. The S&P 500 ESG Index and other such indices were built to underlie strategic, long-term allocations at the core of investors’ portfolios.
For decades, the prospect of inclusion in ESG indices like the Dow Jones Sustainability Indices has encouraged companies to manage their businesses with various stakeholders and objectives in mind. However, these pioneering, best-in-class indices tended to be narrow, including only a small selection of the top ESG performers. This presented challenges to individual and institutional investors who were concerned about the risks inherent in highly concentrated portfolios defined by these indices.
The S&P 500 ESG Index addressed the need for an index that incorporates ESG values while offering benchmark-like performance. Intentionally broad—including over 300 of the original S&P 500 companies—the S&P 500 ESG Index reflects many of the attributes of the S&P 500 itself, while providing an improved sustainability profile. This construction can help ease concerns that there is an unavoidable and significant tradeoff between integrating ESG and achieving a desirable risk/return profile.
This paper outlines the characteristics of the S&P 500 ESG Index that have appealed to investors, including:
- The easy-to-understand methodology behind the index;
- How “financial materiality” drives index construction;
- The similar risk/return profiles of the S&P 500 ESG Index and the S&P 500;
- How the ESG characteristics of the S&P 500 ESG Index improve on those of the S&P 500; and
- Specific examples demonstrating how the S&P 500 ESG Index methodology sorts and selects companies.