With growing interest in environmental, social, and governance (ESG) investing around the world, S&P DJI has launched the S&P/ASX 200 ESG Index in order to provide a transparent measure of the Australian equities market with a sustainability lens.
1. Why is the S&P/ASX 200 ESG Index significant to the Australian market
The S&P/ASX Index Series has played a significant role in characterizing the performance of the Australian equity market since its inception in April 2000. Since then, the S&P/ASX 200 has served as the foundation for benchmarks and index-based investing strategies in Australia. The S&P ASX/200 ESG Index combines the broad-market coverage of the S&P/ASX 200 with improved ESG characteristics. By targeting 75% of each GICS® industry group’s float-adjusted market capitalization in the S&P/ASX 200, the S&P/ASX 200 ESG Index offers similar industry group weights to that of its benchmark, thereby resulting in a risk/return profile that closely tracks its underlying index.
The S&P/ASX 200 ESG Index is part of the S&P ESG Index Series, which is designed to help investors integrate ESG objectives without compromising their investment objectives. The indices enhance overall ESG performance, targeting companies that rank highly according to our S&P DJI ESG Scores. The index design allows this ESG performance boost to come at a low cost in terms of tracking error as well.
The index eligibility and constituent selection process are driven by the S&P DJI ESG Scores. These scores employ data gathered through SAM’s Corporate Sustainability Assessment (CSA), which SAM1 has developed and administered over the past 20 years. The CSA and resulting S&P DJI ESG Scores provide an unparalleled view into companies’ sustainability performance in Australia. The CSA raises corporate awareness on upcoming ESG issues, challenging Australian companies to think about emerging ESG risks and opportunities in their industries. As a result, the CSA helps identify companies that are ahead of the curve on these topics. The CSA also contributes toward more transparency and reporting on these issues to the benefit of the broader investment community.
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2. How and why would market participants use this new index in their practice?
With the S&P/ASX 200 ESG Index, investors are now able to move ESG from the periphery of their portfolios into the core. By providing a similar risk/return profile to that of the S&P/ASX 200, it has become easier and more attractive to allocate more to ESG than ever before. In addition, the S&P/ASX 200 ESG Index methodology is simple and accessible to everyone, particularly to those considering making their first ESG investment. By offering improved ESG characteristics without needing to make too many exclusions, the tracking error of the S&P/ASX 200 ESG Index to the S&P/ASX 200 can be kept low. This profile makes the S&P/ASX 200 ESG Index appealing to institutions, retail investors, and the financial advisor community alike.
In addition, as with any of our benchmark solutions, this index has a range of potential applications, such as defining an investable universe, benchmarking investment performance, or supporting the construction of passive portfolios through investment vehicles like ETFs that are now available in the Australian market.