To address the need for a broad market ESG benchmark in Brazil, S&P DJI and B3 joined forces to launch the S&P/B3 Brazil ESG Index. S&P DJI’s Silvia Kitchener and Iuri Rapoport from BTG Pactual sat down to discuss how this innovative index captures a more complete picture of ESG in Brazil, and how it could be used to address the growing demand for ESG solutions in the region.
- We know that there are many types of environmental, social, and governance (ESG) indices. What is the objective of the S&P/B3 Brazil ESG Index?
Silvia: Correct; there are various ESG indices with different objectives. Some indices use the “best-in-class” approach like the Dow Jones Sustainability MILA Pacific Alliance Index, which selects the top 30% of companies by sustainability score within each GICS® sector. The focus here is to feature the companies with the best ESG practices and policies. Then, we have the S&P ESG Indices, which are designed to provide improved ESG representation while offering a risk/return profile similar to that of the benchmark, as in the case of the S&P 500® ESG Index.
The objective of the S&P/B3 Brazil ESG Index is to serve as a broad representative index of the Brazilian equity market with an improved ESG profile, while offering risk/return characteristics similar to those of the benchmark, the S&P Brazil BMI. The index does not focus on selecting companies based on their ESG scores; however, the score determines their representation in the index. This means that companies with higher ESG scores have a higher weight in the index. Companies with lower scores are incentivized to improve their programs, practices, and policies to help increase their scores and possibly their index weight.
- What has demand for ESG looked like in recent years, and how important do you think ESG will be moving forward?
Iuri: Several studies have shown that companies with better ESG practices enhance long-term returns. In general, these companies develop resilient and solid businesses, as they are more capable of dealing with externalities and adapting to new consumer behavior and regulatory demands.
The capitalist model has changed, and nowadays companies need to add value to a diverse spectrum of stakeholders—shareholders, employees, suppliers, local community members, and society. The urgency of ESG is a global societal commitment, as defined by the UN Sustainable Development Goals and Paris Agreement, and each individual and company must play their role in helping achieve a better, more sustainable world.
We believe companies with better ESG practices will be investors’ priority in the long run.