Demand for ESG investing has undoubtedly risen over the years – and the good news is that it has also become more accessible to everyone.
Whether you’re a seasoned ESG investor or a first-timer, the S&P/ASX 200 ESG Index methodology is straightforward, making ESG investing even more attractive than before.
The S&P®/ASX 200 ESG Index was designed to offer broad market coverage of the S&P/ASX 200 Index with improved environmental, social and governance (ESG) characteristics. In other words, it offers investors the opportunity to invest in Australian companies that have higher sustainability attributes. At the same time, the SPDR S&P/ASX 200 ESG Fund (E200) aims for a similar risk and return profile to the underlying S&P/ASX 200 Index, which means investors do not have to compromise on this front.
The S&P/ASX 200 ESG Index is constructed in a simple and straightforward way, making ESG investing more accessible – and more appealing.
The S&P/ASX 200 ESG Index targets companies that have better ESG characteristics. This refers to excluding companies that are involved in specific sectors and including companies that rank highly according to the S&P Dow Jones Indices (S&P DJI ) ESG Scores. These scores are calculated based on granular company data, and help to establish a view on the ESG performance of each company.
The first stage of the index’s construction is to exclude the following companies:
Companies that are involved in the production or sale of tobacco, or are involved in controversial weapons such as cluster weapons, or extract or generate electricity from thermal coal.
Companies that have a United Nations Global Compact score that is in the bottom 5% of scores globally.1,2
Companies with an S&P DJI ESG Score that is in the bottom 25% of scores within their Global Industry Classification Standard (GICS) industry group (from real estate to information technology).
The second stage is to rank the remaining companies (i.e. the companies that have not been removed from the exclusions in stage 1) from the best to the worst ESG score. Companies are ranked according to their S&P DJI ESG Score, within their relevant GICS industry group.
The S&P/ASX 200 ESG Index aims to target 75% of the market capitalisation within each GICS industry group of the broader S&P/ASX 200 Index. Essentially, this means that the final index should include approximately 75% of the biggest and most sustainable companies from each industry – from financials to energy to health care – and should closely resemble the broader Australian equities market. By doing so, the S&P/ASX 200 ESG Index aims to offer a similar risk and return profile to the S&P/ASX 200 Index.
Once the companies are ranked, they are selected for inclusion from the top down, starting with those that have the highest S&P DJI ESG Score :
Companies are selected until 65% of the market capitalisation within each GICS industry group is reached.
Companies that are ranked between 65% and 85% of the market capitalisation are then selected, until the 75% threshold is reached. To reach the 75% threshold companies are added one by one, until the index’s market capitalisation is as close as possible to the 75% target. There is a preference to have the better scoring companies added to reach this threshold, however, in the case where a company included would bring the group for inclusion up to this threshold, a lower score company may be added.
The selected companies are then weighted by their float-adjusted (the number of shares each company has floating) market capitalisation – or their market weight relative to the broader Australian equities market – to create the final index.