The S&P/ASX 200 ESG Index: How Does it Work?

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.

Index Construction

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.

1: EXCLUDE

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).

2: RANK

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.

3: SELECT

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 :

1. Companies are selected until 65% of the market capitalisation within each GICS industry group is reached. 
2. 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.

Figure  1: Index Construction

Source: S&P Dow Jones Indices LLC. Chart is provided for illustrative purposes

The companies included in the index are continually monitored for any controversies – from human rights issues to corruption. Such events could lower the company’s S&P DJI ESG Score  and in case of severe controversies, may result in it being excluded outside of the annual index rebalance. 

Exposure to Better ESG Characteristics

Based on the above exclude, rank and select process, an investment in the SPDR S&P/ASX 200 ESG Fund could offer investors exposure to companies with better ESG characteristics within the Australian equities market – with similar risk and returns. Investing through an ESG lens has never been simpler.