Introduction
The 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 mainstream investment products.
For decades, companies that manage their business with various stakeholders and objectives in mind have been included in ESG indices such as the Dow Jones Sustainability Indices. 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 addresses the need for an index that incorporates ESG values while maintaining similar overall industry group weights as the S&P 500. Intentionally broad—including over 300 of the original S&P 500 companies—the S&P 500 ESG Index seeks to reflect many of the attributes of the S&P 500 itself, while providing an improved sustainability profile as a result of an updated ESG Score.
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;
- The historically similar risk-adjusted performance profiles of the S&P 500 ESG Index and the S&P 500;
- How the ESG characteristics of the S&P 500 ESG Index are improved compared with those of the S&P 500; and
- Specific examples demonstrating how the S&P 500 ESG Index methodology sorts and selects companies.
