ESG Index Construction - A Tool to Build Sustainable Capital Markets
Investors are increasingly interested in incorporating environmental, social and governance (ESG) considerations into their portfolios — including in policy benchmarks. Yet the ongoing lack of ESG market infrastructure means that not all ESG indices are created equally. In this paper, we examine the Bloomberg SASB ESG Index family as a case study of key considerations facing investors interested in ESG indices.
In recent years, institutional and retail investors have shown growing interest in two distinct areas: environmental, social and governance (ESG) investing, and indexing. While the reasons for gravitating toward these areas differ, the simultaneous interest in both has led to a proliferation of ESG indices, and a movement toward adopting these ESG indices as policy benchmarks.
Yet the many different investment approaches encompassed under the broad umbrella of “ESG investing” are reflected in the significant variety among such indices, each of which may have distinct ESG data, investment objectives, index construction methods and approaches to impact. Investors exploring the use of an ESG policy benchmark must consider these differences as part of their due diligence processes.
This paper aims to highlight some of the key considerations in the construction of ESG indices, using the recently launched Bloomberg SASB ESG Index family as a case study through which to illuminate these questions. We will:
- Explore the rise of the separate but related phenomena of ESG and index investing
- Examine challenges posed by the ESG data sources that power ESG indices
- Introduce a transparent ESG scoring system developed by State Street Global Advisors that is designed to address these challenges (R-FactorTM)
- Highlight key considerations in the construction of an ESG benchmark, using the Bloomberg SASB ESG indices, powered by the R-Factor ESG score, as an example of these decisions in practice
- Compare performance and characteristics of the Bloomberg SASB ESG indices to other ESG indices to illustrate the impact of these construction considerations
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