Incorporating ESG into US equity benchmarks
Increasingly investors seek the ability to incorporate sustainable investment considerations within a broad US market portfolio, but without impacting the risk and return characteristics of the underlying benchmark.
Increasingly investors seek the ability to incorporate sustainable investment considerations within a broad US market portfolio, but without impacting the risk and return characteristics of the underlying benchmark. The Russell US ESG Indexes are a US equity index family that uses the innovative Refinitiv ESG Scores framework to provide an Environmental, Social and Governance lens on the US equity universe.
Investors who want to incorporate ESG considerations into a broad US market passive portfolio have traditionally had to accept a certain (often high) level of deviation from the risk and return characteristics of the underlying benchmark. The Russell US ESG Indexes were designed to address this by applying Refinitiv’s ESG scores into FTSE Russell’s Target Exposure index methodology in order to produce an index that is still investable and performs similarly to the benchmark.
The indexes are suitable substitutes for the traditional benchmarks and can be used by market participants:
1) to benchmark the performance of US equity funds
2) in the creation of ETFs, structured products and index-based derivatives
3) as an ESG alternative for core US market cap weighted passive mandates and model portfolios.
A paper uses the example of the Russell 1000 ESG Enhanced Target Exposure Index to illustrate the effects of the screening and the target exposure methodology to show that even though more than 5% of stocks are screened out, the industry weights are similar to those of the underlying index. The overall correlations between the Russell 1000 ESG Enhanced Target Exposure index and its underlying benchmarks remain extremely high, with the rolling 24-month correlations for the index around 0.999 over the past several years.
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