ESG Indices - Analysis

1. - By Sahil Shrivastav
Intern, ESG Team, Dhir & Dhir
Associates
INTRODUCTION TO
ESG INDICES: A
QUALITATIVE
ANALYSIS

2. INTRODUCTION
 Environmental, Social & Governance are the key parameters or areas on which the
companies are actively focussing and adopting measures which ensure sustainability of
all
 ESG is evidencing growth in its importance lately due to;
a. Conscious Consumerism
b. Shift of focus on ESG based investment
c. Widened scope of Corporate Governance
d. Current government policies

3. ESG INDEX: INTRODUCTION
 Index is a statistical tool that reflects the changes in the financial markets. Reflects the
performance of a certain segment of the market or the market as a whole.1
 Stock market indices acts a nearly accurate indicator of the state of the markets and
reflects the general sentiments of investors.
 ESG Indices take into consideration the performance of companies in ESG measures and
reflects the performance of companies listed based on their ESG Score and investor’s
response to that.
 ESG Indices measure the performance of securities from an underlying index that meet
a certain sustainability criteria.
1. https://www.indiainfoline.com/knowledge-center/share-market/what-are-stock-market-index

4. ESG INDEX: RELEVANCE
 The volume Assets under Management of Sustainable and Responsible Investment (SRI)
theme has increased to USD 22.9 Trillion recording a CAGR of 11.9% since 2014.
 ESG Indices encompass such companies which qualify the test laid down by such Index
and track their performance individually and reflect it in form of changes in composite
index.
 A conservative or retail investor who aims at making investments in companies adhering
to ESG measures and performing well may refer to the index and find it easy to invest.
 Fund Managers and investors can ensure to invest in firms with better ESG Performance
and generate higher returns with lower company specific risks.

5. ESG INDEX: KEY CONCEPTS
1. Index - Method to track the performance of a group of assets in a standardized
way
2. ESG Score – Measurement of company’s exposure to long-term environmental,
social and governance risks
3. Thematic Index - Investment index that tracks the performance of companies that
are tied to specific investment themes
4. Free-market capitalization – Value of outstanding shares available in the market
multiplied by the market price

6. ESG INDEX: CALCULATION
METHODOLOGY
Growth of index is tracked and investments are made based on its movement
Growth of the individual constituent companies are tracked and composite index is calculated
Companies are weighted on their free-market capitalization and ESG Score
Base date and base value of the index is fixed
Companies must qualify the entry criteria such as possessing requisite ESG Score, belonging to admissible industry, qualifying the test
laid down by respective Stock Ex
Companies are picked up from a base Index. Example – Nifty 100 Index (Base Index) Nifty 100 ESG Index (Thematic Index)

7. ESG INDEX: NIFTY 100 ESG SECTOR
LEADERS
 Thematic index of National Stock Exchange under base index Nifty 100
 Launch Date – June 15, 2020
 Object – Track performance of select companies which have scored well on
management of ESG Risk and which do not have involvement in any major
controversies
 Criteria –
i. Stocks forming part of Nifty100
ii. Exclude companies with ESG Score >= 40 but categorized as ‘severe’
iii. Exclude companies with ESG Score > ‘Global Subindustry Average ESG risk score’
iv. Exclude companies with controversy category of 4 & 5
 Performance – Grown from base rate of 2000 to 2996.50 on 11-04-2022

8. ESG INDEX: NIFTY 100 ESG SECTOR
LEADERS (ESG SCORING )
 ESG Scoring for Nifty 100 ESG Indices are done by Sustainalytics, a Morning Star Co.
 Measured on 3 pillars Environmental, Social & Governance
A. Environmental factor covers the impact of the firm’s activity on environment with total 52
indicators
B. Social factor covers the policies and impact of a firm’s activity on working conditions,
human rights etc. with total 52 indicators
C. Governance factor measures the effectiveness of processes and policies pertaining to
corporate governance, business ethics etc. with total 34 indicators
 A Firm is rated on 3 main indicator areas:
a. Preparedness
b. Disclosure
c. Performance
 On each indicator score of 0-100 is awarded
 Lastly, a weighted average company level ESG Score is determined

9. ESG INDEX: NIFTY 100 ESG SECTOR LEADERS (ESG RESEARCH)
 ESG Scoring requires Data which is extracted as below;
 Controversy Analysis Process;

10. ESG INDEX: S&P 500 ESG INDEX
 Thematic index of S&P Global under base index S&P 500
 Launch Date – January 28, 2019
 Object – Designed to provide improved ESG representation while offering a risk
and return profile similar to that of the S&P 500
 Criteria –
i. Exclude companies involved in thermal coal, tobacco, and controversial
weapons
ii. Exclude companies with low United Nations Global Impact Scores
iii. Rank companies by S&P DJI ESG Score
iv. Weight companies by float-adjusted market capitalization
 Performance – Grown from base rate of 200 to 384.80

11. ESG INDEX: FTSE UK 100 ESG SELECT
INDEX
 Thematic index of FTSE under base index FTSE All Share Index
 Launch Date – December 10, 2018
 Object – Designed to measure the performance of the top 100 companies, as
demonstrated by their Environmental, Social and Governance (ESG) practices,
within the FTSE All Share Index
 Criteria –
i. Constituent securities of the FTSE All-Share Index that have ESG scores are
eligible for inclusion in the FTSE UK 100 ESG Select Index
ii. Top 100 companies in the FTSE All-Share Index when ranked in descending
order by ESG score are selected for inclusion in the FTSE UK 100 ESG Select
Index
iii. Selected stocks are weighted by free float adjusted market capitalization

12. ESG INDEX: BENEFITS
Helps the prospective investors in evaluating the potential of their investment
Reflects a collective growth of the industry
Proof of sound ESG
Practice
Creates FOMO in other
companies to perform
better
Reaffirms the significance
of sound ESG Practices
Creates healthy
competition among the
companies

13. CONCLUSION
 ESG based investment strategy is gaining popularity
 Higher returns have been generated which drive more investors towards ESG based
investment
 Multiple indices will ensure awareness among both, the investors and companies,
in order to observe best ESG practices
 Development of Disclosure and Reporting Standards and enforcing such
disclosures will assist

14. APPRECIATE YOUR PATIENT
HEARING
THANK YOU

15. Sources
 ‘NIFTY 100 ESG INDICES’, Indian Index Services & Products Limited, March 2018 available at
https://www.niftyindices.com/docs/default-source/indices/nifty100-
esg/nifty_esg_indices_whitepaper.pdf?sfvrsn=c4a79834_4
 ‘Methodology Document for Equity Indices’, NSE Indices Limited, March 2022 available at
https://www.niftyindices.com/Methodology/Method_NIFTY_Equity_Indices.pdf
 ‘ESG Risk Rating’, Sustainalytics, available at https://www.sustainalytics.com/esg-data
 ‘S&P 500 ESG Index’, S&P Dow Jones Indices, available at
https://www.spglobal.com/spdji/en/documents/additional-material/brochure-sp-500-esg-index.pdf
& https://www.spglobal.com/spdji/en/indices/esg/sp-500-esg-index/#overview
 ‘FTSE4Good UK Index Factsheet’, FTSE Russell, 31st March 2022, available at
https://www.ftserussell.com/analytics/factsheets/home/search?categoryname=sustainable%20invest
ment