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This paper will demonstrate the potential improvements in environmental, social and governance (ESG) characteristics that are reflected in ESG benchmarks versus traditional market-capitalization-weighted benchmarks in a hypothetical group of Australian equities. We explore how various sustainability-focused indices might provide improved ESG characteristics, while maintaining comparable sectoral and country composition to that of traditional equity benchmarks.
An overview of sustainability-focused indices
The S&P/ASX 200 ESG Index draws on the intelligence of the S&P DJI ESG Scores, which robustly measure companies’ ESG risk and performance factors to measure the performance of securities from the benchmark index that meet sustainability criteria. It is designed with the goal of maintaining similar industry group weights as its benchmark, with the overall result of improving ESG performance. It excludes companies with activities in key negative ESG areas, such as the extraction and consumption of thermal coal, production of tobacco and controversial weapons, as well as companies with poor alignment with UN Global Compact (UNGC) principles, involvement in relevant ESG controversies, and those identified as ESG laggards.
The S&P Developed Ex-Australia LargeMidCap Carbon Control Index and the S&P Emerging LargeMidCap Carbon Control Index focus on carbon intensity reduction and employ the carbon emissions intensity figures published by S&P Global Trucost. The index design aims to minimize average carbon intensity of the underlying benchmark, while offering diversification across a range of companies in the underlying index. The indices also apply exclusions based on companies’ involvement in specific business activities including fossil fuel, tobacco, controversial weapons, alcohol, gambling and adult entertainment, as well as companies with poor alignment with UNGC principles, low S&P DJI ESG Scores, and involvement in relevant ESG controversies.
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