Green Indexes

The Evolution of ESG Indices
Evolution, Construction and Performance

BSI 125 : Accounting for Finance and Sustainability
Minor I
Presented by Aashna Singh & Shreya Shetty

Introduction to ESG Index
a. Importance of ESG Index
b. Definition of ESG Index
c. Evolution of ESG Indices
d. Why is it rising in popularity
Importance of ESG Index
Investing now goes beyond profitability. Ignoring ESG factors raises investor risk due to stricter regulations and shifting
consumer preferences. 1.
Intigrates Ethical Enhances Transparency in Volatility Reduction with

Avoide ESG
Consideration in ESG practices to create better stakeholder &
Regulatory Panalties.
investments. 3. actual stakeholder value. 4 shareholder support. 5.
2
Definition of ESG Index
Investors Risk An ESG index combines stock market performance with sustainability criteria, featuring
Mitigation. 6. companies that meet both market capitalization and ESG standards. 7.
Evolution of ESG Index Acceleration and
Sophistication
Early Beginnings ESG indices have

SRI gained traction. diversified. Incorporating
The Domini 400 Advanced
1990 2020
Social Index,, methodologies, like
1990’s first ESG machine learning and big
index. data, emerged.
Expansion and
Mainstream Adoption
Refinement
UN Sustainable Stock
2001 FTSE4Good Index 2014 Exchanges initiative
introduced for ESG-
encouraged stock
focused companies.
exchanges to promote
Expansion and sustainability reporting.
Refinement Mainstream Adoption
ESG index growth
UN PRI (Principles
2005 (MSCI, S&P, Dow 2010
of real investments)
Jones
launched to
promote ESG in
investments.
Rise in popularity
Investor Regulatory Performance

Demand Push Factor
Growing awareness of Example: EU's sustainable S&P 500 ESG Index vs. S&P
climate change and social finance disclosure regulation 500:
issues has driven investor (SFDR) mandated greater From May 2010 to December
interest in sustainable transprency in ESG reporting 2020, the S&P 500 ESG Index
investments. outperformed the S&P 500 by
0.6% annually, with lower
volatility. The ESG index had an
annualized return of 14.65%
compared to 14.01% for the
standard S&P 500.
Major ESG Indices
MSCI ESG SS&P DJI ESG FTSE4Good BSE ESG
Indices Scores Index Index Series Index
High ESG score Focuses on S&P 500 Companies are
compaired to sector assessed using It assesses
companies that meet firms based on
Peers ESG criteria (ESG over 300
Includes companies indicators their adherence
Scores + Diversity to ESG
that focus on risk and tailored to region) 11. across ESG
opportunities to themes and only principles within
Select companies, the Indian
achive sustainability targeting 75% of the companies with
Excludes firms strong market context
market capitalization 10..
involved in GICS Group management
controvercial practices are
activities. 12 included 8
Differentiations:
MSCI and S&P have a global reach, the BSE index specifically targets Indian firms. FTSE4Good includes both developed and emerging markets.
Evaluation Criteria: Each index uses different methodologies for scoring and selection; for example, FTSE4Good employs over 300 indicators
while MSCI focuses on relative sector performance.
Market Orientation: The DJSI emphasizes best-in-class companies across industries globally, whereas S&P targets specific large-cap firms
within its established indices
ESG Functioning Indices
Feature/Criteria MSCI ESG Index BSE ESG Index
Utilizes a rules-based scoring system to assess Employs a criteria-based assessment focusing on

Methodology Overview companies based on their resilience to ESG risks, adherence to ESG practices, particularly relevant to the
with a focus on industry-specific key issues. Indian market.
Company disclosures, media, and proprietary

ESG Data Sources Regulatory filings and third-party research.
databases. 10.3
Industry-specific weights based on ESG Market-capitalization weighted, larger companies have

Weighting Strategy
importance. 10.4 more influence.
Minimum market capitalization and strong ESG Adherence to ESG practices, liquidity, and sector
Inclusion Criteria
performance. representation.
Excludes controversial sectors and low ESG

Exclusion Criteria Excludes unethical firms and those below ESG thresholds.
scorers.
Geographic Focus Global, covering developed and emerging markets. Indian companies listed on BSE.
Target Audience Institutional investors seeking low tracking error. Investors focused on Indian sustainable investments.
Performance Relative to sector peers, focusing on sustainability

Reflects constituent companies' sustainability in India.
Measurement risks and opportunities.
Performance
Analysis of ESG
Indices
The performance of Environmental, Social, and Governance
(ESG) indices has been a subject of intense scrutiny and
debate in the investment community
As sustainable investing gains momentum, understanding

how ESG indices perform compared to their traditional
counterparts is crucial for investors, fund managers, and
policymakers.
A comparison of S&P 500 Indices
Source:: www.spglobal.com
A comparison of NIFTY Indices (2011-2020)
Source:: Sharma, R., & Gupta, S. (2021). Risk and return analysis of ESG and Non-ESG indices: Evidence from India. Pacific Business Review International, 14(2),
96-106. http://www.pbr.co.in/2021/2021_month/August/9.pdf
A comparison of European Equity Indices
Source:: Kurnoga, N., Šimurina, N., & Fučkan, F. (2022). Performance Differences between ESG Indices and Conventional
Market Indices: a Multivariate Analysis of Indices. Sustainability, 14(15), 9145. https://doi.org/10.3390/su14159145
ESG and Financial Performance (2015-2020)
Source:: Whelan, T., Atz, U., Van Holt, T., & Clark, C. (2021). ESG and financial performance: Uncovering the relationship by
aggregating evidence from 1,000 plus studies published between 2015-2020. NYU Stern Center for Sustainable
Business and Rockefeller Asset Management. https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-
RAM_ESG-Paper_2021%20Rev_0.pdf
Why Finance Sustainability ?
01.
ESG investing appears to provide
downside protection, especially during
social or economic crisis
02.
Sustainability initiatives at corporations
appear to drive financial performance
due to factors such as improved risk
management and more innovation
03.
Win win situation for investors as ESG
indices give similar while
simultaneously fulfilling their social
responsibilities
04.
Risk takers will be the ultimate winners
if investing in ESG indices (protection
from risks & regulations) Source:: Yunus Kilic, Mehmet Akif Destek, Emrah Ismail Cevik, Mehmet
Fatih Bugan, Oya Korkmaz, Sel Dibooglu,
Return and risk spillovers between the ESG global index and stock
markets: Evidence from time and frequency analysis,
https://doi.org/10.1016/j.bir.2022.11.015.
01. 02.
Data Quality and Methodology
Consistency and Weightingt
Challenges
03. 04.
Performance and
Greenwashing Correlation
Concerns
Thank you
very much!
References

Green Indexes

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The Evolution of ESG Indices

Evolution, Construction and Performance

Presented by Aashna Singh & Shreya Shetty

Intigrates Ethical Enhances Transparency in Volatility Reduction with

Definition of ESG Index

Early Beginnings ESG indices have

Investor Regulatory Performance

Utilizes a rules-based scoring system to assess Employs a criteria-based assessment focusing on

Company disclosures, media, and proprietary

Industry-specific weights based on ESG Market-capitalization weighted, larger companies have

Excludes controversial sectors and low ESG

Performance Relative to sector peers, focusing on sustainability

As sustainable investing gains momentum, understanding

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