The launch of the S&P 500 ESG Index in April 2019 signaled an evolution in sustainable investing. Indices based on environmental, social, and governance (ESG) data were no longer simply a means for companies to declare their sustainability credentials or tools to manage tactical investments playing a minor role in investors’ portfolios. The S&P 500 ESG Index and other such indices were built to underlie strategic, long-term mainstream investment products.
For decades, the prospect of inclusion in ESG indices like the Dow Jones Sustainability Indices has encouraged companies to manage their businesses with various stakeholders and objectives in mind. However, these pioneering, best-in-class indices tended to be narrow, including only a small selection of the top ESG performers. This presented challenges to individual and institutional investors who were concerned about the risks inherent in highly concentrated portfolios defined by these indices.