S&P Rolls Out ESG India Index

February 05, 2008

S&P, KLD and CRISIL collaborated to create a sustainability index for the Indian stock market. 

India is big with investors right now, and just as the interest in China has spawned a bevy of new indexes and ETFs recently, India also is getting attention from index providers. Just last week Standard & Poor's launched a socially responsible index covering India's stock market in cooperation with KLD Research & Analytics, a socially responsible investing research firm; and CRISIL, a leading research firm in India.

The S&P ESG India Index, which is governed by environmental, social and governance (ESG) standards, was initiated and sponsored by the International Finance Corporation, a member of the World Bank Group. If you'll recall, it's IFC that sold S&P its original emerging and frontier markets family of indexes. 

The newly launched index is the direct result of a competition sponsored by the IFC. The "Capturing Value" research competition required participants to find ways to contribute to private sector development and poverty alleviation by encouraging environmental and social best practice in the private financial sector; the winners received a $500,000 research grant. The objective of the competition was to stimulate interest in emerging markets—investors are sometimes wary of emerging markets because there is not as much information or data available on them, while information providers (research houses, index providers, etc.) are often reluctant to concentrate on emerging markets without proven investor interest or demand.

"As the private sector becomes more important in the growth and development of emerging economies, the profit motive needs to be brought into alignment with public interest. The scope of regulation, though critical, is limited without a commitment by investors to reward strategic behaviour that creates long-term value by balancing the interests of all stakeholders," said Dr. Subir Gokarn, chief economist for S&P Asia Pacific.

Gokarn also noted that the index methodology could be replicated for other emerging markets, which raises the possibility that S&P and its partners could roll out an entire suite of ESG indexes for emerging markets. Emerging markets are an area of strong interest for investors lately, and ESG indexes might be a useful product for investors looking for a little bit of reassurance, since the components have been "vetted" to a certain extent.

The S&P ESG India Index draws its 50 components from the 500 largest stocks listed on the National Stock Exchange of India Ltd. Those companies are subjected to a quantitative evaluation that rates them with regard to ESG transparency and disclosure. The 150 companies with the highest scores are then given qualitative scores based on public information. The qualitative and quantitative scores are combined for each company's final score, which is used in the selection process and to weight the companies within the index. The 50 stocks with the highest composite scores are selected for the index as long as they have a 12-month total trading volume of at least 20 billion rupees.

The top 10 components represent roughly 26% of the index; Infosys Technologies Ltd. has the heaviest weighting at 2.88% of the index. Materials is the largest sector, with a 23.78% weighting, while Telecom Services is the smallest sector at just 2.40% of the index. The sector distribution is significantly different from that of the 50-stock S&P CNX Nifty Index. (For a comparison, see the table below.)

The S&P ESG India Index rose 65.09% in 2007, outperforming the S&P CNX Nifty Index, which was up 56.80%.

Sector (%)

S&P ESG India

S&P CNX Nifty

Consumer, Discretionary 8.80 19.42
Consumer, Staples 9.02 4.87
Energy 5.91 0.60
Financials 14.75 21.82
Healthcare 8.60 4.65
Industrials 6.29 18.24
Information Technology 16.49 13.03
Materials 23.78 9.57
Telecom Services 2.40 3.66
Utilities 3.96 4.15
 

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