The Thomson Reuters Corporate Responsibility Indices were developed jointly with S-Network Global Indexes, a New York-based specialist index design firm. The firms say unlike the majority of ESG indices, however, their indices mirror the performance of major global benchmarks via companies that have substantially higher ESG ratings than the weighted average for such indices as the S&P 500 or MSCI EAFE.
The new indices are powered by “dynamic” ratings based on the Thomson Reuters ASSET4 ESG database. The corporate responsibility indices employ a large array of indicators, each having different levels of importance depending on the industry, country and regional focus of a company’s operations. The company says the ratings include a greater emphasis on quantitative outcomes than on qualitative corporate statements to ensure the indices are as objective and transparent as possible.
The top ESG-rated companies from each sector are included in the indices, which do not use negative screening to exclude certain industries. The companies say this process results in more accurate and diversified benchmarks.
Joseph LaCorte, president of S-Network, says the first generation of ESG indices targeted the very best performers under the presumption that they would provide better returns than others. But this approach resulted in companies concentrated in certain sectors and regions, resulting in excessive risk and unwanted volatility.
LaCorte says the new indices are designed to represent the performance of American and global markets while reassuring investors that all included stocks have better than average ESG ratings.
The first two sets of indices cover large capitalization stocks located in the US and the International Developed Ex- North America region (also known as EAFE). Composite ESG indices are available for these two regions, as well as indices for the two regions based on the individual economic, social and governance pillars.
Real-time index values will be available on Thomson Reuters desktops and feed products starting May 30. The indices and ratings will also be available via an S-Network operated website, which will allow users an affordable way to benchmark against the index and rate ESG performance of a portfolio of stocks.
According to the United Nations Principles for Responsible Investment, more than $3 trillion in financial assets are managed by signatories of the UN PRI’s framework. Adherence to ESG principles is widely regarded as a key indicator of the sustainability of companies’ business practices.