Let’s take a closer look now at how an ESG index originates, taking the SPI ESG Index based on the Swiss Performance Index (SPI) as an example. The SPI includes almost every Swiss company listed on the Swiss stock exchange. The SPI standard index contains 217 companies (status as of 2023). The weights of the individual companies in the index are calculated on the basis of market capitalization (number of shares outstanding x free-float factor x share price). The ESG index additionally factors in ESG criteria using data that SIX obtains from Inrate, a Swiss rating agency that conducts company sustainability assessments. Evaluating sustainability performance is a challenging undertaking because not all corporate data are available in detail. The data are used in four steps to construct the ESG index.
1. In the first step, all companies that derive revenue from one or more of the business areas listed below are excluded. The exclusion threshold is usually set at 5% of total revenue:
- Adult entertainment
- Genetic engineering
- Nuclear energy
- Oil sands
2. Next, companies are examined for their compliance with the UN Global Compact principles, a voluntary set of standards for businesses that was developed by the United Nations Organization to make globalization more socially equitable and ecological. The UN Global Compact contains ten principles that companies are expected to fulfill. The principles cover issues concerning human rights, work conditions, the environment, and corruption. Companies that violate these principles or are unwilling to pursue sustainability as a business objective are excluded from the ESG index.
3. The Swiss Association for Responsible Investments maintains an exclusion list, or blacklist, of companies it advises against including in sustainable financial products. If a company appears on the list, it is not included in the ESG index. Not a single publicly traded Swiss company is on the list at present.
4. The final but not the least important step in the process is a company’s ESG rating. Inrate issues ESG impact ratings for companies that measure how sustainable an enterprise is. Each company is assigned a score on a 12-level scale from D- to A+. A company must have an ESG impact rating of C+ or higher to be included in an ESG index from SIX. A score of C+ means that a company is not yet sustainable, but is making distinct efforts to improve its practices. In January 2023, 44 companies are below C+ (see illustration).