ESG Index Solutions

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What is an ESG index?

An ESG index is built by combining the rules of a traditional stock market index with an assessment of companies based on Environmental, Social and Governance (ESG) criteria.

The first step is to assign each company an ESG score, generally provided by specialized rating agencies such as MSCI ESG, Sustainalytics or ISS ESG. These scores are based on publicly available information — including sustainability reports, climate policies, governance practices and human resources management — as well as the analysis of potential controversies such as pollution, corruption or human rights violations.

What are ESG index solutions?

ESG Index solutions are investment products that use indices integrating ESG criteria. They cover a wide range of asset classes. Several products can be built from ESG indices, such as ETFs and funds, structured products and certificates and derivative products.

Despite their growing popularity, ESG indices still face several limitations. ESG rating methodologies remain insufficiently harmonized.  As a result, ESG indices are useful tools for integrating sustainability into investing, but their methodologies continue to evolve.

The need for transparency and harmonization

The growth of ESG indices is taking place within an increasingly structured regulatory framework.

In Europe, the Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants to provide greater transparency on how ESG criteria are integrated into investment products. The European regulation on climate benchmarks has also introduced categories such as Paris-Aligned Benchmarks (PAB) and Climate Transition Benchmarks (CTB), designed to align certain indices with the climate objectives of the Paris Agreement.

Europe is currently the most advanced region in terms of regulating ESG products and solutions. Other jurisdictions have also developed—or are in the process of developing—regulatory frameworks for ESG index solutions, sustainable funds, and ESG ratings providers.