December 13, 2012
Major Stock Market Indexes can Elevate ESG Risk for Investors
by Robert Kropp
A study by GMI Ratings analyzes the environmental, social, and corporate governance performance of
major stock market indexes, and finds that most perform poorly against the research firm's
Investors typically benchmark the performance of their portfolios against stock market indexes such
as the Nasdaq 100, S&P 500, FTSE 100, and MSCI World. Investors and portfolio managers use indexes
to compare their investments against a representation of the overall market.
indexes themselves vary widely in their components. The S&P 500, for instance, includes the largest
US-based companies in industry sectors with the greatest effect on the nation's economy.
Information technology, financials, health care, and energy are among the index's largest industry
sectors; at present, the largest companies by market capitalization included are Apple, ExxonMobil,
But is the S&P 500 aligned with the environmental, social, and corporate
governance (ESG) criteria sought by sustainable investors? According to a new study by GMI Ratings, not so much.
researches the ESG and accounting risk performances of public companies, and uses its research to
rank them. According to the study, fully 40% of S&P 500 companies are among the worst in ESG
performance, compared to 20% for the normative distribution. High-performing companies are
underrepresented in the index as well.
Furthermore, 30% of S&P 500 companies are in the
lowest quintile of GMI's ratings on accounting risk.
The Nasdaq 100, which excludes
financials but includes international as well as domestic components, also performed poorly against
GMI's normative distribution for ESG and accounting risk, as did the MSCI World, which excludes
Of the indexes analyzed by GMI, only the FTSE 100 outperformed the
normative distribution. The components of the FTSE 100 represent about 81% of the market
capitalization of the London Stock Exchange, and include companies headquartered in emerging market
What are the implications of GMI's study for sustainable investors? It may be
instructive to compare it to a recent analysis by oekom
research, which found that a portfolio comprised of its top sustainability large-caps would
outperform the MSCI World index by a wide margin, and exhibit less volatility as well.
outperformance of the FTSE 100 in GMI's study also suggests that with the persistent low returns
and volatility prevailing in developed markets since the financial crisis, emerging markets have
become an increasingly attractive investment strategy.
"Institutional investors typically
use index benchmarks as a way to measure their contribution to performance," James Kaplan, chief
executive of GMI Ratings, said. "However, our findings suggest that widely followed indices such as
S&P 500 can also expose investors to above-normal concentrations of ESG and accounting risk."
"So far, the financial community has mainly started to apply extra-financial research to the
analysis of individual stocks," Kaplan continued. GMI's analysis "point to the importance of
applying these novel measures more broadly – not only to indices but also to asset classes and