23 Dec 2021
Jakarta – As 2021 comes to a close, the Indonesia Stock Exchange (IDX) and KEHATI Foundation launched two new indices named ESG Sector Leaders IDX KEHATI and ESG Quality 45 IDX KEHATI, on Monday (20/12). The ESG Sector Leaders IDX KEHATI Index contains stocks with an ESG (Environment, Social, Governance) performance assessment above their sectors’ average value, with good liquidity and the classification of industries that refer to IDX Industrial Classification (IDX-IC). Meanwhile, the ESG Quality 45 IDX KEHATI Index measures 45 best stocks from the companies’ ESG and financial performance assessment, with good liquidity.
The collaboration to launch these two new ESG indexes was done to address the needs of both global and domestic investors in the Indonesian capital market, which integrates Environment, Social, and Governance (ESG) aspects. The need for ESG-based investment is reflected, in part, from the huge interest shown by local investors to ESG-based investment products. This can be seen from the total managed mutual funds that refer to ESG-themed stock indexes, which was IDR 3.4 trillion in October 2021, increased 80 times from the total managed fund in 2016, which was IDR 42.2 billion. At the global level, this interest can be seen from the managed investment fund from 3,826 global institution investors joined in the United Nations of Principle of Responsible Investment (UNPRI), which in 2021 was recorded at US$121.3 trillion, showing an increase of 96% from the total managed fund in 2016 of US$62 trillion.
The launching of these two new ESG indexes was also done as a support to the Financial Services Authority (OJK)’s commitment to promoting the implementation of sustainable finance in the capital market, enshrined in Phase II of the Sustainable Finance Roadmap 2021-2025. One priority aspect in this roadmap is related to the Development of Sustainable Products and Services. It is expected that these two new ESG indexes can become a milestone in achieving said roadmap.
The ESG Sector Leaders IDX KEHATI Index and ESG Quality 45 IDX KEHATI Index offer a new approach in assessing stocks with good ESG practices. Currently, there are 2 ESG indexes recorded in IDX, namely SRI-KEHATI Index and IDX ESG Leaders Index. The SRI- KEHATI index, which is a collaboration between IDX and KEHATI, and was launched in June 2009, contains 25 stocks with the best ESG value based on KEHATI’s assessment. Meanwhile, the IDX ESG Leaders Index uses the ESG-risk approach to select 30 low-risk stocks in ESG aspects. Different from its predecessors, the ESG Sector Leaders IDX Index offers a different perspective through sectoral diversification in ESG-based investment, while ESG Quality 45 IDX KEHATI offers a combination of ESG and financial quality factors in selecting its constituents.
The selection of constituents in the ESG Sector Leaders IDX KEHATI, ESG Quality 45 IDX KEHATI, and SRI-KEHATI indexes begins by determining stocks that are eligible to be included in the indexes by considering financial performance and stock liquidity, and excluding stocks of companies whose core businesses are in tobacco, weaponry, related to pornography, alcohol, coal mining, nuclear, gambling, pesticides, and related to Genetical Engineering Products.
Next, an ESG assessment is performed on stocks that passed the previous selection phase by considering ESG criteria based on a company’s sector or materiality exposure. The environment criteria consist of sustainable products and innovations, natural resources, energy use, greenhouse gas emission, and waste management. The social criteria cover the training & development aspect, HR policy, occupational health & safety, consumer rights protection & product safety, and social-environmental impact.
Meanwhile, the governance criteria include the protection of stockholders’ rights, competency and role of the board of commissioners & board of directors, information transparency, business ethics, and sustainable management practices. At this stage, we also look at the company’s involvement in controversial issues regarding ESG aspects. From this ESG assessment, stocks with values above the cap set forth by KEHATI and without significant controversial issues will serve as the universe to select the ESG Sector Leaders IDX KEHATI, ESG Quality 45 IDX KEHATI, and SRI-KEHATI Indexes.
The selection for ESG Sector Leaders IDX KEHATI constituents is done using the best in class method, namely by taking universe stocks with higher ESG value compared to the average ESG value in their sectors. The sector classification used refers to IDX Industrial Classification (IDX-IC). If there are no stocks in one or more sectors in the universe stocks, these sectors may not have a representative stock in the ESG Sector Leaders IDX KEHATI index. There is no limitation to the number of stocks established for this index.
Meanwhile, 45 constituent stocks for ESG Quality 45 IDX KEHATI are selected from universe stocks by looking at their ESG values and the companies’ financial quality value. The indicators used to measure a company’s financial quality are profitability indicator from their Return on Equity (ROE), solvability indicator reflected from their Debt to Equity Ratio (DER), and stability, measured from Earning Variability (EV). Next, the financial performance value will be combined with the ESG value to form a composite quality & ESG value. Forty-five stocks with the best composite value are selected to become constituents of the ESGQuality 45 Index.
The calculation for ESG Sector Leaders IDX KEHATI and ESG Quality 45 IDX KEHATI uses the Capped Free Float AdjustedMarket Capitalization Weighted method, by applying a stock weighted cap of 15 percent, adjusted during evaluation. This index has been calculated since its base day, 01 June 2016, with an initial value of 100.
The periodic evaluation to ESG Sector Leaders IDX KEHATI and ESG Quality 45 IDX KEHATI consists of Major Evaluation and Minor Evaluation. Major Evaluation, which aims to re-select and re-weight the index constituents, will be done at the end of May and November. Meanwhile, Minor Evaluation, which aims to update the free float factor and re-cap the stock weights, will be done at the end of February and August. The index evaluation result will be effective on the first Exchange Day in the following month.
ESG Sector Leaders IDX KEHATI and ESG Quality 45 IDX KEHATI are expected to encourage Listed Companies to continue improving their sustainable finance practices, by considering ESG aspects in their business processes.
In the future, ESG Sector Leaders IDX KEHATI and ESG Quality 45 IDX KEHATI can serve as references for creating ESG index-based investment products, such as index mutual funds and Exchange Traded Fund (ETF), to provide ease for investors wanting to invest in the stocks of companies with good ESG practices.
For more information on the ESG Sector Leaders IDX KEHATI Index and the ESG Quality 45 IDX