Sustainability in finances: the use of environmental indexes for investment practices

Abstract

The use of performance metrics on environmental, social and governance (ESG) issues in different firms may be very useful when implementing different investment practices. Climate-related risks and opportunities that arise when introducing ESG practices change the attractiveness of the firm for investors, lenders, and insurance underwriters. Therefore, by considering some type of indicator about ESG practices, market agents can achieve more information and they can use these indicators as tools in the creation of index-tracking investments, financial instruments or fund products focused on sustainable investment. In this line, the FTSE4Good IBEX index emerges as a good indicator of eco-friendly and good social practices in Spanish firms, and it is designed to measure the performance of companies demonstrating specific ESG practices. Due to its own characterization, it may be interesting to analyze the potential relationship between the index and the firms’ profits, and to conclude if there is a causal relationship between them: are ESG practices really promoting a better situation for individual companies or, on the contrary, does there seem to be no real link between their implementation and company profits?