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Tuesday, January 31, 2023

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Indonesia Stock Exchange to launch inaugural Islamic ESG-based index

The Indonesia Stock Exchange (IDX) is poised to issue its first ESG-based Islamic index in 2023, Irwan Abdalloh, the head of the Islamic Capital Market Division at the IDX, told ISFI.

The upcoming index launch is based on a collaborative research effort between the IDX and the Indonesian Financial Services Authority or Otoritas Jasa Keuangan (OJK), which began in 2021.

“The OJK conducted research on an ESG-based Islamic index in 2021, but for the next development [phase] of the ESG-based Islamic index, it is on the IDX authority,” explained Dien Sukmarini, the division head of Islamic Capital Market Policy Development at OJK.

The IDX has issued four conventional ESG-based indices, the earliest of which is the SRI-KEHATI Index launched in mid-2009 in collaboration with the biodiversity preservation organization, KEHATI Foundation. Over 10 years followed before the IDX would issue its second ESG-based index, the ESG Leaders Index, in late 2020.

In 2021, the IDX issued two ESG-based indices, the ESG Sector Leaders IDX KEHATI Index and the ESG Quality 45 IDX KEHATI Index, in collaboration with KEHATI Foundation to complement the earlier established SRI-KEHATI Index.

While the ESG criteria for the upcoming Islamic index has yet to be disclosed, the criteria for the IDX ESG Leaders Index may form a broad guiding criterion for the new index in addition to the added requirement of Shariah compliant screening.

The ESG Leaders Index requires companies to be a constituent of the IDX80 Index and have an ESG risk score from Sustainalytics. Exclusion criteria include companies involved in Category 4 and 5 controversies and companies with a ‘high’ or ‘severe’ ESG risk score.

Companies with the lowest risk score ranking from the remaining universe are selected for the index with each stock capped at 15% of the total index weightage.

With the added criteria of Shariah compliance, the upcoming ESG-based Islamic index will likely apply its ESG screening methodology on the 477 Shariah compliant stocks listed on the main board and development board of the IDX.

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