Responsible Investor

Indices rise to the sustainability challenge

A new breed of indices is being added to the established SRI benchmarks.

Increasing investor interest in sustainability is closely linked to the changing mainstream perception of the link to long-term shareholder value. Investors can now choose from a growing suite of sustainability focused indices as benchmarking tools, investment universes or as underlyings for passive mandates, according to the size of their desired investment universe. Two examples are, the “very-best-in- class” indices such as the Dow Jones Sustainability series (DJSI), which capture the best 10% by sector- around 300 companies- and the “best-in-class” approach as measured by the recently launched KLD Sustainability indices representing 37.5% of global sector capitalisation. Another provider, Ethibel, does not set a target market capitalization but like the others applies global standards in the company selection process, eschewing a country weighted approach. SAM Indexes defines sustainability leaders as companies best managing the risks and opportunities of trends such as demand for greater corporate transparency, aging population, impending C02 emissions and recycling legislation. While the selection methodologies between sustainability index providers may differ widely, the compilers of best-in-class indices are united by

the challenge of maintaining their relevance to investors by consistently identifying these leaders.
In the wake of the Enron and WorldCom scandals, investor attention has resulted in significant improvement in corporate governance to the extent it has become more difficult to differentiate leaders from laggards.
Two widely recognised sustainability issues facing companies are increasing fossil fuel prices and CO2 emissions legislation. While some low carbon impact companies may wonder what climate change has to do with them, these are nevertheless critical trends for facilitating the differentiation of the best from the rest across a variety of industries. Take eco-efficiency as an example. Against a back drop of USD90 per barrel oil prices and rising coal (+40%) and gas (+60%) prices during the last 5 years, in spring 2006 the European Union adopted a Directive to enhance energy efficiency and reduce energy consumption by 9% by 2016. These realities may well provide the impetus for companies to move energy efficiency up the corporate agenda.
This has yet to become the norm, however; the significant difference in eco-efficiency score between

Not a member? Register here »