Trawling the bottom in Europe
In union is strength
Caledonian collaboration
Most equity fund managers still like to group companies into two broad camps: growth companies, with strong earnings per share momentum; and value companies, those cheap in terms of share price to book value of their assets. But it is becoming increasingly fashionable to analyze companies by another very different standard: the extent to which they are sustainability-driven. Sustainable development, as defined by the UN's Brundtland Commission, is investment that meets "the needs of the present generation without compromising the ability of future generations to meet their own needs". Applied to corporations, this means that sustainability companies are those that take account of social and environmental factors as well as purely financial considerations in managing their businesses.
It may sound earnestly politically correct, or even indicative of a toppy and complacent equity market in which investors feel they can allocate funds on woolly criteria, instead of statistics. But increasingly managers and investors suspect that managing for sustainability can produce long-term shareholder returns. They could come from anticipating and meeting market demands for sustainability products as much as by avoiding the risks and costs of committing environmental degradation.
Defining sustainability is a challenge. Managed funds have varied interpretations on what sustainability is, which companies should qualify and how they should be judged. All funds evaluate companies differently, and most choose from a small investor universe. Dow Jones has created what it hopes is the benchmark for this new style of investment. Dow Jones Sustainability Group Indexes (DJSGI), launched in September with a market capitalization of $4.3 trillion, are the world's first global sustainability indices.
Dow Jones has formed a joint venture with Zürich-based corporate assessor SAM Sustainability Group. They spent the past year investigating over 3,000 Dow Jones companies, and together have compiled a list of 200 companies in 68 industries in 22 countries that meet its sustainability standards.
DJSGI insists that it is not passing moral judgements, not separating nasty companies from nice ones. It will not even disclose the companies that have performed poorly according to its sustainability criteria. It is simply determining which companies best integrate social and environmental factors with economic factors, and includes only the top 10% from each industry in the index. Sustainability performance is determined from an extensive questionnaire where companies are scored on various criteria. These range from asking how many nationalities a company has on its board of directors to more pertinent questions about what companies have done to prepare for Y2K and whether they use recyclable packaging. Also featured are questions about whether a company has ever lost business because of corruption or has suffered public relations problems through neglecting stakeholder groups such as employees or customers, which may have damaged profitability and shareholder returns. In case companies are tempted to fudge their answers, their truthfulness is verified with company reports and stakeholder relations.
US healthcare company Bristol-Myers Squibb has been given the highest score of all by DJSGI for its health and safety practices and environment-friendly approach to its materials. European companies are overweight in the index, particularly those in Scandinavia, the UK, and German-speaking Europe. However, no companies from Italy made the index and only one from France.
The DJSGI is actually a family of 25 indices. There is a global index and three regional indexes covering North America, Europe and Asia-Pacific, and one country index for the US.
The DJSGI pointedly distinguishes itself from ethical investing for fear it will look unscientific and impracticable. The idea behind sustainable investment is to increase long-term shareholder value. The concept is being marketed as a way of determining tomorrow's winners in a way that simple returns cannot reveal. A company's pursuit of sustainability opportunities makes corporate sustainability, DJSGI argues, an investible concept. But in its quarterly report it mentions altruistic aims. It stresses the "sustainability principles-to-performance bridge" and the "benefit circle" it is helping to form. It believes that the index will bring sustainable investors and companies together and with this "will come a greater appreciation of the importance of integrating sustainability principles into both corporate and investment strategies," says Reto Ringger, CEO of SAM Sustainability Group.
Five financial institutions have signed up to market investment products based on the DLSGI: Baloise Insurance Company, Fuerst Fugger Privatbank, HypoVereinsbank, Robeco Group, and Sal Oppenheim. Companies with a good sustainability performance seem to be gaining ground, but as yet it is unclear why. The annualized return over the past five years of the companies included in the DJSGI world index is 17.67%, compared with 12.55% for the Dow Jones Global Index. This might reflect the high number of large-cap companies in the index - these typically have more advanced sustainability policies in place - or perhaps it reflects the fact that savvy management can balance economics with social and environmental factors with ease. Whatever the reason, if the DJSGI continues to outperform other more traditional indices the nice and the nasty investors alike will be queuing up for a stake. Alex Mathias