Sustainability indexes may still be regarded as largely irrelevant by many investment analysts but companies increasingly see a listing on the FTSE4Good or the Dow Jones Sustainability Index as an important affirmation of their commitment to corporate responsibility and a measure of their progress. Ben Cooper reports.
This month saw the annual review for the Dow Jones Sustainability Indexes and the semi-annual review of the FTSE4Good index. The fact that this may have passed largely unnoticed by many in the business world, let alone by a wider public, is not perhaps surprising. Both indexes suffer from a problem which those championing corporate social responsibility (CSR) know only too well, that of being viewed by the mainstream investment community as peripheral or at worst irrelevant.
However, the growing emphasis being placed on CSR means listings like the Dow Jones Sustainability World Index (DJSI World) and the FTSE4Good are taken more seriously today than when they first appeared about a decade ago.
Gavin Neath, senior vice president for sustainability at Unilever, which retained its position as the leading food company on the DJSI, says the company values the index because it is “one of the few objective external measures” of corporate sustainability, adding that it gives the company “a sense of how we’re progressing relative to our peers”, while being important to “informed stakeholders who watch our business”. Retaining the number one position is “a matter of pride to our employees and it does keep us on our toes”, he adds.
That Unilever should attach value to sustainability indexes is not surprising as it has always placed a high priority on corporate social responsibility, long before such things were indexed in fact. More revealing perhaps are the changing attitudes across a wider range of companies.
Leo Martin, a director of GoodCorporation, which advises companies on CSR issues, has seen a marked rise in the importance his clients are now attaching to sustainability indexes where previously they had been “talked about occasionally”.
US meat processor Hormel Foods gained a DJSI listing for the first time this year, prompting CEO Jeffrey Ettinger to say: “We are proud to be recognised on this list for the first time. This reflects the efforts we have made to define our corporate responsibility priorities in the areas of people, products, process, performance and philanthropy.”
Corporate interest in the indexes could well be a sign that companies are attaching greater value to longer-term business criteria. However, Martin points out, the mainstream analysts tends not to share that long-term vision. “The problem is that the investment horizons for the vast majority of investment analysts are three months, six months and 12 months,” says Martin. Save for the advent of a scandal, he adds, the issues covered in the DJSI and FTSE4Good do “not affect share prices within their time frame”.
Analyst disinterest is not the only challenge the indexes face. While Neath may be right in saying that Dow Jones and FTSE are objective arbiters of the companies they examine, the information they are generally relying on comes largely from the companies themselves.
The DJSI evaluates companies across a wide range of ESG (environmental, social, governance) criteria, including corporate governance policy, risk management, reporting, climate change strategy, codes of conduct, human capital development and philanthropic activities. The information is obtained from four sources: a company questionnaire, company documentation such as social and environmental reports, media and other stakeholders and direct contact with companies. So three out of the four information sources originate directly from the companies.
Dr Craig Mackenzie, acting chairman of the FTSE4Good Policy Committee, concedes that the sustainability indexes “rely very, very heavily on what companies say they’re doing”. This has led to NGOs voicing criticism of sustainability indexes when listed companies are shown to fall short of the standards they have set. The indexes are to a degree tarred with the same brush.
This problem speaks to a more fundamental challenge. So far the indexes have tended to focus on assessing management policies and systems rather than actual performance outcomes. This leads to the accusation that gaining listings can be more about box-ticking than engineering change.
But it would be unfair to characterise this as negligence or complicity in greenwash on the part of the indexes. Objective, measurable and comparable assessment of CSR criteria is a problem which everybody working in the CSR arena has to contend with. The sustainability indexes simply suffer from exactly the same problem.
Mackenzie continues: “It’s relatively easy to assess whether a company has an environmental policy or whether it has a management system, but it’s exceptionally hard to assess performance. You get into really difficult benchmarking and comparability issues, not to mention the data availability. Certainly my policy committee at FTSE realise that one of the biggest challenges for assessment is trying to crack the performance issue.”
But while Mackenzie accepts that some companies may be guilty of box-ticking and then found wanting in terms of performance, he says he has strong belief in the power of the indexes as “a catalyst for corporate activity” in the CSR space. When the FTSE4Good changed some of its criteria some years back, Mackenzie recounts, some 400 companies would have found themselves to be under threat of delisting. Instead, FTSE wrote to all 400 giving them time to alter their policies accordingly and within two years some 350 of the companies had complied.
Mackenzie also points out that the prominence and cachet that the indexes can provide gives CSR managers in companies more leverage with senior executives to influence action at the operational level.
However, while Dow Jones and FTSE are brands that are highly valued among business leaders, the fact remains that their sustainability offshoots carry nowhere near the same weight as the core indexes. However, even in the mainstream investment community Unilever’s Neath senses some change.
Neath believes that as environmental stewardship and social responsibility become ever more central to strategy, a company’s approach to these areas can be seen as an indicator of management quality for analysts. Unless a company can show that it is “at least good and competent in this area it’s going to raise doubts in the minds of those analysts about the management quality of the business”, he says. “For mainstream investors [a listing] is not a determining factor as to whether or not to buy one stock in preference to another. That said, it is increasingly becoming ‘table stakes'”.