CORPORATE SUSTAINABILITY INDEX (ISE) METHODOLOGY

Transcription

1 CORPORATE SUSTAINABILITY INDEX (ISE) METHODOLOGY February 2014

2 CORPORATE SUSTAINABILITY INDEX (ISE) METHODOLOGY The Corporate Sustainability Index (ISE) is compiled as a weighted average of a theoretical portfolio of stocks pursuant to criteria set forth in this methodology. The indices compiled by BM&FBOVESPA adopt concepts and practices set forth in the Concepts and Practices Manual for BM&FBOVESPA Indices. OBJECTIVE The ISE is designed to measure average stock performance tracking changes in the prices of stocks of companies recognized for their commitment to corporate sustainability. The index portfolio comprises no more than 40 stocks selected by the Index Governance Committee (see the Attachment). INDEX TYPE The ISE is a total return index (see the Concepts and Practices Manual for BM&FBOVESPA Indices). ELIGIBLE STOCKS The ISE is composed exclusively of shares and units representing shares of BM&FBOVESPA-listed issuers that meet the inclusion criteria set forth below. The index universe excludes Brazilian Depositary Receipts (BDRs) and shares of issuers under judicial or extrajudicial reorganization, government- or court-ordered administration or intervention, as well as shares otherwise designated to be under exceptional trading status (see the Concepts and Practices Manual for BM&FBOVESPA Indices). INCLUSION CRITERIA Eligible stocks which may be selected as index constituents are those that meet the following cumulative criteria: 1. Being amongst the eligible stocks which, sorted in descending order by individual Tradability Ratio (IN) over a period comprising the three (3) previous portfolio cycles, rank in the top 200 positions (see the Concepts and Practices Manual for BM&FBOVESPA Indices). 2

3 2. Having actively traded in fifty percent (50%) of the trading sessions held over a period comprising the three (3) previous portfolio cycles. 3. Not constituting penny stock (see the Concepts and Practices Manual for BM&FBOVESPA Indices). 4. Satisfying the sustainability attribute and having been selected by the ISE Governance Committee (see the Attachment). 5. Where a company has multiple listings, if one type of stock meets all the membership requirements, the other types of stock of that company will be accepted for membership as well, provided they rank in the group of eligible stocks which, as measured in descending order by individual Tradability Ratio (IN) over a period comprising the three (3) previous portfolio cycles, collectively account for ninety-nine percent (99%) of the sum total of such metric (see the Concepts and Practices Manual for BM&FBOVESPA Indices). EXCLUSION CRITERIA A constituent shall be removed from the index theoretical portfolio in the event that: 1. Any of the inclusion criteria set forth above is no longer met; 2. In the course of the portfolio cycle, it is designated to be under exceptional trading status (see the Concepts and Practices Manual for BM&FBOVESPA Indices). In this event, the removal will be implemented from the close as of the first trading day following recognition of such status; 3. An occurrence in the course of the portfolio cycle has (in the discretion of the ISE Governance Committee) materially and adversely affected the corporate sustainability performance of the issuer. In this event, the removal will be implemented in accordance with the removal decision of the ISE Governance Committee (CISE). WEIGHTING CRITERIA The index constituents are weighted by market value attributable to the free float per constituent (free float meaning shares or units outstanding and available for trading, as applicable) subject to a liquidity-based weight cap (see the Concepts and Practices Manual for BM&FBOVESPA Indices). 3

4 However, an industry-sector weight cap applies requiring the stocks (taking into account all types and classes of shares or units representing shares, as applicable) to be grouped by sector. Thus, as measured at the time of selection for the index theoretical portfolio and at any subsequent review, the contribution of each group of sector stocks to the index must not exceed fifteen percent (15%) of the weighting. If this limit is breached, adjustments will be made to cap the relative weight of the relevant group of sector stocks at the above limit, with the surplus being proportionally redistributed amongst the other sector groups. 4

5 ATTACHMENT THE ISE GOVERNANCE COMMITTEE CISE In the early 2000s, BM&FBOVESPA (then known as Bovespa) and other important capital market entities (ABRAPP, ANBIMA, APIMEC, IBGC, IFC, ETHOS INSTITUTE, the Ministry of the Environment and the Getúlio Vargas Foundation FGV 1 ) agreed to join efforts to create a stock index designed as a benchmark for sustainable and socially responsible investing in Brazil. This spawned the Corporate Sustainability Index, or ISE, launched with the financial support of the IFC. In the wage of this initiative, eight of these organizations established the index s governing body, or ISE Governance Committee (CISE), under the chairmanship of BM&FBOVESPA, with the mission of ensuring transparency in index construction and constituent selection. In 2007, the United Nations Environment Program, or UNEP, joined the Committee, following in 2012 by two additional members, the GIFE organization and IBRACON, the independent auditors association. In addition, BM&FBOVESPA is responsible for the technical management and calculation of the index. The ISE is designed to measure the returns on a hypothetical portfolio of stocks of companies recognized for their commitment to sustainable development, practices and strategic alignment with corporate sustainability, thus highlighting their investment attractiveness and their role as drivers of responsible sustainable practices across business industries. Eligibility and Constituent Selection In order to assess the corporate sustainability performance of companies with listings on BM&FBOVESPA, so as to determine 1 These are the participant members of the ISE Governance Committee: ABRAPP: Brazilian Association of Closed-End Pension Funds (Associação Brasileira das Entidades Fechadas de Previdência Complementar); ANBIMA: Brazilian Financial and Capital Markets Association (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais); APIMEC: Brazilian Association of Capital Market Analysts and Investment Professionals (Associação dos Analistas e Profissionais de Investimento do Mercado de Capitais); BM&FBOVESPA: The Brazilian Securities, Commodities and Futures Exchange; GIFE: Group of Institutes, Foundations & Enterprises (Grupo de Institutos, Fundações e Empresas); IBGC: Brazilian Institute of Corporate Governance (Instituto Brasileiro de Governança Corporativa); IFC: International Finance Corporation; IBRACON: Institute of Independent Auditors of Brazil (Instituto dos Auditores Independentes do Brasil); Ethos Institute for Business and Social Responsibility; Brazilian Ministry of the Environment (MMA); and UNEP: the United Nations Environment Program. 5

6 stock eligibility and the index membership, BM&FBOVESPA and the ISE Governance Committee have agreed a technical partnership with the Center for Studies on Sustainability (GVces) of the Business Management School of Getúlio Vargas Foundation (FGV-EAESP). The GVces has developed a questionnaire-based testing method to assess the corporate sustainability performance of companies whose listed stocks rank in the top 200 positions by liquidity. It is a comprehensive questionnaire designed to assess sustainable performance from seven dimensions, including environmental, social and financial dimensions, among other things, for an integrated evaluation. In addition to evaluating the triple bottom line, (TBL or 3BL), other important sets of indicators have been added to the survey. A wider general dimension assesses practices as commitment to sustainable development and internationally agreed sustainability targets; as well as level of sustainability transparency (including as uncovered by the questionnaire answers) and reporting standards. The nature of the product dimension considers, among other concerns, issues relating to potential health hazards affecting consumers or users and other parties, as a result of consumption or handling of products and services. Another dimension tackles state of the art corporate governance and actual practices. More recently, a new dimension has been added to the questionnaire addressing the issue of climate change in greater depth, for an assessment of strategies, risk management and commitment to sustainable practices, as well as opportunities captured in the face of current and prospective climate change developments. Each dimension has been divided into a set of categories, which in turn unfold into a number of topic indicators. The environmental, social, financial and climate change dimensions all follow a similar pattern, divided into four primary categories, namely (a) Policy (commitment indicators); (b) Management (indicators for programs, targets and monitoring); (c) Performance; and d) Compliance (or reporting, for the climate change dimension). The approach to the environmental dimension requires special questionnaires targeting the different business industries and their particular impacts on the environment. Answering the questionnaire which presents only objective questions is a choice that shows commitment to sustainability issues and concerns which are ever more significant for modern-day society and, thus, for investors. 6

7 After submitting their responses, companies must send corporate documents to prove, as samples, the answers given. The sustainability questionnaire s answers give a measure of the quantitative performance of the answering company, while corporate documents give a measure of qualitative performance. Combined, these performances make up a results matrix that is the basis for the ISE Governance Committee s selection of the 40 constituent stocks of the Corporate Sustainability Index. Early on, the index membership review would take place in December 1, and remained unchanged through November 30 of the following year. However, these dates changed in 2011, so that now the membership review takes place in the first Monday of January (or the first business day thereafter, if the stock market is closed for business on that Monday) and remains unchanged through to January of the next year, when the new portfolio composition takes effect. Additionally, the index is rebalanced twice over the year, in May and September, when free-float data for the index constituents are updated (as the index theoretical quantities are based on such data) and the relative weight of each group of sector stocks recalculated for observance of the industry-sector weight cap. 7