www.corporate-env-strategy.com Sustainability Inex Dow Jones Sustainability Group Inex: A Global Benchmark for Corporate Sustainability Ivo Knoepfel Increasingly investors are iversifying their portfolios by investing in companies committe to the concept of corporate sustainability. Investors are attracte to this new investment style because it promises to create long-term shareholer value by embracing opportunities an managing risks eriving from ongoing economic, environmental an social evelopments. It focuses on future challenges an is capable of capturing qualitative non-financial information for criteria such as quality of management, corporate governance structures, reputational risks, human capital management, stakeholer relations, corporate social responsibility. Here we present the framework use by the Dow Jones Sustainability Group Inex ŽDJSGI. for ientifying an ranking companies accoring to their corporate sustainability performance. In a yearly review the 10% leaing sustainability companies in each of the 64 inustry groups are selecte for inclusion in the DJSGI. Throughout the year the companies are continuously monitore an, if necessary, ownrate or exclue from the Inex. A variety of sources is use for the assessment an for cross-checking of information, incluing company questionnaires, company ocuments, publicly available information, stakeholer relations, meia screening an company interviews. The selection process is externally verifie an the methoology is reviewe yearly to capture the increasing knowlege an stanarisation of sustainability issues an to align it with ongoing initiatives such as the Global Reporting Initiative. 2001 Elsevier Science Inc. All rights reserve. Ivo Knoepfel, Hea of Rating an Inex Research, ivo@sam-group.com, is responsible for ratings, inex research an client projects at SAM Sustainability Group 1. He has been a founing member of the UNEP Financial Services Insurance Steering Committee an is a co-chair of the Global Reporting Initiative s Measurement Working Group. Ivo octoral thesis is in Life Cycle Assessment from the Swiss Feeral Institute of Technology. Corresponing author: Hea of Rating an Inex Research, SAM Sustainability Group, Zollikerstrasse 60, CH-8702 Zollikon, Switzerlan; Tel.: q41-1-397-1041; fax: q41-1-397-1080; www.sam-group.com; E-mail: ivo@sam-group.com The past years have seen a rapily increasing interest from the financial community in the broa area of sustainability an ethical investments with growth rates in Europe an North America of up to 70% per year. Estimates for ethically screene funs in the UK are in the range between 50bn an over 100bn. In the U.S. socially screene funs 6 I. Knoepfel, Corporate Environmental Strategy, Vol. 8, Iss. 1 (2001) 1066-7938/01/$ - see front matter. 2001 Elsevier Science Inc. All rights reserve.
Sustainability Inex are estimate at aroun USD 2 trillion. A large portion of these assets is screene accoring to simple negative screens, such as avoiance of companies with sales in tobacco an alcohol. Increasingly, institutional investors such as pension funs have starte to shift towars aopting environmental an social investment policies. In the UK, the July 2000 amenment to the Pensions an Investments Act calling for pension fun trustees to isclose in their annual statements the extent Žif at all. to which social, environmental or ethical consierations are taken into account in the selection, retention an realisation of investments is supporting this tren. The more professional institutional investors are entering this market, the bigger is the nee for active screening of portfolios an for consistent rating an benchmarking tools to assess the environmental, social an economic bottom line Žtriple bottom line. of companies an the implications for value creation for investors. This has prompte Dow Jones Inexes an SAM Sustainability Group to launch the first global sustainability equity inex in September 1999: The Dow Jones Sustainability Group Inex ŽDJSGI. 2. Alreay more than 20 financial institutions are using the DJSGI for a variety of proucts ranging from inex funs, certificates an equity linke notes totalling assets uner management of approximately 1.5 USD billion. Moreover, because the companies inclue in the Inex are publicly announce, the wier social investment community is increasingly using the DJSGI as a benchmark. Increasingly, institutional investors..have starte to shift towars aopting environmental an social investment policies. w1x The DJSGI focus on the concept of corporate sustainability an in its first year of operation has alreay shown that this concept leas to a favourable risk/return profile for investors ŽFigures 1 an 2.. An in-epth comparison between the components of the DJSGI an those of its benchmark, the Dow Jones Global Inex ŽDJGI., shows better average returns on equity, on investments an on assets for the sustainability companies ŽFigure 3.. In the long-term sustainability companies eliver more preictable results, which means fewer negative surprises. Therefore, investors will seek out leaing sustainability companies not for outsize performance, which always is temporary, but for aboveaverage growth on which they can rely. Figure 1 Dow Jones Sustainability Group Inex Worl ŽDecember 1993 October 2000, USD, Price Inex. I. Knoepfel, Corporate Environmental Strategy, Vol. 8, Iss. 1 (2001) 7 1066-7938/01/$ - see front matter. 2001 Elsevier Science Inc. All rights reserve.
Sustainability Inex Figure 2 Risk/Return Profiles 5 Years: October 1995 October 2000 Increasingy, investors use corporate sustainability as a proxy for enlightene an iscipline management which is one of the most important factors that investors consier in buying a stock. Concept of corporate sustainability Corporate sustainability leaers achieve their business goals by gearing their strategies an management to harness the market s potential for sustainability proucts an services while at the same time successfully reucing an avoiing sustainability costs an risks. It is this pursuit an relate management capabilities that creates long-term shareholer value. Sustainability opportunities an risks are irectly relate to a company s commitment to five key corporate sustainability performance principles: w2x Innovation: Investing in prouct an service innovations leaing to a more efficient, effective an economic use of financial, natural an social resources over the longterm. In the long-term sustainability companies eliver more preictable results Governance: Setting the highest stanars of corporate governance, incluing management quality an responsibility, organizational capability an corporate culture. Shareholers: Meeting shareholers emans for soun financial returns, longterm economic growth, long-term prouctivity increases, sharpene global 8 I. Knoepfel, Corporate Environmental Strategy, Vol. 8, Iss. 1 (2001) 1066-7938/01/$ - see front matter. 2001 Elsevier Science Inc. All rights reserve.
Sustainability Inex Figure 3 DJSGI Characteristics 5 Year Average competitiveness an contributions to intellectual capital. Leaership: Leaing the inustry towar sustainability by setting stanars for best practice an maintaining superior performance. Society: Encouraging long lasting social well being in local an global communities, interacting with ifferent stakeholers Že.g. clients, suppliers, employees, government, local communities an NGOs. an responing to their specific an evolving nees thereby securing a long term license to operate an superior customer an employee loyalty. Structure of the DJSGI The Dow Jones Sustainability Group Inexes ŽDJSGI. cover the leaing sustainability companies in the Dow Jones Global Inex universe. Inclue in the DJSGI universe are the 2000 largest capitalise companies in the worl. The top 10% of companies with the best sustainability performance in each of the 64 inustry groups is selecte for inclusion in the DJSGI Ž best in inustry approach.žfigure 4.. The DJSGI inex family consists of the following global, regional an specialise inexes: Regional Inexes The Corporate Sustainability Assessment methoology evelope by the SAM Sustainability Group is structure along these lines an covers the three major imensions of corporate sustainability: the economic, the social an the environmental imension. DJSGI Worl inex DJSGI Europe inex DJSGI North America inex DJSGI Asia Pacific inex DJSGI USA inex The DJSGI Europe, DJSGI North America, DJSGI Asia Pacific an DJSGI USA inexes are erive from an are, therefore, subsets of the DJSGI Worl inex. I. Knoepfel, Corporate Environmental Strategy, Vol. 8, Iss. 1 (2001) 9 1066-7938/01/$ - see front matter. 2001 Elsevier Science Inc. All rights reserve.
Sustainability Inex Figure 4 DJSGI component selection process. Externally auite by PricewaterhouseCoopers. Specialise Inexes DJSGI excluing Alcohol inexes DJSGI excluing. Gambling inexes DJSGI excluing Tobacco inexes DJSGI excluing All inexes Ži.e. excluing alcohol, gambling an tobacco. Each specialise inex is erive from an is, therefore, a subset of the relevant regional inex. Corporate Sustainability Assessment The annual DJSGI component selection process reassesses the companies in the Dow Jones Global Inex for their corporate sustainability performances. This reassessment consists of the Corporate Sustainability Assessment, Corporate Sustainability Monitoring an component ranking an selection. Once the components are selecte, they are continuously monitore throughout the year ŽFigure 5.. The Corporate Sustainability Assessment methoology ientifies the leaing sustainability companies from the DJSGI investable stocks universe for each inustry group. The methoology is base on the application of specific criteria to assess the opportunities an risks eriving from economic, environmental an social imensions of each of the eligible companies in the DJSGI investable stocks universe. These criteria consist of both general criteria applicable to all inustries an criteria applicable to companies in a specific inustry group. For each company, the input sources of information for the corporate sustainability assessment consist of the responses to the corporate sustainability assessment questionnaire, submitte ocumentation, policies an reports, an publicly available information. Monitoring meia an stakeholer information assesses a company s ongoing involvement in critical social, economic an environmental issues an its management of these situations. For example, the four categories of Corporate Sustainability monitoring are: Ilegal commercial practices e.g. tax frau, money launering, antitrust, balance sheet frau, an corruption cases; Human rights issues e.g. cases involving iscrimination, force resettlements, chil labor an iscrimination of inigenous people; Workforce conflicts e.g. extensive layoffs an strikes; an, Large isasters or accients e.g. fatalities, accients, workplace safety, technical fail- 10 I. Knoepfel, Corporate Environmental Strategy, Vol. 8, Iss. 1 (2001) 1066-7938/01/$ - see front matter. 2001 Elsevier Science Inc. All rights reserve.
Sustainability Inex Figure 5 Component selection process ures, ecological isasters an prouct recall. The quality of crisis management is also assesse an consiers: Quick reaction, acknowlegment of responsibility, transparent communication Reaction consistent with state policies an guielines Top management involvement Relief measures with involvement of stakeholers No pressures on policy makers, regulators, meia Lessons learne, internal consequences Case not inicative of a systematic weakness of compliance systems Companies that score poorly in the ongoing Corporate Sustainability Monitoring are exclue from the annual Corporate Sustainability Assessment. A separate sustainability screening methoology is use to review changes ue to mergers an acquisitions. w3x To ensure quality an objectivity, an external auit an internal quality assurance proce- ures such as crosschecking of information sources, are use to monitor an maintain the accuracy of the input ata, assessment proceures an results. Assessment Criteria Through the assessment of economic, environmental an societal riving forces an trens, generally applicable corporate sustainability criteria are ientifie an efine. They are base on wiely accepte stanars, best practices an auit proceures an are applie to all inustries, ientically an without exception. Companies that score poorly in the ongoing Corporate Sustainability Monitoring are exclue In aition, inustry specific criteria covering each imension are ientifie for every inustry group. The inustry group specific criteria reflect the economic, environmental an social, political an technological forces riv- I. Knoepfel, Corporate Environmental Strategy, Vol. 8, Iss. 1 (2001) 11 1066-7938/01/$ - see front matter. 2001 Elsevier Science Inc. All rights reserve.
Sustainability Inex ing the sustainability performance of a particular inustry group. They are base on extensive input from inustry specialists an consultants. In a secon step, both the general an inustry specific criteria are then equally efine in terms of sustainability opportunities an risks. An aitional classification of the criteria is introuce accoring to their strategic, management an inustry specific character. Sustainability leaing companies «will irectly benefit from the growing eman for sustainability relate investments. Table 1 gives an overview of all criteria use an their classification. The table also shows the weighting structure use. Aitionally, in each imension a 30% weight is assigne to strategic, a 40% weight to management an a 30% weight to inustry specific criteria. Base on these criteria, a total of 500 companies has been analyse by SAM in 1999 an a total of 600 companies in 2000. Results For each company assesse the total sustainability score can be shown on a scale from 0% to 100% an compare to the inustry average score. Aitionally, subscores for the economic, environmental an social imensions or for the quality of opportunities an risks management can be shown. Every year, companies that have participate in the DJSGI assessment receive a rating report showing their scores compare to the inustry average an qualitative sustainability performance information. Figure 6 shows results for Procter an Gamble, the leaing company in the consumer non-cyclical market sector accoring to the year 2000 reassessment of DJSGI. The leaing companies in each of the ten market sectors in the DJSGI are as follows: 1. Consumer non-cyclical Procter & Gamble Co. 2. Consumer cyclical Bayerische Motoren Werke AG, Volkswagen AG, Daimler Chrysler AG 3. Energy BG Group Plc 4. Healthcare Bristol-Myers Squibb Co. 5. Financial UBS Group 6. Telecommunication Deutsche Telecom Group 7. Basic Materials Dofasco Inc. 8. Technology Fujitsu Lt. 9. Inustrial ITT Inustries 10. Utilities Anglian Water Plc., Transalta Corp Another way of presenting the results is by means of the SAM Sustainability Rating 1, which provies a rating for both sustainability opportunities an risks. It is interesting to compare the sprea of results for ifferent imensions. Figure 7 shows the comparison of the sprea of economic sub-scores an of environmental subscores of 600 companies analyse in the year 2000 Ž33% is the maximum score for each imension.. The ifferences between companies are much bigger for the environmental imension as compare to the economic imension. The main reason for this is the still strongly iffering perception of the importance of environmental issues in ifferent companies an inustries. Economic scores are bunle aroun a surprisingly low score of 14%. The main reason for this is the still relatively low average performance on issues such as human capital management, quality management, an corporate governance stanars. Outlook w4x The DJSGI provie the investment community with the first global benchmark for sustainability that is publishe aily an is base on well-efine, externally reviewe rules an on a high quality of information Žb.. The methoology evelope by SAM Sustainability Group for the DJSGI provies 12 I. Knoepfel, Corporate Environmental Strategy, Vol. 8, Iss. 1 (2001) 1066-7938/01/$ - see front matter. 2001 Elsevier Science Inc. All rights reserve.
Sustainability Inex Table 1 Assessment Criteria an their Classification Economic Ž33% weight. Opportunities Ž50% weight. Risks Ž50% weight. Strategic Strategic planning Corporate governance Organisational evelopment Management Intellectual capital management Risk an crisis management IT management Corporate coes of conuct Quality management Inustry Specific Žfor example. R&D spening Internet security Environmental Ž33% weight. Strategic Environmental charters Environmental policy Responsibility for environmental issues Management Environmental reporting Environmental auits an management systems Environmental profit an loss accounting Environmental performance Inustry Specific Žfor example. Eco-esign of proucts Prouct labelling Innovative services Environmental liabilities Social Ž33% weight. Strategic Stakeholer involvement Social policy Responsibility for social issues Management Social reporting Chil labour Employee benefits Conflict resolution Employee satisfaction Remuneration Inustry Specific Žfor example. Community programs Resettlements Equal rights an non-iscrimination Occupational Health an Safety Layoffs/freeom of association Stanars for suppliers investors with a consistent framework for the financial quantification of corporate sustainability performance. The structure of the assessment methoology allows benchmarking companies on all relevant imensions of sustainability: economic, social an environmental. In aition, company benchmarks for opportunities an risk categories, an for strategic, managerial an inustry-specific criteria are possible. The methoology will be further evelope in the future to reflect our increasing knowlege about the linkages between corporate sustainability performance an long-term shareholer value creation. The DJSGI provies not only investors but also companies with strategic sustainability information. SAM Sustainability Group is planning to provie companies with more etaile rating an benchmarking services as a basis for their continuous improvement efforts. In future, all information exchange between companies an SAM will be supporte by an internet-base information management platform. I. Knoepfel, Corporate Environmental Strategy, Vol. 8, Iss. 1 (2001) 13 1066-7938/01/$ - see front matter. 2001 Elsevier Science Inc. All rights reserve.
Sustainability Inex Figure 6 Sustainability Scores of Procter & Gamble Figure 7 Sprea of total economic an environmental scores of 600 analyse companies 14 I. Knoepfel, Corporate Environmental Strategy, Vol. 8, Iss. 1 (2001) 1066-7938/01/$ - see front matter. 2001 Elsevier Science Inc. All rights reserve.
Sustainability Inex Sustainability leaing companies inclue in the DJSGI will irectly benefit from the growing eman for sustainability relate investments. In aition, being inclue among the leaers in the DJSGI will enhance a company s image in the eyes of its stakeholers an the public at large. Ennotes 1. For more information on the SAM Sustainability Rating please refer to www.samgroup.com. 2. For aitional information about the DJSGI an the escribe corporate sustainability assessment please refer to www.sustainability-inex.com. I. Knoepfel, Corporate Environmental Strategy, Vol. 8, Iss. 1 (2001) 15 1066-7938/01/$ - see front matter. 2001 Elsevier Science Inc. All rights reserve.