Ethical Performance
inside intelligence for responsible business
 

editorial

A bright future is in prospect for ethical investment indices

February 2008

Another day, another ethical investment index. Last month, three big equity index providers added to their already extensive offerings. Standard & Poor’s launched the ESG Index of 50 India-based companies, selected for their environmental, social and governance policies, FTSE Group brought in an Environmental Technology Index, and Dow Jones introduced several faith-based indices (see page four). Religion, social factors and green tech – the index field was a lot less crowded before investors had a choice of passive and active trackers, exchange-traded funds and index derivatives.

Clearly defined investment themes – clean technology, corporate governance, sustainability – are grist to an index provider’s mill, making socially responsible investment and equity indices natural bedfellows. More than $11billion (£5.5bn) is now invested in funds based on KLD indices, and the Dow Jones Sustainability Index family underpins over $6bn in funds. This will grow, and not only because investors see the business case for themes such as energy efficiency and clean tech.

SRI funds currently use conventional indices to benchmark their financial performance. This will change as institutions lose their suspicion of SRI, and an SRI benchmark may soon emerge. Academic studies show that SRI broad indices perform roughly on a par with their conventional cousins, a fact noticed by US institutions offering screened investment options to 401(K) pension plans. With large universes available for broad SRI indices, and passively managed funds costing less than actively managed ones, the future for ethical investment indices is bright.

This growth is underpinned by more than financial considerations. Ethical investors have redefined the purpose of an investment index, which can now act as an ethical as well as financial benchmark. FTSE4Good prods companies into meeting progressively higher ethical standards by steadily raising the bar. As a result, a constituent gains credibility. Indeed, FTSE was surprised at the keenness of companies to be included.

A list of the ethical investment indices in which a company has been included now features regularly in non-financial and many annual reports, and activist investors use investment indices such as the forthcoming Access to Medicine Index to influence company behaviour (see page one). They have also raised awareness in emerging markets: South Africa, Brazil and India now have specific SRI indices, making it easier for investors to identify responsible companies in those countries.

No index can capture a company’s culture: meeting mechanical inclusion criteria and doing the right thing can be very different. Enron ticked all the right boxes and before its collapse was in at least one respected SRI index. To that extent, ethical investors still have to do their homework.
 




Peter Mason | Global | Indices

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