Stock index seeks to promote socially responsible companies

The Sustainability Group Index allows investors to zoom in on stocks owned by socially responsible companies Keystone

Fund managers with a social conscience have a new tool which allows them to identify the financial prospects of companies with good environmental and social policies.

The Dow Jones Sustainability Group Index is a joint venture between Dow Jones Indexes in New York and the Zurich-based company, Sustainable Asset Management.

It includes more than 200 companies based on their commitment to the environment, their use of technology, corporate relations and their treatment of the workforce. The index represents 68 industries from 22 countries.

Fund managers can use sub-indexes to screen out investments in alcohol, tobacco or gambling. Any company which derives more than 50 per cent of its annual revenue from arms sales is disqualified.

The index is researched through an annual questionnaire sent to businesses as well as through independent scrutiny and media archives. There is also a yearly review of the selection process carried out by external auditors.

The market for sustainable investment is becoming fashionable. It is estimated that Swiss financial institutions have channelled around SFr2 billion into ethical funds. The country’s state pension fund has also earmarked two per cent of its money for sustainable investment.

Many analysts say people are finally coming around to the idea that companies with good ethics are most likely to increase shareholder value.

“Most people talk about the triple bottom line when they talk about sustainability,” says Tauni Sanchez, the managing director of the Dow Jones Sustainability Group Index.

“That’s economics, the environment and the social aspect. But in my opinion there’s only one bottom line and that’s financial. If you treat your people well and have good policies against sexual and racial discrimination, for example, your workforce is likely to be more productive.”

There is much talk at the moment of the divide between the old and the new economy but for Sanchez the real divide is elsewhere.

“There is no old/new economy but just well-run companies,” she says, “If you look at the internet sector right now it’s been taking a dive but companies that are well-managed are retaining their value. It doesn’t matter if it’s an internet company or a steel company.”

The trend towards sustainable investment as a means to boost profit could eventually make instruments like the Dow Jones Sustainability Group Index redundant.

But for now it’s establishing itself as a useful benchmark for fund managers interested in finding businesses that offer good investment returns as well as the best environmental and social records.

by Michael Hollingdale