It’s not often that we see a UN organization putting its money where its mouth is, but the UN Global Compact (UNGC) may have done it this time with the launch of a new stock index which seeks to correlate sustainability and financial performance.
UNGC’s 10 principles are seen as one of the easier sustainability programs for organizations to get behind. UNGC keeps it simple with 10 general principles and the request that compact signatories “embrace, support and enact, within their sphere of influence, a set of core values” to meet them. Signing up is as simple as agreeing to that, and issuing an annual statement of progress on these efforts. This ease of commitment has led to many pundits questioning the usefulness of the UNGC. If everyone can join and reap the marketing value of being a signatory to a worldwide compact on sustainability practices – doesn’t that dilute the value of the compact as a whole? The compact has also been criticized for not pushing companies to push their sustainability practices further.
The question is still out on whether or not the UNGC really moves the needle on sustainability, however the performance of the organization’s new stock index appears to indicate that adherence to the UNGC is correlated with positive financial performance. Pretty big news!
The UNGC announced the launch of the Global Compact 100, an index of companies committed to the UNGC’s ten principles. Better yet, the index outperformed the FTSE All World in each of the last two years.
“While the performance of the GC 100 should not be seen as clear evidence of a causal relationship between a commitment to corporate sustainability practices and stock performance, there appears to be an exciting correlation,” said Georg Kell, Executive Director the UN Global Compact, in a news release. “Moreover, the results may also reflect the fact that sustainability performance is a factor that is receiving increasing interest from investors.”
The past performance of the 100 chosen stocks is impressive, but of course it’s a bit easier to pick a stock fund based on past performance than it is to accurately create one with future positive earnings. Only time will tell if the index continues to outperform the FTSE.
The fund was created by Sustainalytics out of the overlap between that organization’s “research universe” and public companies that are UNGC signatories. 772 companies (out of over 8000 UNGC signatories) fit both criteria and were up for consideration. Among those 772, financial performance was considered, but Sustalytics also looked at how closely the companies adhered to the UNGC, the depth of the annual communication on progress, and whether or not the company’s chief executive submitted its required annual letter of support for the UN Global Compact and its principles.
So what does this mean for sustainability practitioners?
I’m putting this one down as good news. Even though the UNGC isn’t as strong as it could be, and even though we have a while to go before we can see if the fund outperforms stocks from companies without sustainability programs, anything that makes it easier to make the business case for sustainability is good news by me.
Even if all this proves is that companies that have the marketing savvy to see the benefit of signing on to the UNGC are also smooth financial performers, that’s a good thing. Because companies that see the marketing benefits of sustainability will soon find other benefits to thinking sustainably.