Investors are now using various ratings and reference indices to evaluate financial and socially responsible investment (SRI) portfolios. Typically, SRI indices constitute a relevant proxy as they evaluate the environmental, social and governance (ESG) performance of listed businesses. A large number of SR contractors, analysts and research firms are increasingly specializing in the collection of ESG information as they perform ongoing analyses of corporate performance. Many of them maintain a database and use it to provide their clients with ESG analyses - including proxy advice - benchmarks and information about engagement strategies of different corporations. They publish directories of ethical and SRI funds - as they outline their screening criteria. In a sense, these data providers support the responsible investors in their selection of funds.
KLD / Jantzi Global Environmental Index, Jantzi Research, Ethical Investment Research Service from Vigeo EIRIS and Innovest are among the firms that analyze the corporations’ socially responsible and environmentally-sound behaviors. Some of their indices shed light about the impact of products, the production processes, or investments in renewables or recycling. Similarly, social issues are also a common category for these services that evaluate socially responsible investment portfolios.
Generally, socially responsible investment indices benchmark different types of firms hailing from diverse industries and sectors. They adjust their weighting on specific screening criteria as they choose which firms to include - or exclude - from their indices. One of the oldest SRI indices for CSR and Sustainability ratings is the Dow Jones Sustainability Index (DJSI). The companies that are featured in the DJSI are analyzed by the Sustainable Asset Management (SAM) Group.
Another popular SRI index is FTSE Russell’s KLD’s Domini 400 Social Index (also known as the KLD400) which partners with the Financial Times (FT) on a range of issues. Similarly, FT partners with an EIRES, an ESG research firm, to construct its FTSE4 Good Index series. Smaller FTSE Responsible Investment Indices include the Catholic Values Index, the Calvert Social Index, the FTSE4Good indices and the Dow Jones family of SRI Indices.
The KLD400 index screens the companies’ performance on a set of ESG criteria. It eliminates those companies that are involved in non-eligible industries. Impax, a specialist finance house that focuses on the markets for cleaner or more efficient delivery of basic services of energy, water and waste also maintain a group of FTSE Indices that are related to environmental technologies and business activities.
The Catholic Values Index uses the U.S. Conference of Catholic Bishops’ Socially Responsible Investment guidelines to scrutinize eligible companies, as in corporations with generous wage and benefit policies, or those who create environmentally beneficial technologies. This index excludes certain businesses trading in “irresponsible” activities.
Calvert Group’s Calvert Social Index examines 1,000 of the largest U.S. companies according to the social audit of four criteria: the company’s products, their impact on the environment, labour relations, and community relations. The latter “community relations” variable includes issues such as the treatment of indigenous people, provision of local credit, operations of overseas subsidiaries, and the like. The responsible companies are then featured in the Index when and if they meet Calvert’s criteria. This index also maintains a target economic sector weighting scheme.
Other smaller indices include; Ethibel Sustainability Index for Belgian and other European companies and OMX GES Ethical Index for Scandinavian companies, among others. Generally, these SRI indices are considered as investment benchmarks. In a nutshell, SRI Indices have spawned a range of products, including index mutual funds, ETFs, and structured financial products. Many SRI mutual fund managers are expected to consider other important criteria such as risk and return targets. For instance, iShares lists two ETFs based on the KLD Index funds, and Domini itself offers a number of actively managed mutual funds based on both ESG and community development challenges. In addition, there are research and ratings vendors who also manage a series of mutual funds, including Calvert and Domini.
In sum, these socially responsible investment indices serve as a ‘seal of approval’ function for the responsible businesses that want to prove their positive impact investment credentials to their stakeholders.
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