Wednesday, November 17, 2010

The Sustainability Index - Friend or Foe?

Goldcorp Inc. has been added to the Dow Jones Sustainability Index (DJSI).  It's a company with a checkered past.  And while Goldcorp has taken steps to improve its human rights practices as of late, its listing on the DJSI led me to wonder, are sustainability indexes good or bad when choosing to invest in sustainable and socially responsible companies?

When companies like Goldcorp or BP Plc. are added to the DJSI, or any other sustainability or corporate social responsibility (CSR) index for that matter, it always seems to raise the ire of critics.  Does listing on the DJSI simply give companies an unwarranted stamp of approval?

In my opinion, yes and no.

When the BP oil spill happened, it kicked off a debate in the socially responsible investing (SRI) community about the value of sustainability indexes.  How could BP - revered by some as a leading-edge oil company on the climate change and renewables file - be listed on the DJSI, yet still have such a catastrophic environmental accident?  For some in the SRI industry, it led to an identity crisis.  Should SRI practitioners have seen this coming and excluded BP from their portfolios? 

BP also generated a lively email debate amongst members of the UN Principles for Responsible Investment (UNPRI) Academic Network about the value of sustainability indexes.  And in true academic style we came to no clear consensus on the matter.  It did however, generate some interesting discussions, for example "If the Niger Delta were the Mississippi Delta, would Shell would still be on the Dow Jones Sustainability Index?" And, "Should extractive companies even be on the index, given the very nature of extraction is by definition, unsustainable?"  (You can read more of the opinions and debates in an upcoming special edition of the Journal for Sustainable Finance and Investment, thanks to Matt Haigh of Aarhus University.)

On the surface of it, yes, perhaps listing on an index like the DJSI, or its peers such as the FTSE4GOOD or the Jantzi Social Index (JSI) here in Canada, constitutes a stamp of approval.  But I think we need to take a closer look.

Achieving a listing on a sustainability index should not be viewed as some sort of holy grail of sustainability.  This is far too narrow a view.  Listing on a sustainability or CSR index is not an insurance policy against corporate misconduct.  And investors that are under the impression that it is, need to re-think their approach.

The DJSI and many other indexes follow a 'best of sector' approach - choosing companies that have marginally better environmental and social policies, procedures, governance and performance than their peers.  So Goldcorp, in comparison to say Ivanhoe, Anvil, or our most recent Canadian villain Teseko Mines, has made notable progress over the past two years despite some ongoing controversies.

Recognition of this fact by the DJSI does not mean that Goldcorp embodies the essence of sustainability.  And it certainly does not mean the company is immune from any future conflicts or controversies.  It simply means that it is one of the better companies in a sector that is late to the sustainability game (and is just beginning to recognize the mounting social and environmental risks mining companies face).

The argument was put most eloquently by Carlos Joly, of the climate change scientific advisory committee at Natixis Asset Management in a recent IPE Article:  "Indices reflect the past, not the future. They are a straitjacket, which prevents investors and their managers from making intelligent decisions based on where the world is going."  Joly argues that investors must be more discerning, and not get duped into thinking an index investment will protect them from future risk.

So, back to the task at hand:  friend or foe?  Sustainability indexes can be useful tools for recognizing company achievements, and for separating out the leaders from the laggards based on past performance.  They become dangerous when investors take them at face value, assuming a portfolio that tracks the DJSI faces little environmental and social risk and/or is protected from future embarrassment.

Sustainability is a work in progress.  Investors that seek to invest in sustainable companies need to be partners in developing and promoting sustainable corporate practices.  The act of listing and de-listing companies on sustainability indexes alone will not get us there.  Neither will passive investing in sustainability indexes.

We need ongoing, proactive, focused and strategic shareholder engagement.  And we need investors to encourage all companies, leaders and laggards, to innovate and find ways to operate with an ever-smaller impact on the planet, and a greater contribution to human well-being.

This blog article was cross-posted on