Friday, September 24, 2010

Dow Jones Sustainability Index

The New Greenwashing

Painting a wall gray or green
Not really being green.
Instead, shades of gray
The value of being sustainable is increasingly recognized and there is a growing movement to be sustainable and to select sustainable businesses and practices. No surprise then that hype and confusion are also growing, especially where there is money at stake. The Dow Jones Sustainability Indexes "track the financial performance of the leading sustainability-driven companies worldwide."
The Dow Jones Sustainability World Index (DJSI World) covers the top 10% of the biggest 2,500 companies in the Dow Jones Global Total Stock Market Index in terms of economic, environmental and social criteria.
So no surprise after the Gulf of Mexico disaster they removed BP from the list.
As a component of the DJSI World Index, BP was subject to index rules that allow for elimination from the DJSI following extraordinary events... The extent of the oil-spill catastrophe in the Gulf of Mexico and its foreseeable long-term effects on the environment and the local population – in addition to the economic effects and the long term damage to the reputation of the company – were included in the analysis leading up to BP’s removal.
Monitoring of crisis events
assess how well the company informs the public, acknowledges responsibility, provides relief measures, involves relevant stakeholders and develops solutions.
But wait! Who's the new company they just added? Darth Cheney's Haliburton?! Really? This is, after all, a company also complicit in fouling the Gulf.

We are left to draw one of two wretched conclusions:
  • "Sustainability" means something a bit different to Dow Jones.
  • Haliburton really is in the 90th percentile in sustainability amongst the 2500 largest global corporations.
The second is not a valid conclusion, as we will see. The first is certainly true—the assessment method for inclusion in the index says that
companies are ranked within their industry group and selected for the Dow Jones Sustainability Indexes, if they are among the sustainability leaders within their field.
A company like Haliburton is selected in such a sustainability index not because it exhibits the highest standard so much as it does marginally better than its peer group. It's rather like selecting from Stalin, Pol Pot, Mussolini, Genghis Khan, Hitler and Vlad the Impaler for a humanitarian award. The winner does not exemplify the absolute best but rather the relatively least worst.

And not only are they grading companies on a curve, but the Gordon Geckos at Dow Jones use criteria that appear to numerically overweight the economic factors at the expense of environmental ones. What they measure is also not what you might think. There are only two criteria for environmental scoring: one is "industry-specific" (so again grading on a curve) and the other is the company's "reporting" (and which only includes that which is "public.") The general criteria add up to only 43% of the score; "industry-specific" criteria comprise 57% of the final score.

The general role of Dow Jones in the financial industry suggests, however, that these indexes are properly constructed for their actual purpose, providing guidance to money managers looking to structure investments based on notions of sustainability. The index does not select companies with the best sustainability practices but instead selects companies with relatively higher measure while still maintaining the overall sector composition of the larger economy. Such an index can then be compared to general indexes to measure the relative performance of sustainability as a business practice. This may be useful in its way as it demonstrates over time that the most sustainable companies financially outperform those less so. It does not, however, qualify a company such as Haliburton to brag about it.

(h/t TriplePundit)

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