Who is best in class

The Down Jones sustainability index have just issued a press release were they state that the DJSI is now including 20% of all the companies in Down Jones (out of 2500).  In the release DJ states that it will use 513 components in their screening process and in addition they will use 459 components that exclude companies involved in tobacco, alcohol, gambling, armament and firearms, and adult entertainment.

One of the reasons for the change and expansion of the index is that institutional investors have been asking for a more diverse “investment universe”. As Rodrigo Amandi CEO from SAM Indexes (the screening company) states “SAM Indexes has repeatedly received inquiries for a more extensive investment universe from institutional investors managing sustainability portfolios. It is inspiring to see the increasing importance investors attribute to sustainability criteria and we are looking forward to providing this benchmarking tool, while continually expanding our unique Sustainability Investing platform.”  

This made me wonder on what ground the index was expanded. One of the major issues in SRI is the exposure to risk. Because your choice of portfolio is relative small compared to traditional investors there you have fewer options to diversify your investments. If however the index from where you can choose companies from suddenly expands your risk will subsequently fall as you have more options to pick from. The DJSI is one of the criteria’s that many investors use to legitimize their choice of portfolios and companies use the DJSI logo on their homepage when they get included. So there are a lot at stake when the index is included both for all parties involved.

I think this show some of the complexity of SRI and how to handle the fundamental issue of “being good while doing well”. A social conscious and responsible investor wants to invest in companies that make the world better off in the long-term. This would naturally mean that a lot of companies would have to be excluded. In the DJSI we find companies like Chevron (Oil) and until recently was also BP included. Both companies would not be associated with long-term sustainability. Also companies like Vodafone and General Electric are part of the top holders of the index both associated with conflict minerals which are used in mobile phones.

I will not argue for or against specific companies being part of the DJSI or another index for that matter but I think it highlights some of the central issues that we as investors face. To what extend does a given index support our own view of what a sustainable company constitutes? Why exclude Alcohol and include Oil? I would not be able to tell you which one make out the biggest danger to our common health. Why exclude firearms and include mining companies and electronic manufacturers that rely on the cheap raw materials which the arms are helping produce.

Of cause one has to draw a line somewhere and it might as well be where the DJSI puts it as anywhere else but It makes one wonder what a true sustainable business really is.

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