Can Financial Markets Push for CSR? Part 2

Part 2 of  Professor Adrian Zicari’s But research on South America reveals a surge in local-specific sustainability indexes for investors seeking a clearer picture of firms’ responsible business practices.

By Adrian Zicari, Full Teaching Professor in the Accounting and Management Control Department and Director of the Center of Excellence Management and Society at ESSEC Business School.

Does it work? 

In Brazil, the Sao Paulo stock exchange created the ISE corporate sustainability index as far back as 2005 – the fourth in the world and the second in an emerging market. Data is collected on a voluntary basis and corresponds to seven different criteria: general, product nature, corporate governance, economic and finance, environmental, social, and climate change. Both a good score and a minimum liquidity are required before selection is made. All in all, the index does not seem to have better returns compared to a classical investment portfolio. However, it can be argued that SRI investors may still prefer to invest in companies with better ESG performance even if financial results remain similar. Moreover, it can be said that the ISE directly influences corporate practice, appearing attractive to firms wishing to make their reputations visible, gain knowledge and exert influence on competitors and suppliers via their presence in the index.
Mexico has the IPC Sustentable, created by the Mexican stock exchange in 2011 with the involvement of the European ESG rating agency, Eiris. Here too, a requirement is minimum liquidity and companies are assessed on three criteria – environmental (50% of the score), social (40%), and governance (10%). As with the Brazilian ISE, the IPC Sustentable changes its list of companies yearly.
The latest newcomer is the Chilean Sustainability Index jointly launched in 2015 by the stock exchange and S&P Dow Jones.  Known as the Dow Jones Sustainability Index Chile, it follows a best-in-class approach – cherry-picking the best companies and with no exclusion of sector – with assessment made on the basis of information submitted by listed companies. If a company decides not to answer the questionnaire, the evaluators can use publicly available data. The biggest difference from the Brazilian and Mexican indexes is the use of the Dow Jones name. It will be interesting to see in the next few years if this choice of launching a sustainability index with a widely known brand will accelerate the international awareness for this Index.

Helping responsible investors make their decisions

For investors, the most valuable information is not the Index composition itself but the methodology for assessing ESG performance. This is where the Dow Jones Sustainability Index Chile “best-in-class” approach may prove difficult for the socially responsible investor to swallow. Controversial businesses such as oil and tobacco can be included and, given that only the very best firms are selected, many firms with very good responsible business reputations may remain off the radar screen. As a result, Sustainability Indexes cannot perfectly replace the lack of ESG rating agencies. Indeed, both serve different purposes: the former are meant for reference or benchmark for SRI portfolios while ESG rating agencies evaluate the ESG performance of particular firms. This said, information from Sustainability Indexes in the context of Latin America can still help SRI investors to make their decisions. And for responsible investors, where there is no index to glean there are always corporate reports to read, announcements to hear – or the doom-laden prime-time TV news to watch.

Read Part 1 of Prof. Adrian Zicari’s article

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