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Sustainability 13 Nov 2019

What is a sustainability index used for?

These days the term sustainability seems to cover everything, and financial institutions are adapting to this new way of understanding the economy. In a gradual but unstoppable fashion, companies are incorporating sustainability criteria in their management. As a result, private and institutional investors are starting to call for global sustainable investment indexes that are rational, solid and reliable to allow them to monitor the evolving profitability of their sustainable investments.

Sustainability indexes are instruments to measure the responsibility of a certain company in social and environmental areas. The more they take these aspects into account as they develop their business, the higher the score they will obtain. More questions about sustainability? Here are some answers.

Why are sustainability indexes needed?

“Sustainability indexes are designed and built with the goal of providing information to institutional and retail investors that value the importance of the companies’ environmental and social responsibility and corporate governance in their everyday management, in addition to economic results, in their decisions to purchase shares, ”notes  Beatriz Fernández, environmentalist and professor at the Instituto Superior de Medioambiente (Higher Institute of the Environment).

Victor Viñuales, the Director of Ecodes and CSR Professor at the IE Business School, stresses the difference between socially responsible investments and other investments: “Instead of asking the three classic questions: the interest it gives, the security, and availability,  it adds the questions ‘where does this go’ and ‘what am I supporting with my money’”.

How are sustainability indexes built? 

Independent companies exist that are specialized in designing the methodology for the assessment, and they also select the companies that will be part of the analysis process. “These assessment processes, which are repeated at different times, determine which are the best companies based on their results in economic, environmental and social areas,” notes Fernández Viñuales, who adds that “one of the problems that could appear is finding companies with internal communication problems, whose underlying problems are unknown to the rest of the company.”

Which sustainability indexes currently exist?

There are basically three sustainability indexes that have the largest impact and representativeness on an international level. In the U.S., it’s Domini 400 social index; in Europe the two most popular are the Dow Jones Sustainability Indexes and FTSE4Good.

Dow Jones Sustainability Indices evaluates three spheres of action (economic, environmental and social) based on approximately 24 parameters. Their scrutiny amounts to the three scores indicated above and an overall score. They all go from 0 to 100.

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Socially responsible companies are attractive because one of their objectives is to increase the value for the shareholder in the long term.

FTSE4Good  gives an overall score of 0 to 5 and a score for each of the six most relevant areas for them (environmental management, climate change, human rights, labor rights, labor standards in the supply chain, corporate governance and the fight against corruption).

Why are they important for investors?

“The more you know about a company, the safer your decision could be. If you only see the outside, and not the roots – which could be problems with communities, their salary policy, etc. – this could lead to financial chaos. It’s important to find out whether there are environment, social or ethical controversies. It’s an analysis of policies and facts,” notes Viñuales, who emphasizes that nevertheless, “not everyone will have access to this extra-financial analysis, but it’s important to use it”. Meanwhile  Beatriz Fernández argues that socially responsible companies “are attractive because one of their objectives is increasing long-term value for shareholders”.

How does CSR affect investments?

As Fernández explains, “Corporate Social Responsibility is a different approach to business that creates long-term value for shareholders, taking advantage of opportunities and minimizing the risks from new environmental, social and economic developments.”  The degree of success for a company’s strategy entails taking advantage of opportunities and minimizing these risks.

How can these risks be measured?

They can be quantified and used to identify and select leading companies that are attractive for investment. “Since it is possible to economically quantify sustainability, shareholders have identified the concept as a new discriminating element in their investments,” says Fernández.

Have these indexes had an impact on Spanish corporations?

According to the environmentalist, the demands and consequences of Spanish companies’ participation in the scrutiny of the sustainability indexes has had an even greater influence than the responsibility standards or Global Compact. “Through these assessments, companies have found a tool for competitiveness, organizational alignment, international leadership, growth and stability from the value of action. They are vitally important in planning, programming, and defining projects and fields of action in corporate responsibility,” she concludes.

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