begin asking the reader a little patience as this article is a little longer than usual to be a less familiar topic.
This article aims to contribute to a better understanding of what are and what the rates are not sustainable, what are they and what will not work. This is important to understand the criticisms made of them, so that the reader knows how to use and can draw your conclusions in an informed manner.
To mark the event named BP and Shell least, has recently revived the issue of sustainability indices. The first case refers to criticism of the indices include companies such as BP irresponsible. The second to Shell decided to exclude the Dow Jones Sustainability Index of the indicators to determine some of the bonuses of their executives, to be excluded from the index.
This has given rise to great critical indices especially the lack of transparency about the criteria used for inclusion and exclusion of companies (Jose Angel Moreno Izquierdo wrote a lengthy article, Qualifiers "disqualified? on these critical Responsible Journal on October 28, 2010 (www . diarioresponsable.com). There have also been critical of apparent inconsistencies between rates when companies include and exclude.
To understand all this criticism need to know more about the different indices. Why indexes are created What are the criteria for inclusion of companies what are their problems? Why what are they and how are they used? Why do companies want to be members?
mid-2009 had more than 50 levels of sustainability, most of them created in the last three years, some new are general indices, multisectoral and multinational companies, but most are specialized in clean energy and climate change some are specialized in countries. In September 2010 the stock of Mexico and Istanbul announced the creation of its indexes. In Latin America was created in 2005, the Sao Paulo Stock Exchange (ISE BM & FBovespa). In Spain was created in 2009 the FTSE4Good IBEX, which belongs to the family of indices FTSE4Good, which also consisted of many other stock exchanges in developed countries.
This article attempts to put these criticisms into context and clarify some misunderstandings that have arisen with regard to indexes. Obviously not a treatise on sustainability indexes. I will comment on Dow Jones Sustainability Index (originated by the company then owns the Wall Street Journal, created in 1999) and the FTSE4Good (Financial Times, established in 2001) are the largest and most popular, and the Stock Market Sao Paulo, being the first in Latin America (and second in developing countries). The Dow Jones covers 318 companies, the FTSE4Good not revealed and the Stock Market Sao Paulo only 34 companies. The first two are family and have rates by country and region subscripts.
Let's start by answering why they create these indexes. Are created primarily to meet the needs of the socially responsible investment industry, ISR, which seeks to invest in securities of companies that according to some criterion , qualify as responsible. Investors can buy shares directly (if you know what) or buy shares in investment funds created to reproduce partially or totally the index.
Once investors create portfolios or funds based on criteria of sustainability need evaluate their performance, and used these indexes as benchmark for reference. The sale of these services is where the income comes from rates of Dow Jones and FTSE4Good (this index gives its revenue from licensing UNICEF.) They also prepare indexes of the client. For example, the Dow Jones has sold more than 70 licenses for use. The Stock Exchange of Sao Paulo derives its revenue by charging for applications, as not yet being used as a benchmark. These indexes also have costs that must be covered and, in some cases, provide benefits. Therefore, the methodology in both cases is copyrighted reserved. The product indexes is relatively easy to copy, but expensive to reproduce, and hence the confidence with which they are managed.
is very important to stress that the rating is done "according to a criterion" because this is where they leave a lot of confusion. We have mentioned many times that there is no fully responsible company. The companies have some or many responsible practices (see my recent article "The tip of the iceberg of CSR " http://www.cumpetere.blogspot.com/ ). For this reason, the indexes must decide what criteria and methodology will be used to determine the inclusion of companies.
The Dow Jones index is a kind of "best in class", so it includes companies that are considered more responsible in their "class", ie, within your industry or subsector. Some companies might consider very responsible but not so as the leader and therefore may not be, or exit at any given time if it gets any better. Dow Jones publishes The components, inputs and outputs of the index and the general methodology for calculating the index. The FTSE4Good is an index. Only public companies entering and leaving, and neither its composition nor its methodology in the public domain. What can find are the criteria for inclusion and exclusion that are public and other details about the methodology, as the areas of risk and compliance requirements by risk and level of market capitalization .
The Stock Exchange of Sao Paulo has its own methodology. The process of selection of companies is based on a survey of nearly 200 questions, inviting companies that exceed a minimum of stock market liquidity. The responses from companies that agree to participate are encrypted, eliminating the worst, and it becomes a statistical analysis to determine the best that are submitted for final decision making Advisory Council.
Can these indexes include companies with irresponsible practices? Sure . And here's the first confusion. Firstly, because the primary source of information to companies. In some cases analysts pose questions to the companies or physical information is asked back, but overall the information is controlled by companies. Secondly the selection process itself can not be exhaustive.
In the case of the Dow Jones Sustainability Index are companies that produce products that many would describe as irresponsible, but in your industry are the most responsible and best practices have. In the index there are producers of snuff and spirits, that maybe used with raw material from sustainable agriculture by paying fair prices, excellent human resources management, etc. Companies included are those rated as more responsible in their subsector (also prepared subscripts to the measure, without snuff, weapons or alcohol products). In the case of FTSE4Good, companies may also be irresponsible because it does not measure all of their practices. Should the indexes include companies with products irresponsible? I think not. Is oil a responsible product?
Inclusion criteria are different for each index. Some indexes are updated every six months, other annual update, hence they do not react immediately to the detection of some irresponsibility. This may also explain why a company can enter and exit a rate other than using different criteria for inclusion.
Much of the criticism is based on a mistaken assumption that membership in the indexes, it means that companies are fully accountable. The user of the index, as the user of any tool, you must know how to use. It is possible that producers have rates much of the blame by failing to make this clear. It is also important to understand that a company is at a rate just means that the company was met, at the time of selection, the criteria used by the index.
Another part of the problem, which extends the above is the lack of transparency. These indexes are now going through the same stage that passed the rating agencies during the financial crisis. The methodology was not in the public and users used them without looking behind him. The problem was that the pundits did not trust us and the ignorant. The sustainability indices are also products for use by experts.
Remember that the information they deliver the Delivery companies are confidential, hence it can explain, though not justify, the lack of transparency regarding this information. Can we qualify as a responsible company that considers its sustainability information confidential? Many readers will say that this is a contradiction, which is a sign of irresponsibility. But here is also worth remembering that there may be information that would allow competition to decipher some secrets. If the information were to become public, companies begin to provide less information and therefore may be disadvantaged or even to stop. We are not defending the confidentiality, we are explaining. It would be desirable that the companies disclose all the information they gave to the indexes, make it available on their sustainability reports. But is that confidentiality is not as trivial as it seems.
is also alleged lack of transparency on the part of the indexes on the reasons for excluding or including companies. During 2010 there was a case that one of the indices exclude some firms that were included in another index. While it may seem absurd, remember that what is considered as a sustainable company in an index is different from what it considers another.
Moreover, disclose the reasons for the exclusion of a company may cause damage important, ranging far beyond the "irresponsibility" in which it is excluded. Some are excluded because they went one better (Dow Jones). Again, some would argue that disclosure is what to do. But we must also remember that rates are not institutions whose aim is to reward and punish irresponsible. They do not compete. If so, would be very few companies that wanted to participate in the process, and lose the opportunity for continuous improvement in sustainability. Presumably they know companies excluded because they are excluded and do something to improve and re-enter the index. As long as the cost-benefit to do so warrants.
There is a delicate balance between transparency and effectiveness, including precision and between utility rates. It is not trivial.
is also important to understand why companies want to become members. Presumably, the inclusion in the index should improve responsible business practices, improve market liquidity, improving access to financial markets and, perhaps, until his return on the stock. In a detailed study of the sustainability index a bag that I have just completed I realized that in fact, responsible practices of companies tend to improve to be included in the index and deteriorate to leave, but that their inclusion not have any affect on market liquidity, access to financial markets. In many studies it has been a confirmation on whether the inclusion makes his return on the stock is higher than that of companies not included. In some studies it seems that yes, in others not. They might be the most profitable to make efforts to be in the index. In any case, being in the indexes, not hurt.
Much of the criticism arising from that some people expect rates to be something they are not. Are not intended to be a source of information for the public, not information intermediaries between businesses and the public. Are special products for those who want to buy, are investment products to guide a group of investors. Many of those who criticize them because the indexes do not play the role they wanted to meet . We must remember that there is a public good, is a private good. This does not mean that just as we require companies to be responsible, so we should also require indexes. But we must also ask: Do you publish details of their business processes and components of its products and services?
But the day will discuss CSR in the sustainability indices.
But as in the case of companies, we can not achieve all of the overnight. Purists might be trying to create indexes and fully transparent. Companies you participate? We could pretend that contain only firms fully responsible. Where are they? Lose a good opportunity to contribute to sustainability.
With all these problems, the indexes can help improve the sustainability of enterprises, both through the process of internal introspection that they should take to prepare the information, and by the feedback they receive. Moreover, the inclusion in these indexes can help improve market liquidity and access to financing, which can start a vicious virtuoso of sustainability.
not throw the baby with the bath water bath.
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