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September 08, 2005
Banks and Financial Service Providers Figure Prominently in FTSE4Good Attrition, DJSI Matriculation
    by William Baue

Corporate social responsibility plays an important role at banks and financial service companies, which are not only recipients but also increasingly purveyors of socially responsible investment.

The two leading global socially responsible investment (SRI) index providers, the Dow Jones Sustainability Indexes (DJSI) and FTSE4Good, announced results of their annual reviews yesterday and today, and will reconstitute their indexes over the next weeks. High-profile names stud the DJSI lists, with McDonald's (ticker: MCD), Daimler-Chrysler (DCX), IBM (IBM), Colgate-Palmolive (CL), and Abbott Laboratories (ABT) amongst the 57 additions and Dow (DOW), Alcoa (AA), Fannie Mae (FNM), HJ Heinz (HNZ), Home Depot (HD), Mattel (MAT), and VW (VOW) amongst the 54 deletions. While the FTSE4Good lists are also populated with some well-known companies, such as Georgia-Pacific (GP) and Walgreen (WAG) amongst the 24 deletions and Cinergy (CIN) and MCI (MCIP) amongst the 42 additions, their most striking feature is the sector concentration of the deletions list.

Fully half (11 of 22) of the companies deleted for failing to meet FTSE4Good's Environmental Criteria inhabit the banking and financial services sector, including AmSouth Bancorporation (ASO), Bank of New York (BK), Charles Schwab (SCH), Fifth Third Bancorp (FITB), Keycorp (KEY), National City (NCC) and US Bancorp (USB).

On the other side of the same coin, banks and financial services companies account for more than a quarter (15 of 57) of the DJSI additions list, including Bear Stearns (BSC), Goldman Sachs (GS), H&R Block (HRB), Nomura Holdings (NMR), the London Stock Exchange (LDNXF.PK), and Provident Financial (PFG.L).

While financial service companies were previously considered to be far removed from issues of social and environmental sustainability, a sea change has occurred in the last few years in the understanding of how financial services impact society and the environment. For example, more than 30 banks worldwide have now voluntarily adopted the Equator Principles, which require them to assess the social and environmental impact of project financing over $50 million. And the Enhanced Analytics Initiative (EAI) provides financial inducements for sell-side analysts to assess corporate social and environmental performance in their buy, sell, and hold recommendations.

Indeed, financial services companies sit at the fulcrum of the investment transaction, making their commitment to corporate social responsibility (CSR) a key driver of socially responsible investment. In other words, the more banks and financial service companies qualify for SRI indexes, the more likely they will be to further fuel the growth of SRI.

"We are excited about the accelerating momentum that [the sustainability investments] market has created," said Alex Barkawi, managing director of Sustainable Asset Management (SAM), which administers the DJSI. "Assets are up, mainstream brokers are moving in, and investment managers are expanding their offerings."

Two weeks before qualifying for the DJSI, Goldman Sachs issued a report authored by Abby Joseph Cohen and Michael Moran entitled The Growing Interest in Environmental Issues is Important to Both Socially Responsible and Fundamental Investors. As the title suggests, the report endeavors to tear down the wall between social and mainstream investors by pointing out that issues such as climate change know no boundaries.

"[W]e take the position in this introductory paper that whether or not an individual investor is convinced that antropogenic, that is, manmade GHGs [greenhouse gases] are leading to changes in the Earth's climate, this issue will have implications for the financial markets and for corporate performance," write Ms. Cohen and Mr. Moran (emphasis in original).

Why did DJSI add so many banks and financial service companies, while FTSE4Good deleted so many? DJSI utilizes a best-in-class approach, rewarding best practice on sustainability issues. Many banks and financial service companies recognize the increasing importance of addressing social and environmental issues in their sector, and hence are striving toward best practice. DJSI's annual review recognizes this progress in the 15 financial service companies added to its ranks (and deleted only three.)

On the other hand, FTSE4Good utilizes negative screens while also employing an approach of raising the bar on social and environmental performance criteria incrementally to promote gradual and achievable improvement from companies. In May 2002, the FTSE4Good Policy Committee approved new, more stringent environmental criteria for inclusion in the indexes, and the recent review revealed almost a dozen banks and financial service companies that have not raised the bar on their own environmental performance.

"FTSE operates an engagement program throughout the year to support and assist companies to understand and meet the FTSE4Good criteria," said Mark Makepeace, CEO of the FTSE Group. "This is what gives FTSE4Good its unique benefit, it works not only to facilitate investment in companies demonstrating good CSR management, but also as a valuable source for listed companies to benchmark themselves against current best practice standards."


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