September 11, 2006
DJSI Takes Holistic Approach to Assessing and Promoting Corporate Sustainability
by Bill Baue
Dow Jones Sustainability Indexes assesses overall sustainability performance, driving constant
improvement through the competitiveness to attain best-in-class status.
Last week, leading global socially responsible (SRI) index providers Dow Jones Sustainability
Indexes (DJSI) announced index
changes resulting from its annual review. DJSI added 46 companies to its world index and deleted
36, added 26 to the STOXX pan-European index and removed 16, and added 17 to its newest index
covering North America, eliminating 13. While some SRI indexes announce changes resulting from
technical shifts, such as mergers or acquisitions, all DJSI changes announced are due to
sustainability issues. However, DJSI's structure does not lend itself to identifying which
specific sustainability criteria prompted the change, but rather takes a more holistic approach.
"We don't identify specific reasons for deletions because of the nature of the
research process--there are no single criteria that can lead to a deletion," said Alex Barkawi,
managing director of Sustainable Asset Management (SAM) Indexes, which manages the DJSI series. "A
deletion is the result of a company's total score leading to its ranking being below the threshold
for companies we take in."
"Since the total score is the sum of the entire set of
criteria we look at, it's not possible to point to a single or several criteria and say, 'These
were the reasons,' because a company may score very low on a single criterion but be so good on
other issues that eventually its total score positions it among the leaders," Mr. Barkawi told
Additions to the DJSI World Index included Amgen (AMGN), Cisco (CSCO), Dow (DOW), Kraft (KFT), ServiceMaster (SVM), and Walt
Some of these names may surprise social investors, given the significant problems associated with
them--such as Cisco impinging Internet freedom in China, Dow ducking accountability for the Bhopal
disaster, ServiceMaster's ChemLawn for its toxic herbicides and pesticides. However, Mr. Barkawi
contends that their positive actions counterbalance their negative impacts.
of issues flow into the assessment and are reflected in the criteria which they affect, for
instance, stakeholder relations, and they would therefore weigh negatively on the total score,"
explained Mr. Barkawi. "However, if a company does a lot of things right in other dimensions, it
may still be top of its industry."
Interestingly, companies deleted from one DJSI index
are not automatically deleted from other indexes in the family, due to the different sizes of the
universes and hence the number of companies competing for best-in-class status. For example, Kodak
(EK), Ford (F), Goldman Sachs
(GS), and Whole
were booted from the DJSI World Index, but not the DJSI North American Index.
might be among the top within its industry regionally, but may not reach that threshold on a global
level," Mr. Barkawi pointed out.
SAM includes the top 10 percent of sustainability
performers from the biggest 2,500 companies in the global index, and the top 20 percent from the
largest 600 companies in the North American index. So while companies like Goldman Sachs (which
introduced a comprehensive environmental policy within the year) and Whole Foods (a perennial SRI
favorite despite some governance problems this year) fared well compared to their regional peers,
they did not hold their own on the global level.
"Most of the companies that get deleted
have actually not scored worse compared to last year--they just have not progressed as fast as
their peers," said Mr. Barkawi. "The companies compete amongst each other and raise the bar
SAM has traditionally provided companies it assesses free feedback reports
showing companies' scores on all the different criteria and the industry average for particular
criteria, as well as the best score a company in this industry has achieved. Due to company
requests for more in-depth information to help determine areas for improvements to move ahead on
sustainability, SAM has introduced a fee-based benchmarking service to cover
the expense of providing this additional information.
Institutional Shareholder Services
(ISS), a leading proxy advisory firm (that
is now on the auction block), has endured strong criticism for providing consulting services to the
companies it evaluates to help them perform better, creating the perception of a "pay-for-ranking"
system. DJSI avoids this through independent verification of
its sustainability scoring.
"For each annual review, PricewaterhouseCoopers comes into the office and takes a
random sample of companies we assessed, and they go through the entire assessment again based on
the methodology we have defined, and they eventually come up with an average error margin and say,
'Here's company A, you've given them a score of X, but they should have gotten a score of Y,'" Mr.
Barkawi said. "Through that, we have installed a mechanism that is very capable of getting a
third-party assurance that we actually follow the methodology as we have defined it."