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November 08, 2002
DJSI and FTSE4Good Index Licensing Continues to Expand
    by William Baue

Index-based separate accounts, certificates, and exchange-traded funds are among the products being created based on these European SRI indexes.

European SRI stock indexes, which track companies deemed to be leaders in sustainable social and environmental practices, are continuing to be one key to the expansion of SRI in Europe. The FTSE4Good Index and the Dow Jones Sustainability Index and their derivatives are leading the way in giving investors sophisticated new products. Institutional investors there are taking notice.

"Institutional investors are increasingly moving into this market," said Alexander Barkawi, managing director of the Sustainable Asset Management (SAM) Indexes, a part of the SAM Group. "At the very beginning, we had the bulk of licensees using the benchmarks for retail funds. We have a growing number of licensees who then go out to their institutional clients to manage separate accounts for them based on the Dow Jones Sustainability Index. That's a trend that is probably a little more than a year old."

SAM Group is an independent, Switzerland-based financial services firm that focuses exclusively on sustainability. It partnered with Dow Jones Indexes to launch the DJSI in 1999.

State Street Global Advisors (ticker: STT) uses the DJSI to manage a 500 million Swiss franc (approx. $345 million US) account for the Swiss Federal Social Security Fund. State Street landed the account, which represents one of the largest passive SRI mandates to date, in May 2001. In addition to institutional use, DJSI indexes continue to attract licensees for retail products.

FTSE4Good also licenses its indexes in Europe. Assets linked to FTSE4Good indexes total about $1.5 billion.

"There are currently about 20 investment products in Europe that have been linked to the FTSE4Good indexes," said FTSE Group Deputy Chief Executive Will Oulton. "There are a mix of retail and institutional products from the likes of UBS (UBS), CSFB (CSR), JP Morgan (JPM), Nordea Bank, Co-operative Bank (CPBB_p.L), Close Brothers, BNP Paribas (BNPP) and Fortis Investment Management (FTS). UBS has options and certificates on all FTSE4Good Indexes."

DJSI also licenses its indexes to clients who offer certificates.

"What we also see is a growing number of structured products being launched based on the index," said Mr. Barkawi. "There is a certificate that was launched this May by Merrill Lynch (MER) based on our pan-European sustainability index, the Dow Jones STOXX sustainability index, and that certificate tracks the performance of 50 stocks out of that European universe."

Merrill Lynch Product Manager Filip Matic explained how certificates function.

"A certificate, basically, is nothing else than a bond linked to an equity index. It's an issuing vehicle," Mr. Matic told "We had an index tailor-made by SAM Research, called the SAM Top 50 Sustainability Europe Index, that the certificate is based on and linked to. Whereas most normal indexes are market-cap weighted, ours is not--it is equal weighted for all 50 constituents."

Also in May, WestLB Panmure launched a certificate based on the performance of the DJSI EURO STOXX, which tracks sustainability leaders in the Euro-zone.

"Europe is pretty far ahead of the U.S. at integrating these issues," said Mr. Barwaki.

Mr. Oulton concurred, and expanded on this opinion.

"Socially responsible investing is more established in Europe in part because of a more positive regulatory environment," said Mr. Oulton. "In Europe, there is pressure on governments to require companies to have systems in place and publish reports on social and environmental policies. That's not the case in the United States. These environmental and social issues are not on the political agenda in America and its unlikely there will be a government push for this type of regulation."

Mr. Oulton explained the role of indexes in promoting SRI in Europe.

"The availability of index products, such as FTSE4Good, makes it increasingly viable for institutional investors to transition to a portfolio based on a SRI benchmark at a relatively low cost," said Mr. Oulton. "The creation of SRI indexes has also helped with the development of exchange-traded funds as tradable products in this area."

FTSE is hoping that SRI exchange traded funds can carve a niche in the U.S. market. On Wednesday, FTSE announced a joint effort with the American Stock Exchange (Amex) to introduce exchange-traded funds (ETFs) based on FTSE4Good indexes, representing the first such SRI products in the U.S.

An SRI ETF based on the DJSI is also forthcoming.

"An exchange-traded fund is a combination of a stock and a fund," said Mr. Barkawi. "Basically, it is a fund that you can invest in and diversify which is traded realtime on the stock exchange. It's a very efficient instrument. It's usually also a very cost-effective instrument that allows both retail and institutional investors to diversify and invest into different portfolios. We are all set up for such an exchange-traded fund launched based on our sustainability indexes. We have a licensee and they are ready to go in the upcoming months."


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