Director of London-based Action on Smoking and Health
(ASH) Clive Bates sent a letter to SAM Head of Research
Alois Flatz calling into question the inclusion of British American Tobacco in an index of
companies defined by their commitment to sustainability. Mr. Flatz clarified SAM's definition of
"We do not consider BAT a 'sustainable company.'" Mr. Flatz wrote.
"No company anywhere is sustainable in an absolute sense. We identify companies that lead in the
transition to a sustainable future, and therefore identify the relative sustainability performance
of a company to its peer group."
SAM and DJSI use a best-in-class approach that
identifies the top sustainability performer in all sectors, regardless of any given sector's social
or environmental impact. It is possible that if no company in a given sector exceeds a defined
threshold of sustainability, no company in that sector is included in the indexes. In other words,
SAM and DJSI do not include a bad company just because its peers are even worse. However, they do
not exclude a company simply because it operates in a so-called 'sin' sector such as arms or
"If you exclude them, you do not give them an appropriate incentive to
improve," said SAM Managing Director Alexander Barkawi. "Also, we cater to mainstream investors
who want to be exposed to the entire economy in their portfolios. The exclusion of an industry is
an ethical decision, with so many different views on what industry is considered 'sin.' We
therefore follow a flexible approach of providing a composite index and at the same time subset
indexes that exclude certain industries. And then the asset manager or the licensee can decide
which path to follow."
The inclusion of United Technologies and BAT particularly concerned
the Dutch asset management firm Robeco. The additions prompted Robeco, which
manages approximately $106 million US, to discontinue using DJSI to benchmark its Duurzaam Aandelen
fund. The Duurzaam Aandelen fund excludes armaments and tobacco as well as fur, pornography, and
"Once we decided we had to switch to another index, we took into consideration
not only other SAM DJSI indices but also sustainable indices from other providers like FTSE," said
Ronald Florisson of Robeco's Corporate Communications department. "Based on a number of criteria
such as sector and regional weight, market capitalization, and definition of sustainability, we
decided to use the FTSE4Good Global index. The definitions of FTSE4Good as well as the combination
with the expertise from EIRIS [Ethical Investment Research Service] used by FTSE resulted in better
fit to our SRI philosophy."
FTSE4Good excludes companies involved in tobacco, arms, and
nuclear power. Exclusions represent the other major strategy in socially responsible investing
besides best-in-class. Both practices are employed by social investors, depending on which fits
best with their philosophical approach to investing.
While Robeco's defection represents
an expression of preference for one method of advocating sustainability over another, both methods
enjoy widespread support. Robeco's action is counterbalanced by opinion that calls into question
the exclusionary approach. In his presentation at the New Zealand Socially Responsible
Investment (SRI) Conference in May, VicSuper CEO Bob Welsh explained how his foundation, which
manages a multi-employer superannuation fund for the State of Victoria, considered applying SRI
criteria to its investments.
"Our research started with a look at ethical investing," said
Mr. Welsh. "We were disappointed as this approach seemed to involve a moralistic and often single
issue focus: no nuke, no grog, no smokes."
Instead of implementing exclusions, VicSuper
selected a fund manager who screened companies on a best-in-class basis.