SRI indices

Once a company has understood the basics of SRI indices and their value chain, the following tips should smooth the process of dealing with SRI indices and the information requests that accompany them.

How to be efficient

1. Put index data requests in the context of other SRI communications activity
2. Prioritise responses to research providers with leverage
3. Understand and use the competitive dynamics of the SRI index business
4. Reward efficient practice with improved access
5. Integrate into broader SRI communications activity
6. Don’t let the tail wag the dog
7. Maximise reputational leverage
8. Stop moaning

Tip 1: Contextualise within other SRI communications

Our general guidance to companies is that they should divide the time they allocate to SRI between:

• 50% - buy-side analysts and portfolio managers
• 50% - SRI sell-side analysts & research agency analysts (this includes time spent responding to index questionnaires)

Clearly this is a rough guide – but if a company is spending more than 25% of its ‘SRI time’ on indices, then they’ve probably got the balance wrong.

Tip 2: Prioritise research providers with leverage

Although an SRI index may be the most visible output from some SRI research providers, companies should remember that these research providers typically supply information & ratings to a much wider investment client base.

Companies should therefore prioritise responses to research providers with the most significant list of investor clients – not just those with a single high-profile index contract.

Companies can identify the other clients of research providers by viewing the SRI-CONNECT profiles (with subscription-level access) of the following:

• EIRIS (Research provider for FTSE4Good)
• Impax (... FTSE Environmental Markets Series)
• MSCI ESG Research (... MSCI ESG Indices)
• Sarasin (... STOXX Sustainability indices)
• Sustainable Asset Management (... DJSI)

Tip 3 Understand & use the competitive dynamics

SRI index provision is a competitive business – most large providers are now doing it.  The supply of SRI research to index providers is certainly a competitive business – with different agencies competing for these high-profile contracts.  Responses from companies are the lifeblood of SRI research providers.

The economics of SRI research for indices are difficult; tracker funds charge lower fees than actively managed funds so introducing intensive (& expensive) SRI research into the low-fee, low-margin end of the SRI fund market creates problems.

Research providers will understandably be tempted to export this problem to companies by requiring them to fill in questionnaires or to correct swathes of inaccurate data.

Companies should resist this and SRI research agencies and index providers that resolve these problems in innovative ways.  They should avoid those that ‘fix’ the problem by exporting the work of data collection to the companies.

Put in simple terms, the research agencies that gather information themselves from a companies’ published material should be prioritised over those that expect companies to complete questionnaires.

Tip 4: Efficient practice => improved access

Companies can build on Tip 3 by actively favouring those research providers that do not try to export their margin problems onto companies.

They can reward positive practice by agencies with more detailed context and better access to more senior and specialist management.

Tip 5: Integrate into broader SRI communications activity

I recently heard an anecdote that one company spent $150,000 responding to SRI information requests.  This is excessive.  My calculations suggest that this figure should be closer to $16,000  (See SRI: The $150,000 question(naire)).

Achieving these efficiencies will, however, require companies to Take control of their SRI communications – details of how to do this can be seen in this presentation | report | videoclip | spreadsheet.

Tip 6: Don’t let the tail wag the dog

Companies should understand their businesses and how to integrate sustainability within them much better than any SRI researcher ever will.

Companies should therefore take account of the broad thrust of SRI research demands (to improve their sustainability performance) but should never fall into the trap of interpreting information requests as detailed guidance on how they should be managing their sustainability programme or their business.

Tip 7: Maximise reputational leverage

In exchange for the demands that they make, index providers have done a good job in supporting included companies and enabling them to use their endorsement as a quasi-certification.

Once included, companies should use this support.  At the same time, they should ensure that inclusion within indices is set firmly within the context of wider SRI investor and other stakeholder communications to prevent them being held hostage to the (necessarily subjective) views of a single analyst or firm.

Tip 8: Stop moaning

Review these articles (SRI indices: types & usage; SRI indices: the value chain; SRI indices: who cares?), apply the tips above and ask yourself the question: “Do the benefits of seeking SRI index inclusion for my company outweigh the burdens.

• If they do, complete the process with maximum efficiency
• If they don’t, ignore the indices

Either way, stop moaning!

There are five levels to the ‘ecology’ of SRI indices:

• Index providers
• Index families (or series)
• Indices
• SRI research agencies
• Investment product providers

Index providers

All of the main index providers now have SRI capabilities.  These capabilities are described in the SRI-CONNECT profiles for the following:

• Dow Jones Indexes
• FTSE
• MSCI (Indices)
• Russell (Indices)
• STOXX
• S&P (Indices)

Index families

Many of the index providers offer a number of different types of SRI indices.  These are typically grouped into ‘families’ of indices with similar characteristics.

For example, FTSE offers SRI indices grouped into the following ‘families’:

• FTSE4Good indices
• FTSE CDP Carbon Strategy indices
• FTSE ECPI Italia SRI indices
• FTSE Environmental Markets indices

Many of the other index providers group their indices in similar ways.

Indices

Within families of similar styles, providers typically offer a number of individual indices – each with a slight variation in scope.  Staying with the FTSE example, the FTSE4Good family consists of a number of constituent indices including: FTSE4Good Europe Benchmark Index, FTSE4Good Europe 50 Index, FTSE4Good US 100 Index etc.

SRI research providers

Specialist SRI research providers are used to identify which companies are (and are not) suitable for particular indices.  These providers can be:

• In-house to the index provider (e.g. MSCI ESG Research provides research for the MSCI ESG indices)
• External SRI agencies (e.g. EIRIS for FTSE4Good)
• Independent fund managers (e.g. SAM for DJGSI or Sarasin for STOXX Sustainability Indices)

Investment product providers

Passive fund managers and product providers purchase index licences that enable them to manage funds or to create and manage structured products.

Index providers also supply risk data and analytics tools to asset managers in their attribution analysis and other reporting activities.