SRI indices

There are three principal types of sustainability index:

• Ethical exclusion indices - which are constructed by screening out companies exposed to 'undesirable' industries and business activities or companies that contravene religious principles
• Broad sustainability indices – which are constructed from top-down by filtering a conventional market index through broad-based sustainability (often ‘best-in-class’) screens
• Specialist thematic indices – which are constructed from bottom-up by identifying stocks exposed to specific activities or issues.  Renewable and clean tech indices are common; climate change indices are becoming more so.  There are also a number of esoteric single-issue indices (e.g. human capital management indices etc.)

Usage of SRI indices

Indices are used by providers of investment products in a variety of ways:

• As weighted constituents lists against which to manage:
• passive funds
• ETFs
• structured products
• As benchmarks for actively managed funds (although many active SRI fund managers use mainstream benchmarks)
• As stock universes for active fund management (rarely)

There are five reasons for companies to seek inclusion within SRI indices:

• assets under licence
• internal management impact
• benchmarking & stakeholder challenge
• indirect investments
• external communications benefit

There is one reason for companies to ignore SRI indices: Completing the data / info submissions can take ages!  (See SRI indices: 8 tips for companies).

Assets under licence

Disclosure from index providers of assets managed against their indices is patchy.  However, information from the three largest providers gives a sense of scale:

• DJSI World: $6.2bn under licenced management
• FTSE: 100 clients (including pension funds, asset managers, banks etc.)
• MSCI: AuM in publicly-available funds is c. $12bn but this does not include a significant number of other discretionary private and institutional accounts

Internal management impact

SRI index inclusion is a highly visible mark of approbation for a company’s sustainability impact – particularly as it comes with the imprimatur of investors.

As a result it can engage the competitiveness of CEOs and therefore enable CSR managers to drive their sustainability agenda through companies.  Indeed the information demands made by research providers can be used by CSR managers as ways of driving internal performance improvement

Benchmarking & stakeholder challenge

Some companies find the CSR managers find the questions presented by index questionnaires to be a form of stakeholder feedback in themselves and the results to be an easy way of benchmarking sustainability performance against peers.

Some care should be taken with this as index questionnaires tend to represent the specific needs of SRI indices and should not be confused with the views of the SRI industry as a whole.  However, where research providers employ established and insightful analysts, these views can be considered as one perspective from the SRI industry.

Indirect investments

It is often assumed that inclusion within SRI indices is a widely followed metric within the SRI industry and that index inclusion has knock-on effects as other SRI fund managers purchase stock.  This effect is typically overstated.

Asset managers that run active SRI funds typically show little interest in whether Company A is, or is not, included within Index B.  They tend to have their own ratings systems or providers that they will use to determine a stock’s suitability or not.

External communications benefit

However, as index updates typically occur in public and new inclusions / exclusions often receive press coverage.  Equally companies often use index inclusion within wider marketing materials thereby bringing it to the attention of suppliers, customers and peers.

Although there is clearly a logical disconnect in investment instruments being used for these wider audiences, SRI indices are one of the most visible (and best funded) providers of whole company sustainability assessments.  (Others include media-sponsored listings).

Detailed analysis of this area and its benefits or not, however, falls outside the scope & competence of this website.