In Indiana Jones and The Last Crusade, the fearless archaeologist has to step through a grid of letters in order to reach his goal. If he puts a foot on the wrong letter he’s promised nothing more than a long fall to a hard landing.
Converting business’ existing tools and structures to a more sustainable model is equally fraught with danger. One false move and it’s possible that the existing financial basis to business could be lost with no real gain elsewhere.
This is why the establishment and development of sustainability indices by two of the most well respected brands, Dow Jones and FTSE, was a welcome development.
Both have now been operating for over seven years and look set to strengthen their role as stock indices of the future. But how so they gauge the sustainability of their constituent companies?
Dow Jones Sustainability Index
The majority of the decision to allow a company entry to the index and it’s ranking within it comes from a questionnaire. This is sent to companies seeking entry to the index and has to be filled out and signed by a senior manager.
This questionnaire is made up of 51 items, covering aspects of business as diverse as performance appraisals, support of international agreements and fees paid to the company’s auditors.
Other company related documentation, such as annual and sustainability reports, press coverage and publicity material, is also considered with assessment made against its performance in economic, environmental and social spheres.
Companies are assessed annually and the index published every September. Performance and behaviour is monitored throughout the year and companies can be “dropped” from the index under exceptional circumstances.
The website includes reports on the leaders in each of the index’s sectors. These can show tales yet to be told: for instance the overall leader in the media section, Pearson, only scores 10% for product piracy while the highest score for this indicator in this sector is 50%.
FTSE 4 Good
The FTSE 4Good index is compiled by the Ethical Investment Research Service (EIRIS) supported by a handful of national ethical and ecological performance measurement organisations.
Entry to the index is considered over six months. During this time a questionnaire is completed by the company and the company’s report, website and other publicly available documents are considered alongside further information supplied by EIRIS.
Indicators used to compile the index cover the company’s policies, management and reporting. These are then divided between four sets of criteria: Environmental, Social and Stakeholder, Human Rights and Supply Chain.
The index is reviewed on a six monthly rolling basis with FTSE reserving the right to exclude any company in exceptional circumstances.
Long term investment
Membership of these indexes has become something of a badge of honour for those companies who join. However critics point to the fact companies opt in to the systems, making them more of a self-fulfilling club than a tough competitive arena.
This is not entirely true as they also contain an unintended name and shame aspect when a company has fails its assessment and is deleted from the relative index.
For instance, in March 2008 the UK oil & gas company Cairn Energy and the German pharmaceutical company Celesio were removed from the FTSE 4Good index for failing their climate change and corruption assessments respectively.
This makes membership of the indexes something more than belonging to a club. It is a serious proposition which should only be undertaken if the company in question is prepared to make long term commitments to meeting ever more stringent sustainability criteria.