The Dow Jones Sustainability Index is a publicly acclaimed index that measures the sustainability performance of 500 of the largest companies in 20 different countries. The DJSI only lists the top 10% most sustainable companies on their list, so there are a little under 50 ‘most sustainable’ companies worldwide currently listed by the DJSI.
What is measured by the Dow Jones Sustainability Indexes?
The Dow Jones Sustainability Index is made up of ten different indices to measure the performance of companies. The first index, called “economic dimension”, accounts for around 50% of how a company is scored against other candidates and measures an organization’s economic standing. Four other indexes looked at environmental (20%), social (20%) and governance (10%). The last two indexes measure a company’s earnings quality and quantity respectively.
The History of the DJSI
The DJSI was first published in 1999 by FTSE Group, an index provider from London, United Kingdom. The index now covers nearly 30 countries worldwide providing insights into the sustainability of companies operating across many sectors.
As of 2017 there are only five countries worldwide without DJSI listed companies, which are: Qatar, Saudi Arabia, Oman, the United Arab Emirates and Kuwait.
Dow Jones & Company was founded in 1882 by Charles Dow, Edward Jones and Charles Bergstresser as a news reporting company. Today it is also known as an index provider and publishes over 30 different stock indices each with their own methodology.
Who owns the Dow Jones Indices?
The DJSI is owned by FTSE Group but it was built in conjunction with Dow Jones Indexes, a subsidiary of the Dow Jones Company that was later acquired by S&P Incorporated. The Sustainability Index has been created using data from many different sources including research institutions and other index providers.
Why are the Dow Jones Sustainability Indices Important?
The DJSI provides awareness for investors and clients about the performance of companies that currently meet their standards of sustainability. The higher a company scores on the index, the more likely they are to become a sustainable investment candidate.
The Dow Jones Sustainability Index is one of many indices used by professional investors as a measure of how companies may perform in the future. The DJSI can be used as a way to compare and contrast different companies on their ability to create long-term value and meet the needs of all stakeholders (employees, suppliers, customers and investors).
What are the sustainability criteria of the DJSI?
The S&P Dow Jones Indices LLC has a code of ethics which is used by their family of sustainability indices. The code of ethics states that they must assess companies against environmentally sound principles, labor standards and anti-corruption measures.
Sustainability metrics are determined using information from company reports, international organizations and third party research providers. Each index has a specific set of metrics that they will assess on, for example the first index has only one criteria: ‘favorable long-term prospects’.
A list of the Dow’s Indexes
The DJSI uses ten different indices to measure how well companies are performing. The criteria used in each index is listed below:
- The Dow Jones Sustainability Index (DJSI) – ‘favorable long-term prospects’
- The Dow Jones Sustainability Europe Index (DJSI Europe) – ‘environmental, social and corporate governance performance’
- The Dow Jones Sustainability Asia Pacific Index (DJSI Asia Pacific) – ‘environmental, social and corporate governance performance’
- The Dow Jones Sustainability North America Index (DJSI North America) – ‘environmental, social and corporate governance performance’
- The Dow Jones Sustainability Latin America Index (DJSI Latin America) – ‘environmental, social and corporate governance performance’
- The Dow Jones Sustainability World ex-US Index (DJSI World ex-US) – ‘environmental, social and corporate governance performance’
- The Dow Jones Sustainability Emerging Markets Index (DJSI Emerging Market) – ‘environmental, social and corporate governance performance’
- The DJSI Frontier 100 – ‘favorable long-term prospects’
- The Sustainable Stock Exchanges (SSE) indices – public policy and the environment.
What are the challenges to using the DJSI?
There are many challenges to using the DJSI. First, one of the major challenges is that it only uses publicly listed companies which means that small companies, family-owned businesses or privately held ones are not included. Additionally, there is no breakdown of how each metric was scored within an index and certain events may sway a company’s score in either direction. For example, a company may have an incident where there is pollution caused by their factory which will mean that they are marked down for environmental factors but at the same time, it may improve their social factor if they take steps to try and fix the problem.
Lastly, there are many different types of companies included in one index. This could mean that there isn’t enough data for one specific index to accurately measure companies against each other. The DJSI uses ten different indices to measure how well companies are performing.
The Dow and emerging markets
The DJSI does not include many emerging markets due to the lack of information available about them. The index also doesn’t examine the criteria used by other indices, for example it doesn’t measure energy intensity or greenhouse gas emissions which are included in some other indices. This means that it is difficult to compare companies scores across different markets and indices.
What are ESG indexes?
ESG stands for environmental, social and governance factors. ESG indexes are similar to the DJSI but they give more weighting to specific criteria. For example, an ESG index may give more weighting to environmental or social metrics rather than corporate governance criteria which is given a higher weighting in the DJSI.
Typically, ESGs are developed by academics rather than professional analysts. This means that it is useful for investors to have knowledge of ESG theory and be able to interpret the data provided in the index.
Measuring ESG Indexes
ESG indexes are measured using 24 different criteria which fit into three broad categories: 1) environment 2) social and 3) corporate governance. The criteria used in each index is listed below:
Environment – greenhouse gas emissions intensity, air pollution emissions intensity, water consumption intensity, waste generation intensity
Social – labor practices, community relations, human rights, anti-corruption
Corporate Governance – board structure independence ratio, CEO/worker pay ratio, disclosure of political lobbying
Each index uses between 10 and 12 criteria within these categories to measure how well companies are performing. ESG indexes measure both quantitative data (e.g. the number of steps taken by a company to tackle climate change) and qualitative information (e.g. what type of environmental policies are in place).
Benefits of ESG indexes
One of the benefits of using ESG indexes is that they provide a more detailed comparison between companies. For example, an individual may be interested in investing in a particular sector such as technology or retail and want to use a specific index which focuses on these sectors. Therefore, it is useful for an investor to use a broader ESG index such as the SSE which includes many different sectors and then focus on specific criteria that they are interested in.
Some investors also believe that using ESG indexes can add value to their portfolios because there is empirical evidence that there is a correlation between social responsibility and financial returns. For example, there is a positive correlation between companies that have good ESG scores and their stocks’ performance.
The ESG indices debate
However, there has been some debate over whether or not the benefits of using ESG indexes actually translate into higher returns and if they can be easily incorporated into analyst reports and portfolio management. Some studies show that the benefits only exist at very high levels of ESG scores. Others have found that using ESG indexes can sometimes lead to less efficient portfolios.
In Conclusion with the Dow
ESG indexes are useful for investors because they provide detailed comparisons between different companies, rather than just looking at broad sector averages. However, it is important for an investor to make sure they understand the data provided in ESG indexes and how it fits into ESG theory.
What is the difference between the DJSI and SEG Indexes?
The DJSI is a standard ESG index which measures corporate governance as its main criteria. In contrast, the SEG Index measures environment and social factors as well as corporate governance. The SSE (Sustainable Stock Exchanges) uses quantitative measurements to measure these factors instead of focusing on qualitative information.
The DJSI is measured using 24 criteria falling under three main categories: environment, social and corporate governance. These are further divided into more specific sub-categories. The SEG Index uses ten criteria falling under two main categories of environment and social/community factors. This information is taken from the reports for each index.
DJSI SEG and ESG
As seen above, there are some slight differences in how the DJSI and SEG Indexes measure their criteria. The DJSI does more to avoid having one company weigh down its list by focusing on corporate governance as an indicator of responsible business practices whereas the SEG Index focuses on “environmental quality and social factors” which include an aspect of corporate governance in the board structure independence ratio. One could think that this gives a slight advantage to companies who have strong environmental or social policies without good corporate governance practices but the reality is that the ESG indices are not necessarily in place just to give investors a “feel-good” experience.
Caveats and Disclaimers
We have covered many topics in this article and want to be clear that any reference to, or mention of corporate governance, jones sustainability, social criteria, dow jones sustainability, dow jones indexes, sustainable investing, human development, sustainability index, corporate sustainability, investment portfolios, crisis management, dow jones, djsi north America, north America, industry specific criteria, financial performance, large companies, esg factors, asia pacific region, economic environmental and social, long term economic, djsi world, environmental effects, investment products, annual basis, adult entertainment, environmental, September based, overall score, economic, indices, 9, company, 9, companies, jones sustainability index, sustainability, index, investors, environmental and social criteria, management, governance, industry, identified, indexes, industries, interest, environmental social and governance, expertise, sustainable, world, development in the context of this article is purely for informational purposes and not to be misconstrued with investment advice or personal opinion. Thank you for reading.