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November 08, 2002
DJSI and FTSE4Good Index Licensing Continues to Expand
by William Baue
Index-based separate accounts, certificates, and exchange-traded funds are among the products being
created based on these European SRI indexes.
SocialFunds.com --
European SRI stock indexes, which track companies deemed to be leaders in sustainable social and
environmental practices, are continuing to be one key to the expansion of SRI in Europe. The
FTSE4Good Index and the Dow Jones Sustainability Index and their derivatives are leading the way in
giving investors sophisticated new products. Institutional investors there are taking notice.
"Institutional investors are increasingly moving into this market," said Alexander Barkawi,
managing director of the Sustainable
Asset Management (SAM) Indexes, a part of the SAM Group. "At the very beginning, we had the
bulk of licensees using the benchmarks for retail funds. We have a growing number of licensees who
then go out to their institutional clients to manage separate accounts for them based on the Dow
Jones Sustainability Index. That's a trend that is probably a little more than a year old."
SAM Group is an independent, Switzerland-based financial services firm that focuses exclusively
on sustainability. It partnered with Dow Jones Indexes to launch the DJSI in 1999.
State Street Global
Advisors (ticker: STT) uses the DJSI to manage a 500 million Swiss franc (approx. $345 million
US) account for the Swiss Federal Social Security Fund. State Street landed the account, which
represents one of the largest passive SRI mandates to date, in May 2001. In addition to
institutional use, DJSI indexes continue to attract licensees for retail products.
FTSE4Good also licenses its indexes in Europe. Assets linked to FTSE4Good indexes total about
$1.5 billion.
"There are currently about 20 investment products in Europe that have been
linked to the FTSE4Good indexes," said FTSE Group
Deputy Chief Executive Will Oulton. "There are a mix of retail and institutional products from the
likes of UBS
(UBS), CSFB
(CSR), JP Morgan
(JPM), Nordea Bank, Co-operative Bank (CPBB_p.L), Close
Brothers, BNP
Paribas (BNPP) and Fortis Investment Management (FTS).
UBS has options and certificates on all FTSE4Good Indexes."
DJSI also licenses its
indexes to clients who offer certificates.
"What we also see is a growing number of
structured products being launched based on the index," said Mr. Barkawi. "There is a certificate
that was launched this May by Merrill Lynch (MER) based on our
pan-European sustainability index, the Dow Jones STOXX sustainability index, and that certificate
tracks the performance of 50 stocks out of that European universe."
Merrill Lynch
Product Manager Filip Matic explained how certificates function.
"A certificate,
basically, is nothing else than a bond linked to an equity index. It's an issuing vehicle," Mr.
Matic told SocialFunds.com. "We had an index tailor-made by SAM Research, called the SAM Top 50
Sustainability Europe Index, that the certificate is based on and linked to. Whereas most normal
indexes are market-cap weighted, ours is not--it is equal weighted for all 50 constituents."
Also in May, WestLB Panmure launched a certificate based on the performance of the DJSI EURO
STOXX, which tracks sustainability leaders in the Euro-zone.
"Europe is pretty far ahead
of the U.S. at integrating these issues," said Mr. Barwaki.
Mr. Oulton concurred, and
expanded on this opinion.
"Socially responsible investing is more established in Europe in
part because of a more positive regulatory environment," said Mr. Oulton. "In Europe, there is
pressure on governments to require companies to have systems in place and publish reports on social
and environmental policies. That's not the case in the United States. These environmental and
social issues are not on the political agenda in America and its unlikely there will be a
government push for this type of regulation."
Mr. Oulton explained the role of indexes in
promoting SRI in Europe.
"The availability of index products, such as FTSE4Good, makes it
increasingly viable for institutional investors to transition to a portfolio based on a SRI
benchmark at a relatively low cost," said Mr. Oulton. "The creation of SRI indexes has also helped
with the development of exchange-traded funds as tradable products in this area."
FTSE is
hoping that SRI exchange traded funds can carve a niche in the U.S. market. On Wednesday, FTSE
announced a joint effort with the American Stock
Exchange (Amex) to introduce exchange-traded funds (ETFs) based on FTSE4Good indexes,
representing the first such SRI products in the U.S.
An SRI ETF based on the DJSI is
also forthcoming.
"An exchange-traded fund is a combination of a stock and a fund," said
Mr. Barkawi. "Basically, it is a fund that you can invest in and diversify which is traded
realtime on the stock exchange. It's a very efficient instrument. It's usually also a very
cost-effective instrument that allows both retail and institutional investors to diversify and
invest into different portfolios. We are all set up for such an exchange-traded fund launched
based on our sustainability indexes. We have a licensee and they are ready to go in the upcoming
months."
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SRI World Group, Inc. All Rights Reserved.
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