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September 27, 2013

New Stock Indexes Champion Sustainability
    by Robert Kropp

The United Nations Global Compact creates an index of 100 companies adhering to its principles, and STOXX launches two indexes using key performance indicators developed by Axel Hesse.

SocialFunds.com -- Recently launched stock indexes suggest that sustainable investment strategies can lead to portfolio outperformance.

Referring to the Global Compact 100—an index of 100 companies that have committed to the ten principles of the UN Global Compact—Executive Director Georg Kell said, “While the performance of the GC 100 should not be seen as clear evidence of a causal relationship between a commitment to corporate sustainability practices and stock performance, there appears to be an exciting correlation.”

Compared to the FTSE All World benchmark, the GC 100 outperformed over periods of one and two years. The total investment return of the GC 100 over the past year was 26.4% compared to 22.1% for the FTSE All World.

“The results may also reflect the fact that sustainability performance is a factor that is receiving increasing interest from investors,” Kell continued.

Research for the construction of the index was provided by Sustainalytics, a sustainable investment research firm. “Portfolios containing companies that exhibit enhanced extra-financial risk management characteristics have the potential to perform better over time,” Sustainalytics CEO Michael Jantzi said. “We developed the GC 100 to test that hypothesis and these initial results are positive.”

In its research, Sustainalytics uses the key performance indicators (KPIs) developed by Axel Hesse of Sustainable Development Management (SD-M), which also form the basis of the construction of two sustainability-weighted indexes launched this week by STOXX. In the EURO iSTOXX 50 SD-KPI and iSTOXX Europe 50 SD-KPI indexes, index components are over- and underweighted according to their KPIs.

Referring to the conclusions of the influential Freshfields reports, Hesse said, “Institutional investors have a fiduciary duty to consider material environmental, social and governance (ESG) indicators that are relevant for the financial performance. The integration of sustainable development key performance indicators (SD-KPIs) should also achieve two more goals: a low tracking error to the EURO STOXX 50 or STOXX Europe 50, with the opportunity to use the conventional options and futures for hedging, and a more sustainable investment.”

The new indices are designed to act both as an underlying to passive institutional mandates, exchange-traded funds and other investable products, and as a proper benchmark for actively managed funds, STOXX stated.

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