If you like your investment portfolio with a side order of conscience, there are a lot of new sustainability indices out there for you. But you’ll need to do some work to make an organic-apples-to-apples comparison between them.
“I think they'll continue to proliferate for a while, for better and worse,” says Garvin Jabusch, co-founder and chief investment officer of Colorado-based investment advisory firm, Green Alpha Advisors, about the increasingly crowded sustainable index marketplace.
The concept of having a “do good” index has been around for decades, often using a “negative screening” approach to avoid exposure to certain subsectors or countries.
“These started as ‘don’t buy sin stocks’”, says John Prestbo, executive director of the Dow Jones indices and chairman of their index oversight committee, referring to typical exclusion of gambling, guns, and gin from old-school “clean” indices. “That’s morphed into the environmentally-focused indexes in the 21st century.”
Investors can play sustainability in a deeper way than evaluating a firm’s headline risk or green credentials.
“Sustainability is larger than the environment,” says Prestbo, whose firm offers a family of Dow Jones Sustainability Indexes. “It can include it, but we give equal weight to [corporate social responsibility, CSR].”
Indices likethose of the Dow Jones group, the FTSE4Good, KLD 400 Social Index and NASDAQ OMX CRD Global Sustainability50 Index, generally start by requiring potential index members to fill out a comprehensive questionnaire about their practices and policies.
Dow Jones, for example, starts with a universe of 2,600 equities, narrowing it down with the completed questionnaires or by using publicly available data that corporations may provide for other CSR efforts.
These efforts create sustainability “report cards” for the equities universe, and then seek to attribute part of their performance to their CSR policies.
But Green Alpha’s Jabusch says a purely CSR approach can be hobbled by ongoing due diligence needs and can be subject to corporate manipulation.
“I think some [indices] are genuine attempts to provide investors with a means to invest in green companies and cleantech in general, while providing a conduit of capital to such companies,” but quickly adds that in some cases undeserving companies "have paid or otherwise qualified themselves for inclusion as part of a greenwashing campaign.”
Prestbo says Dow Jones' “positive and complex” screening process is always being refined and updated.“Every year, the questionnaire is revised because sustainability is a changing concept,” he says. “The questionnaire has to add new areas of inquiry or be upping standards.”
As new industry participants pop up in once-unheard-of subsectors like smart grid technologies or utility-scale energy storage, another approach includes growth-focused indices, like those launched over the last few years that focus on cleantech. These include the WilderHill Clean Energy Index and The Cleantech Group’s Cleantech Index.
But better returns may be found somewhere in between these two approaches—those firms with superior policies and practices for their own CSR efforts, and creating the products and services that will help the planet and its inhabitants in the long run.
“Almost a decade into the 21st century, investors are beginning to see the new fundamentals of creating not only the next wave of profits, but also the potential for tremendously positive human impact,” says R. Paul Herman, founder of HIP Investor, a California-based investment advisor and manager of the HIP 100 Index that tracks the S&P 100 with a sustainability overlay.
Herman, for instance, looks at revenues from “positive-impact products” as well as customer and employee satisfaction when considering firms for his HIP 100 Index.
“These factors tend to be leading indicators, integrating them into a portfolio creates an opportunity for investors seeking to make more money while benefitting the public good,” he says.
Jabusch says his firm’s Green Alpha Next Economy Index, or GANEX, takes a top-down/bottom-up approach.
“The approach is simple. From the top down, it asks, 'what sectors and industries must grow the fastest to give us a fighting chance to minimize climate issues, including ecological disaster?'” he says. “From the bottom up, it means a very granular approach to finding only the very best companies providing solutions to the problems identified from the top-down.
He adds he’s focused on finding firms that are “cross-industry, cross-sector, cross-cap. This means energy solutions, water solutions, basic materials research, agricultural solutions, forestry solutions, sustainable commerce.”
“All these things are connected,” he points out. “Solving for one issue type doesn't make sense when confronted with multi-part problems.”
The goal of sustainable investing may be a better planet and a fatter 401(k), but investors need to understand what they get with any particular index.
Dow Jones' Prestbo says his firm's index seeks to measure economic benefit, but not necessarily the bottom line. "By economic benefit, I don't mean profit. I mean governance," he says. "[Profit] is the point of a company existing in the first place, so you don't overlay for that."