The Dow Jones Sustainability Index is the only sustainability index for investors and remains the Oscar of corporate sustainability. But does it employ an effective definition of sustainability? (Photo Source: hms.harvard.edu)
On April 22nd 2012, more than 1 billion people from 192 countries celebrated Earth Day in some fashion. In an age where environmental awareness and climate mitigation are becoming central priorities, this is particularly encouraging. However, what exactly are the most effective steps to take on Earth Day and every other day of the year to truly reach sustainability? Metrics and best practices for achieving a sustainable planet are failing to develop concretely. So when I discovered a webinar – “Unlocking the Mysteries of the Dow Jones Sustainability Index” – discussing the methodology behind the Dow Jones Sustainability Index (DJSI), I was intrigued to find out how the for-profit world defines and ranks businesses achieving sustainability.
History of DJSI
The DJSI launched in 1999 and was the first global benchmark for sustainability. I had the perception that the DJSI would rank companies based on their business practices, supply chains, or some other method that would determine which companies are practicing the most environmentally and socially responsible business activities. Instead, however, the main priority of the DJSI is to rank sustainability-driven companies based on how viable of an investment option they are according to their long term fiscally sustainable growth.
The DJSI is the only sustainability index for investors, and according to the webinar, a rank within DJSI remains the Oscar of corporate sustainability. The index only looks at the largest of the 2,500 companies in the Dow Jones Global Total Stock Market Index. Last year, of the 2,763 companies that were invited to submit an application to be considered in the DJSI, 1,443 were analyzed and approximately 320 were listed on the DJSI.
On April 10th, companies were sent the extensive survey required to be considered for the DJSI. Each question in the survey has a predetermined score for the answer, a weight for the question, and a weight for the overarching criteria questions are placed into. When filling out the assessment, a company does not know the point value given to different questions and criteria. While this allows for every question to be answered as honestly as possible, it also makes it difficult for companies to focus their resources towards areas within their company that would make them more sustainable, at least in the eyes of the DJSI.
This lack of transparency also prevents an accurate and effective evaluation of the tool. For example, it has been argued that one of the most effective ways to reduce energy needs while addressing climate change mitigation is to improve energy efficiency, although it’s not clear how building efficiency plays a role in the DJSI rankings.
One can get a sense of the index’s priorities when looking through DJSI’s guidebook. The DJSI lists many reasons for why a company may be removed from the DJSI list even after they have been awarded it. The first reason is poor business practices: (e.g., tax fraud, money laundering, antitrust, balance sheet fraud, and corruption cases) followed by human rights abuses, (e.g., cases involving discrimination, forced resettlements, child labor, and discrimination of indigenous people) layoffs or workforce conflicts, (e.g., extensive layoffs and strikes.) and finally, catastrophic events, which include ecological disasters.
Examples of companies being taken off the list are BP after the Deepwater Horizon oil spill and most recently Olympus due to an internal financial scandal. The fact that poor financial conduct – not careless environmental and social behavior – is the very first reason given for why a company may be removed from the DJSI shows just how relative the definition of sustainability is.
Even though it is more than 20 years since the Brundtland Commission defined “sustainability” as “meeting the needs of the present without compromising the ability of future generations to meet their own needs,” the fact that a financial investment tool that values economics more than environmental and social impacts remains the largest sustainability metric currently in existence shows we are not yet at a point where we need to be. Investments deemed worthwhile by the DJSI are based on expectations of long-term growth and expansion, which if done irresponsibly, are largely counter-productive to what environmental sustainability is.
Despite the well-intentioned effort of the DJSI, a lack of transparency in how the questions are weighted and a focus on underlying financial priorities contradictory to environmental sustainability make it difficult to determine if a company is truly sustainable and if it is being labeled correctly. For investors attempting to invest intelligently and sustainably, there is a need for a clearer and more all-encompassing definition of sustainability in the DJSI.