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442 Int. J. Sustainable Economy, Vol. 2, No. 4, 2010
Copyright © 2010 Inderscience Enterprises Ltd.
Socially responsible investing: sustainability indices,
ESG rating and information provider agencies
Elena Escrig-Olmedo*,
María Jesús Muñoz-Torres and
María Ángeles Fernández-Izquierdo
Department of Finance and Accounting,
Universitat Jaume I,
Campus del Riu Sec,
Castellón 12071, Spain
E-mail: eescrig@cofin.uji.es
E-mail: munoz@cofin.uji.es
E-mail: afernand@cofin.uji.es
*Corresponding author
Abstract: Currently, there are many sustainability indices and environmental,
social and governance rating and information provider agencies (ESG IPAs).
These organisations study companies in terms of sustainability, that is,
economic, social, environmental and corporate governance criteria. But which
are the criteria used to evaluate? This paper exhibits an exhaustive overview
about the different criteria for evaluation used by sustainability indices and
ESG agencies. The sample comprises a group of six sustainability indices and
ten ESG agencies. The importance of the sustainability indices and ESG
agencies is increasing in terms of encouraging the implementation of
responsible corporate policies. This is considered as an important research topic
because of the growth of social responsible financial markets, and the fact that
investors are demanding more and more information about these topics. The
results suggest that the methods currently being used by ESG agencies and
sustainability indices are diverse and show a lack of standardisation.
Keywords: environmental, social, governance information provider agencies;
ESG IPAs; environmental, social, governance rating agencies; ESG RAs;
sustainable economy; sustainability indices; socially responsible investing;
corporate social responsibility.
Reference to this paper should be made as follows: Escrig-Olmedo, E.,
Muñoz-Torres, M.J. and Fernández-Izquierdo, M.Á. (2010) ‘Socially
responsible investing: sustainability indices, ESG rating and information
provider agencies’, Int. J. Sustainable Economy, Vol. 2, No. 4, pp.442–461.
Biographical notes: Elena Escrig-Olmedo is a Graduate in Business
Administration, at the University Jaume I, Castellon, Spain (2007) and gained a
Masters degree in Sustainability and Corporate Social Responsibility (2008).
Currently, she works as a Researcher at the Department of Finance and
Accounting at the University Jaume I. She studies topics about corporate social
responsibility and social responsible investment, specifically, the investment
process that integrates social, environmental and ethical considerations into
investment decision making. She is a Member of the research groups ‘SoGReS’
and ‘Mercados Financieros’ and she has collaborated in research projects with
the RSC Observatorio and Economists without Borders (non-for profit
association).
Socially responsible investing 443
María Jesús Muñoz-Torres is a PhD in Agricultural Economics from the
Polytechnic University of Valencia (1994). She is a Professor in Finance in the
Department of Finance and Accountancy at the Universitat Jaume I, Spain and
a Member of the Spanish Institute of Financial Analysts. Her research focuses
on stock markets and their derivatives, CSR and socially responsible investing
and efficiency of public financial support to companies and has published
scientific papers in high-impact international academic journals. Currently, she
is a Faculty Member in a number of postgraduate courses related to CSR and
development and corporate finance.
María Ángeles Fernández-Izquierdo received a PhD in Financial Economics
and Accountancy (1991) from the Universidad de Valencia. She is a Full
Professor in Finance and Accountancy at the Universitat Jaume I, Spain and a
Member of the Spanish Institute of Financial Analysts. From 1981 to 1987, she
held a position as an Economist in the Valencia Stock Exchange. Her research
focuses on efficiency, microstructure and hedging in stock markets and their
derivatives, ethical investment and CSR and has published scientific papers in
high-impact international academic journals. Currently, she is a Faculty
Member in postgraduate courses related to corporate finance, financial markets
and sustainable finance.
1 Introduction
The objective of this paper is to analyse the evaluation criteria and methodologies used
by sustainability indices and environmental, social and governance rating and
information provider agencies (ESG IPAs) to assess sustainability in companies – with
the aim of defining the standard evaluation criteria used by these organisations. We have
selected six sustainability indices and ten ESG agencies for the analysis. The selection of
these indices and agencies was determined by the amount of available information. In
general, little information is made available and a lack of transparency is apparent.
Especially, this is true for environmental, social and governance rating agencies (ESG
RAs) when explaining their analysis criteria, evaluation and scoring systems.
To ensure that a firm is socially responsible, it is essential to be able to express the
principles of corporate social responsibility (CSR) in measurable variables. The purpose
of the use of non-financial performance measures is to align managerial incentives with
long-term value for shareholders, and to additionally align the creation of shareholder
value with the creation of social value (Chatterji and Levine, 2006). As Adam and Shavit
(2008) point out, if a firm is publicly ranked according to SRI index parameters, then
investment made by the firm to improve its performance in the area of social
responsibility will generate a pay off in terms of an improvement in the firm’s public
image and reputation.
Firms and investors recognise that investing in accordance with sustainability
principles can create long-term value (Bebbington, 2001). According to Schuler and
Cording (2006), consumers consider an awareness of the social actions of companies to
be important. Their model also suggests that the information provided by external sources
regarding the performance of a company has a greater impact on consumers than
information provided by the company itself. Bearing this in mind, evaluations made by
444 E. Escrig-Olmedo, M.J. Muñoz-Torres and M.Á. Fernández-Izquierdo
sustainability indices and ESG agencies on the socially responsible behaviour of
companies should play a major role in socially responsible investing (SRI).
However, as reported by Lopez et al. (2007) neither there is no single concept of
sustainability, nor is there a commonly accepted method of measuring it. Therefore, it is
sometimes difficult to take business decisions and make comparisons among companies
because of the numerous and differing performance measurements (Krajnc and Glaviþ,
2005).
This study is limited by the lack of public information made available by ESG
agencies about their evaluation criteria. Because of this shortage of information, a
questionnaire was given to the agencies in the sample so that they could facilitate
complete information about their criteria.
This paper is structured as follows: the present introduction is followed by a brief
historical explanation of SRI. Subsequently, we analyse the selected sustainability indices
and ESG agencies and show the methodology used and the results obtained. The final
section provides the main conclusions.
2 Background about SRI
SRI has its origins in what was termed ethical investment with moral screening. In 17th
century in North America, the Quakers refused to profit from weapons and slave trade.
The first modern mutual fund employing screens based on religious convictions was the
‘Pioneer Fund’, founded in 1928 (Renneboog et al., 2008).
The Vietnam War and Apartheid in South Africa in the 1970s resulted in a new
model for investment. The first modern SRI mutual fund, the ‘Pax World Fund’, was
founded in 1971.This type of investment continued growing during the 1980s, with the
development and promotion of environmental values in the community. In addition,
socially responsible mutual funds began to combine different types of screens: negative
screens and positive screens – and these screens were often combined with a ‘best in
class’ approach.
SRI is the financial investment process which takes into account social,
environmental and corporate governance impacts – and/or investment in the community
and shareholder activism (SIF, 2009). Therefore, in contrast to the original ethical
investing process, which was based on religious convictions, modern SRI is based on the
social convictions of individual investors (Renneboog et al., 2008).
SRI enjoyed a rapid expansion during 1980s in the USA and emerged simultaneously
in Great Britain. However, it was not until the 1990s that SRI began to acquire
importance in continental Europe.
The current European market for SRI has increased from €1.033 billion in 2005 to
€2.665 billion by the end of 2007. This represents a growth of 102% over two years.
According to a report published by Eurosif (2008), the growth in demand for SRI during
the next three years will be mainly due to:
1 demand from institutional investors
2 changes in regulations
3 external pressure from NGOs and the media.
Socially responsible investing 445
However, despite the growth of SRI, investors need more exact information regarding
social, environmental and corporate governance behaviour in order to invest in socially
responsible companies and change behaviours among some of them. These factors gave
rise to the inevitable appearance of sustainability indices and ESG agencies.
ESG rating agencies are a new phenomenon. Theses institutions are the link between
stakeholders and companies (Schäfer, 2005). It is clear that these agencies are growing
due to two key factors: the expansion of the securities markets (resulting from the rapid
transformation from bank- to market-based financial systems) and the growth of
regulation (Ferri and Liu, 2005) regarding the disclosure of social, environmental and
corporate governance information.
Credit rating agencies are specialised in the analysis of shares and companies; and
they make conclusions about the ability of a company to meet its financial objectives in
the short and medium term. These conclusions are summarised in a rating. By
comparison, ESG RAs study businesses and make evaluations in social, environmental
and corporate governance terms – using their own research methodologies. Normally,
evaluations are made using complex questionnaires and an analysis of public information
sources. The criteria used by ESG RAs are later reflected by the most prestigious
sustainability indices.
Sustainability indices, in the same way as traditional stock market indices, are
indicators of the price trends displayed by the most representative shares in a stock
market. However, in this case, the market is limited to socially responsible companies.
These indices are made publicly available and the methodology of developing an index
depends on the institution that designs, develops and publishes the index. However, these
indices generally share certain characteristics, such as providing a representation of the
total market they cover and serving as underlying assets for derivatives and structured
products. These indices are also used as benchmarks in the management of socially
responsible portfolios (Fernández and Muñoz, 2009).
3 Data and methodology
3.1 Sustainability indices and ESG agencies: data and description
As mentioned above, the objective of this research is to analyse the criteria for the
evaluation of companies and the methodologies used by a sample of sustainability indices
and ESG agencies. We have selected six sustainability indices and ten ESG agencies for
the analysis. These indices and agencies consider social, environmental and corporate
governance factors when making their evaluations (see Table 1).
The indices and ESG agencies in the sample emerged mainly in Europe and in the
USA between 1983 and 2004. Besides the two US ESG agencies (Innovest Strategic
Value Advisors and KLD Research & Analytics) the remaining agencies were originated
in European nations: Germany (oekom research), France (Vigeo), Italy (ECP),
Switzerland (SAM, SiRi Company, ASSET4), and the UK (Accountability and EIRIS).
Most of the sampled sustainability indices were also originated in Europe: Belgium
(Ethibel Sustainability Index), France (ASPI), Switzerland (Dow Jones Sustainability
Index) and the UK (FTSE4Good). Two US indices are also included: (KLD’s Domini
400 Social Index and the Calvert Social Index). Next are reported the main characteristics
of each index and agency.
446 E. Escrig-Olmedo, M.J. Muñoz-Torres and M.Á. Fernández-Izquierdo
Table 1 The sample
Country of origin Sustainability indices ESG agencies
USA
KLD’s Domini 400 Social Index
Calvert Social Index
Innovest Strategic Value Advisors
KLD Research & Analytics Inc.
Germany oekom research AG
Belgium Ethibel Sustainability Index
France ASPI (ARESE Sustainable
Performance Indices)
Vigeo
Italy E. Capital Partners (ECP) S.p.A.
Switzerland Dow Jones Sustainability Index SAM
SiRi Company
ASSET4
Europe
UK FTSE4Good Accountability Rating
EIRIS
Source: Own creation.
Among the indices:
1 ASPI (ARESE Sustainable Performance Indices): a group of indices created in 2001.
These indices use the Vigeo rating system and focus on a positive approach to
sustainability.
2 Calvert Social Index: comprised of 468 (31 October 2008) large US companies,
selected objectively from a universe composed of the 1,000 largest US companies.
3Dow Jones Sustainability Index: a family of global indices created in 1999 (Dow
Jones Sustainability World Index) which holds European (Dow Jones STOXX
Sustainability Index), North American (Dow Jones Sustainability North America
Index and Dow Jones Sustainability USA Index) and Asian/Pacific benchmarks.
These indices represent the companies and industries that have achieved the best
ratios of sustainability and economic, social and environmental integration –
according to the social and environmental rating agency SAM.
4 Ethibel Sustainability Index: Ethibel is an independent SRI consultancy founded in
1992. It launched its first series of sustainable and global indices in 2002 and uses
the Vigeo rating system.
5 FTSE4Good: the main aim of this family of indices is to help investors to identify
companies that meet globally recognised standards of CSR. To do this, the index
works in conjunction with EIRIS and its network of international partners.
6 KLD’s Domini 400 Social Index: this US company launched a series of sustainability
indicators in 1999 – both national (USA) and global. As the result of a strategic
partnership with FTSE Group, first announced in October, 2008, the family of 16
indexes developed by KLD Research & Analytics has been rebranded as FTSE KLD
Indexes.
Socially responsible investing 447
The most noteworthy aspects regarding the ESG agencies are:
1 Accountability Rating: developed jointly by a leading CSR consultancy in the UK
(CSRnetwork) and an international group of experts known as ‘Accountability’. It
began operating in 2004 and annually rates the world’s largest companies (Fortune
Global 100). The headline results are published in Fortune magazine.
2 ASSET 4: an ESG information provider agency, rather than a rating agency. It offers
clients a database with ESG information on over 2,300 businesses and a
benchmarking tool.
3 E. Capital Partners (ECP) S.p.A.: it has two divisions: ECPI Investment Advisory
and Corporate Finance Advisory. ECPI Advisory offers ratings, ESG data, indices,
etc.; while Corporate Finance Advisory provides businesses and public institutions
with information and solutions for market opportunities – as well as highlighting
opportunities to create shareholder value while taking CSR into account.
4 Ethical Investment Research Service (EIRIS): this agency does not assign weight to
assessment criteria in its analysis, but makes independent evaluations. The client
selects the most relevant criteria and assigns the relative weights to reflect their own
investment policy.
5 Innovest Strategic Value Advisors, Inc.: founded in 1995 with the mission of
integrating sustainability and finance by identifying non-traditional sources of
potential risk and values for investors. The ratings evaluate the performance of a
company in four strategic areas: environment, strategic governance, stakeholder
capital and human capital. The agency uses the EcoValue’21 and Intangible Value
Assessment Social Research (IVA) models.
6 KLD Research & Analytics Inc.: an independent investment research firm. It
provides management tools that enable ESG factors to be included in investment
decisions.
7 oekom research AG: one of the leading sustainable investment rating agencies
worldwide. It analyses the environmental and social performance of companies. The
agency’s analysis also takes into account negative and controversial issues such as
alcohol, pornography, etc.
8 SAM Group: founded in 1995, it is today one of the leading agencies in the SRI field.
An analysis by SAM, using various evaluation criteria, is part of the process of
selecting companies for the Dow Jones Sustainability Indices.
9 SiRi Company: the world’s largest independent provider of SRI research and
consulting services for institutional investors and financial professionals. The
company’s network of consultancies includes 11 ESG rating agencies.
10 Vigeo: the largest group of ESG rating agencies in Europe. The company analyses
about 1,500 companies in Europe, the USA and Asia with respect to human rights,
human resources, environment, business behaviour, corporate governance and
community involvement.
448 E. Escrig-Olmedo, M.J. Muñoz-Torres and M.Á. Fernández-Izquierdo
3.2 Data
The study of criteria for the evaluation of companies used by sustainability indices and
ESG agencies was conducted between September 2007 and February 2009 and the main
covered aspects were: the evaluation and selection criteria with respect to business
performance in the areas of environmental, economic, social and corporate governance;
global standards for the valuation of corporate behaviour and the criteria for scoring and
risk assessment.
3.3 Methodology
A sample was selected from the universe of ESG agencies and sustainability indices. This
sample selection was built from the availability of the following information:
1 public criteria evaluation
2 specific weight in the market
3 availability of corporate information from the company.
Finally, six sustainability indices and ten ESG rating agencies were selected. Such a
small and heterogeneous sample enables targeted qualitative research. Several authors
(Finch, 2004; Kempf and Osthoff, 2007; Van de Velde et al., 2005) have used small
samples in their research, considering it an adequate approach for obtaining rich and
comprehensive qualitative data.
Certain issues, with insufficient public information, were studied through a
questionnaire sent to the ESG agencies in the sample. The questionnaire was split into
two parts: criteria for evaluation and risk assessment. About 26% of the questionnaires
were returned completed. Due to the lack of information about the methodology used by
most of these ESG agencies, the analysis was completed using public documents (annual
report, sustainable development reports, press releases, etc.) from each institution.
To standardise the analysis of all the agencies, we have analysed the same kind of
documents for each institution and – with this information – we completed and revised
the questionnaire sent to the agencies. However, the agencies evaluate companies using a
number of criteria that are not always standardised. To solve this problem – when the
criteria are very different – we use global standards to unify them. In other hand, this
study has it limit in the lack of public information made available by ESG agencies about
their evaluation criteria. We consider this lack of information also as a result.
The first stage of our analysis consists in studying the criteria for the selection of
companies used by each sustainability index and ESG agency; and to examine the
relationship between indices and ESG agencies. There is a wide variety of criteria among
the various indices and agencies, and therefore, according to the existing literature
(Krajnc and Glaviþ, 2005; Székely and Knirsch, 2005; UNCTAD, 2004), indicators have
been reviewed and ESG valuation criteria have been established. Reference was also
made to the guidelines and indicators for sustainability from the Global Reporting
Initiative (2004) which are considered essential for assess the sustainability of a
company.
Secondly, a study was made about how different systems of evaluation used by the
sustainability indices and the ESG agencies are based on global standards. To achieve
this, a range of social and environmental standards were selected from the literature;
Socially responsible investing 449
authors such as Chatterji and Levine (2006) and Elkington (1987) set minimum
guidelines for responsible behaviour in social and environmental organisations.
Subsequently, the scoring modes employed by the sustainability indices and ESG
RAs were reviewed; and information published by the index publishers and agencies was
carefully analysed.
An analysis of services offered by the ESG agencies was made using the public
information available on the corporate websites of the agencies in the sample. This
methodology is similar to the one used by the French Observatory on Corporate Social
Responsibility (2007).
Finally, the available information on measuring risk was studied. We have found few
references in the literature (Suhejla et al., 2007) regarding the measurement of
environmental and social risk by ESG agencies. Therefore, we have designed the
questionnaire in order to fulfil this gap.
4 Results
4.1 Screening criteria
In response to changing attitudes towards responsible behaviour and a concern for
sustainability and finite natural resources, a new type of rating has appeared. It focuses on
corporate performance in relation to the social needs of stakeholders (Finch, 2004).
Sustainability indices and ESG agencies have different criteria for the evaluation of CSR
performance and the selection of businesses. Most screening methods consist of negative
(exclusion) criteria that exclude certain investments; and positive criteria, which identify
those companies with the best behaviour.
We should stress the difference between negative criteria or exclusionary criteria and
controversial business areas. While using negative criteria implies to avoid investment in
companies associated with certain sectors, controversial business areas assessment
implies a detailed analysis of companies associated with certain sectors in order to
determine whether the company will be retained or not.
While analysing the negative evaluation criteria used by the indices and agencies in
the sample (Table 2) it can be seen that there are some differences. It is noteworthy that
the main exclusion criterion is involvement in the tobacco industry (used by 12 of those
polled), and the least used are uranium mining, embryonic research, landmines and the
chemical industry (highlighted only by one in the sample).
According to a CSR and Public Policies report (Benbeniste et al., 2004) most ESG
agencies take into account the following fields: company data, basic company
information, social initiatives, corporate governance, clients, employees, environment,
controversial business activities and relationships with investors and suppliers. This
coincides with the evaluation criteria used by the ESG agencies in our sample. However,
some diversity is revealed when comparing in detail the positive criteria used by each
agency, as well as the systems of categorisation, and information contained in each
criterion of evaluation (Table 3). Nevertheless, some evaluation criteria are used by most
of the indices and sustainability agencies in the sample. An example is environmental
management – which is fundamental for all the agencies in the sample. In contrast,
criteria relating to the rights of indigenous peoples and corporate citizenship are only
analysed by two agencies in the sample.
450 E. Escrig-Olmedo, M.J. Muñoz-Torres and M.Á. Fernández-Izquierdo
Table 2 Exclusionary criteria (9) and controversial business involvement (2)
Sustainability indices ESG agencies
ASPIa
Calvert
Dow Jones
Sustainability
Ethibelb
FTSE4Good
400 Social
Index
Accountabilityc
ASSET4
ECP
EIRISd
Innovest
KLD
oekom
SAMe
SiRif
Vigeog
Abortion
292
Alcohol 99 292229929
Contraceptives 22299
Firearms
99 9 9 2299 9
Military weapons 99922 929
Nuclear power 99 9 22 9929
Animal testing 2
229 9
Extraction of uranium 9
Genetic engineering 2
2
Embryonic research 2
Gambling 99 9 9 2229929
Anti-personnel
landmines
2
GMOs 222929
Fur 22
Pornography 92
222929
Chemical industry 2
Tobacco
99 99 9 2229929
aASPI does not exclude companies for trading in a given industry and takes positive
actions into account.
bEthibel excludes companies in four sectors (9) and carefully studies companies in
controversial business (2).
cAccountability applies benchmarking to the world’s largest companies (Fortune Global
100).
dEIRIS pays special attention to controversial issues.
eSAM does not exclude ex ante any companies.
fSiRi uses 61 excluding criteria in seven areas: business ethics, community, corporate
government, clients, employees, environment and suppliers.
gVigeo does not exclude ex ante any company.
Source: Prepared by the authors from the evaluation criteria specified on the agencies’ webs.
The results show agencies evaluate companies using a number of criteria that are not
always standardised. However, despite this diversity it is worth emphasising that the
evaluation systems of agencies and indices are based on an adapted Stakeholder Model
(Fassin, 2009; Podnar and Jancic, 2006) – given that the needs and interests of company’s
stakeholders are taken into account.
Socially responsible investing 451
Table 3 Positive evaluation criteria used in the main sustainability indices and ESG agencies
Sustainability indices ESG rating and information provider
agencies
Positive criteria
ASPI
Calvert Social Index
Dow Jones Sustainability
Ethibel Sustainability Index
F
TSE4Good
KLD's Domini 400 Social Index
Accountability
ASSET4
ECP
EIRIS
Innovest (IVA Methodology)
KLD Research & Analytics Inc.
oekom research
SAM
SiRi
Vigeo
Corporate governance 999 9 99 9 9 9 9 99999
Board structure 99999
Risk and crisis
management 9
9
Codes of
conduct/compliance 99
9
9
Corruption and bribery 99
9
9
Corporate governance
Industry specific criteria 9
9
Environmental
management 9999999 9 99999999
Industry specific criteria 9
99 9
Eco-efficiency
9
99
Environment
Climate change 9
9
99
Human capital
development 99999999999999
Labour practices
indicators 9999 9 9 9 9 9
Supply chain labour
standards criteria
99 9
Business behaviour 9
9
999
Corporate
citizenship/philanthropy 9
9
Community relations 99
999999999
Social reporting
(indicators on workface,
suppliers, etc.)
99 99 9 99 999
Human rights criteria 99 999 9 9999
9
Rights of indigenous
people 99
Product safety and
impact 999 9 9 99 99
Diversity
99 9 9 9
Social
Industry specific criteria 9 99 9
Source: Prepared by the authors from the evaluation criteria specified on the agencies’ webs and
the questionnaire.
452 E. Escrig-Olmedo, M.J. Muñoz-Torres and M.Á. Fernández-Izquierdo
4.2 International standards
The evaluation models of sustainability indices and ESG agencies are based on
international standards and conventions for measuring social aspects – such as the OECD
Guidelines for Multinational Enterprises, UN Global Compact, EFQM and the SA8000
standard. The most important environmental standards are EMAS and ISO14000 and also
GRI (Global Reporting Initiative) and the Triple Bottom Line (Table 4). Specifically, the
standards most employed by agencies and indices in the sample are: the Universal
Declaration of Human Rights and the ILO Core Labour Standards. In contrast, the
International Codes of Corporate Governance are one of the least used.
Table 4 International standards
Sustainability indices ESG agencies
ASPI
Calvert
Dow Jones
Sustainability
Ethibel
FTSE4Good
KLD Domini 400
Social Index
Accountabilitya
ASSET4
ECP
EIRIS
Innovest
KLD
oekom
SAM
SiRi
Vigeo
EFQM Excellence Model 9
OECD Guidelines for
Multinational Enterprises
9999
99 99 9
UN Global Compact 9999999
UN’s PRI 9 9 9 999 9
UN Declaration of Human
Rights
999 99 9999 9999
SA8000 9 99
AA1000 99
ISO 14000 9 9 9 999999
ISO 9000 999
EMAS
99
99
GRI 9999999
Triple Bottom Line 9 99
ILO Core Labour Standards 999 99
999 9999
OSHAS 999
Kyoto protocol 999
999
Millennium Development
Goals
99
9
Agenda 21 999
9
The Rio Declaration 999
9
9
UN Charter and Treaties 99
9
International Financial
Reporting Standards (IFRS)
9
International Codes of
Corporate Governances
9
NGOs 999
99999999
aThe company says it uses all the standards up to a point – although the points shown in
the table are the main points.
Source: Own creation. Information obtained in agencies reports and questionnaire.
Socially responsible investing 453
4.3 Scoring systems
Sustainability indices and ESG RAs often use similar processes for rating or ‘scoring’–
and follow a similar structure, with some variations, for measuring corporate
sustainability. Using various sources of information and, sometimes, sending a
questionnaire to the companies (see the case of the Dow Jones Sustainability Index or
EIRIS) various evaluation criteria are established and applied through sub-criteria. These
sub-criteria are measured through information obtained from the companies or
questionnaires. In this way, weightings are constructed for each sub-criteria and this
enables a score for each criteria to be set.
Sustainability indices choose the companies that form part of their universe on criteria
that include financial factors, as well as aspects covering social, environmental and
corporate governance. To make an initial selection, the indices use sustainability analysis
made by various ESG RAs (e.g. SAM – which contributes to the process of making the
Dow Jones Sustainability Indices). The indices then build on these evaluations by adding
their own assessments; and these may contain financial criteria. Table 5 shows how the
indices in the sample give preliminary ratings to companies and then add their own
evaluations.
Table 5 Scoring systems for sustainability indices
Indices Score
ASPI To select companies that form part of the index, ASPI uses the Vigeo
evaluation system and then adds its own scores (prior evaluation).
Vigeo ASPI
++ Æ4
+Æ3
=Æ2
-Æ1
-- Æ0
A geometric average is then calculated for each company from the scores
obtained in each category (society, corporate governance, clients, suppliers,
health and environment and human resources). In this way, a ranking is
obtained for the companies in the index. The selected companies are then
assessed using the ‘Laspeyre’ formula.
Calvert Social
Index
This is a market capitalisation-weighted index. This type of index measures the
changes in the market value of the index components as a whole. On the start
date (28 April 2000), the Calvert Social Index base value was set to 100. The
value of the index is updated every business day.
Dow Jones
Sustainability
Index
Calculates a company’s total corporate sustainability score at the highest
aggregated level according to the following formula:
TS (ANS CRW QUW) uu
¦ for all criteria
TS = Total score
ANS = Answer score
CRW = Criteria weight
QUW = Question weight
The final score is a percentage.
454 E. Escrig-Olmedo, M.J. Muñoz-Torres and M.Á. Fernández-Izquierdo
Table 5 Scoring systems for sustainability indices (continued)
Indices Score
Ethibel
Sustainability
Index
Based on the industry surveys provided by Vigeo, Forum Ethibel classifies
companies into five categories (prior evaluation):
A: Pioneers
B: Best in class companies
C: Companies that perform above average
D: Followers – companies performing below average
E: Laggards and/or non-transparent companies
The selected companies are then assessed using the ‘Laspeyre’ formula.
FTSE4Good Companies are classified as high, medium or low-impact.
KLD’s Domini
400 Social Index
Information unavailable.
Source: Own creation using sustainability indices reports and webs.
Problems appear when each index or agency gives different weights to similar criteria.
We may find that a company is ranked in different positions – according to the index or
sustainability agency that made the study. For example, in its annual assessment for 2008,
SAM rated the Group Telefonica – one of the world’s largest telecommunications
companies – with a score of 81.4, which is 28% points more than the industry average.
On the other hand, Accountability Rating 2008 (Full G100 ranking) rated Telefonica with
a score of 51; the company achieved the 35 of a list of 100 companies.
This problem is compounded when the positioning of a company and its status in
terms of CSR is expressed symbolically, or using a numerical or linguistical scale.
Table 6 shows the diversity in scoring systems used by agencies in the sample – with
every agency scoring in a different way.
Table 6 Scoring systems used by the ESG agencies
Agencies Score
Accountability Each criterion is assessed by giving companies a score in each of the four areas.
The maximum score for a company being 100.
ASSET4 The client selects from among 3,000 indicators and gives weightings so that the
overall weighting is 100%.
ECP EEE, EE, E – Eligible Names: companies that have passed the negative criteria
and score well on the positive criteria.
F – Ethically Weak Names: companies that only pass the negative test criteria.
Operating in ethical sectors, but score poorly on the positive criteria.
NE – Non-Eligible Names: companies that do not pass the negative test criteria.
Socially responsible investing 455
Table 6 Scoring systems used by the ESG agencies (continued)
Agencies Score
EIRIS No company is outstanding or unacceptable, but each company is scored according
to points that the client assigns, or according to positive and negative factors.
These points are assigned to each evaluation criteria and can then be used to
identify the best rated companies in a sector. This is a possible example of scoring
table:
High positive Æ 3 Low negative Æ1
Medium positive Æ 2 Medium negative Æ2
Rating
table
Low positive Æ 1 High negative Æ3
Innovest
Strategic Value
Advisors, Inc.
EcoValue21 ÆEach criteria is valued on a scale of 1–10
Intangible Value Assessment (IVA)
Æ
Each criteria is valued according to the
following scale:
AAA AA ABBB BB BCCC
Strong Good Above
average
Average Below
average
Poor Risks
attached
KLD Research Information unavailable.
oekom Research
The complete analysis is graded on a scale ranging from A+ (a progressive
company) to D (little or no environmental, social and cultural responsibility).
DDD+ CCC+ BBB+ A
A
A+
Poor Medium Good Excellent
SAM Each criteria (economic, environmental and social) is rated on a percentage scale,
so that each sub-criteria is evaluated inside the general criteria. Subsequently, the
score obtained by a company is compared with the industry average and highest
scores, as well as the lowest scores from the DJSI World and DJSI STOXX
indices. The result is the final score.
SiRi Each criterion is evaluated on a scale of 100 and ratings are obtained for each
company; as well as the industry average.
Vigeo The rating system is not based on a ranking, but as a deviation from the average.
The values ‘+ +’ and ‘- -’ represent the tangible deviation from the average. In this
way, a curve with a rigorous distribution is obtained.
Rating Significance
- - The least advanced companies in the sector
- Companies below the sector average
= Companies with an average performance in the sector
+ Active companies
+ + The most committed companies in the sector
Source: Own creation using various reports and the web.
456 E. Escrig-Olmedo, M.J. Muñoz-Torres and M.Á. Fernández-Izquierdo
4.4 Services offered by the ESG agencies
From the middle of last century the role of the newly created US credit rating agencies
(Moody’s and Standard & Poor’s) were crucial for the growth of capital markets.
The agencies won the trust of investors by ensuring their right to information, while
rating government bonds, company shares and financial instruments. However, it was not
until 1983, with the launch of EIRIS in London, that ESG rating agencies began to appear
in Europe. It is noteworthy that ESG agencies perform consulting services, as well as
offer to investors a range of products and services. Table 7 shows the most common
services offered by ESG agencies in the sample: sustainability indices, sector and
thematic research reports, benchmarks, etc.
Table 7 Products and services offered by ESG agencies
Products and services offered by ESG agencies
Accountability – Analysis/rating
– Standards (AA1000)
– Benchmarks
– Assistance with corporate
engagement programs (Global
Leadership Network)
ASSET4 – Investment research and consulting
– Information provision
– Benchmarks
– Portfolio screening
– Sector and thematic research reports
ECP – Analysis/rating
– Investment research and consulting
– Stock indices
– Benchmarks
– Portfolio screening
– Company profiles
EIRIS – Analysis/rating
– Investment research and consulting
(EIRIS Bespoke Research Reports)
– Information provision
– Sector and thematic research reports
– Convention watch
– Portfolio screening
– Alert-services
Innovest
Strategic
Value
Advisors, Inc.
– Analysis/rating
– Portfolio Screening (Index Models &
Customised Screens, Innovest’s Global
Compact Plus Screen, etc.)
– Sector and thematic research reports
– Benchmarks
– Investment research and consulting
KLD Research
& Analytics
Inc.
– Analysis/rating
– Investment research and consulting
(Socrates database, KLD Compliance,
etc.)
– Stock Indices (Domini 400 Social Index,
KLD Select Social Index, etc.)
– Benchmarks
– Portfolio screening (KLD PASS)
– Company profiles
– Proxy voting services
– Sector and thematic research reports
oekom
Research
– Analysis/rating
– Stock indices (Global Challenges Index)
– Portfolio Screening (oekom Portfolio
‘Sustainable Lifestyle’, oekom Portfolio
‘Biodiversity & Ecosystem Services’,
and oekom Portfolio ‘Climate Change’)
– Company profiles
– Alert-services (monthly alert service
and quarterly updates)
– Sector and thematic research reports
– Investment research and consulting
Socially responsible investing 457
Table 7 Products and services offered by ESG agencies (continued)
Products and services offered by ESG agencies
SAM – Investment research and consulting
– Company benchmarking report
– Sector and thematic research reports
– Training courses for corporations
– Stock indices (Dow Jones
Sustainability Indexes, Dow Jones
Islamic Market Sustainability Index
and Australian SAM Sustainability
Index)
SiRi – Analysis/rating (SiRi Pro, SiRi
sustainability ratings and SiRi country
ratings)
– Investment research and consulting (SRI
indices)
– Information provision
– Benchmarks
– Portfolio Screening (SiRi
Exclusionary Screens)
– Company profiles (SiRi Global
Profiles and Local Profiles)
– Alert-services (SiRi Alert Service)
– Sector and thematic research reports
Vigeo – Analysis/rating
– Investment research and consulting
– Information provision (Equi-News,
Equi-Training)
– Stock indices (The ASPI Eurozone index
and The Ethibel sustainability indexes)
– Benchmarks
– Portfolio screening
– Company profiles
– Sector and thematic research reports
– European SRI funds database
– Ethical Standards
Source: Own creation based on reports by ORSE and ADEME (2007) and information on
the webs.
4.5 Investment risk
Globalisation not only offers advantages for companies but also implies risk. For this
reason, business decisions are often uncertain. It is important to analyse not only the
financial risks – but also the social, environmental and corporate governance risks. CSR
is a fundamental tool for this task. It should be noted that very little information is
published about how ESG agencies measure risk.
Table 8 shows of the risk assessment provided by the agencies in the sample which
offer complete information about risk indicators.
Due to the heterogeneity of indicators used by agencies to identify potential business
risks, we have decided to show them agency by agency. For this reason, Table 8, that is a
collection of tables, allow us to conclude that each ESG agency uses a great variety of
indicators to identify potential business risk related to ESG issues.
458 E. Escrig-Olmedo, M.J. Muñoz-Torres and M.Á. Fernández-Izquierdo
Table 8 Criteria used by ESG agencies for the measurement of risk in organisations
ESG agencies Economic risks
Environmental
risks Social risks
Ethnical
risks Others
Accountability ––––
Studies on the
specific risks of
each industry
EIRIS – Board practice
– Bribery and
corruption
– Directors’ pay
– Business details
– Responsibility
for stakeholders
– Biodiversity
– Kyoto protocol
– Ozone depleting
chemicals
– Pollution
convictions
– Chemical safety
and sustainability
– Human rights
principles
– International
labour
standards
– Anti-
personnel
landmines
– Alcohol,
tobacco,
military
production
and sale,
etc.
SEE risk
management: this
criterion analyses
the management
of financial,
environmental,
and social risks
and so includes all
risks
SAM – Corporate
governance
– Risk and crisis
management
– Supply chain
management
– Responsibility
board level
– Environmental
performance
– Environmental
management
– Responsibility
board level
– Anti-
discrimination
– Anti-corruption
procedures
Studies business
opportunities
together with
emerging risks
SiRi ––––
Studies the risks
specific to the
nation and
industry
Emerging markets risk
assessment (EMRA)
Climate risk portfolio
check
oekom commodities ESG
screening (OCES)
oekom
– Documentation and
evaluation of the
social and environmental
situation in NICs and
developing countries
– Assistance for the
proactive management of
social and environmental
risks of involvement in
these countries
– Solid foundation on
which you can structure
your involvement in
these countries – whether
it be investing capital,
entering into business
relations, financing
projects or investing
directly in these countries
The analysis is based on the
potential impact of six
climate-dependent risks on
various sectors of the
economy
– OCES provides a well-
founded basis for assessing
and selecting raw materials in
a way that takes social and
environmental aspects into
account
– The screening process
evaluates the companies
which mine or produce the
raw materials concerned
– The corporate and country
analyses are complemented
by detailed description of the
specific social and
environmental challenges
faced in extracting the raw
materials
Socially responsible investing 459
Table 8 Criteria used by ESG agencies for the measurement of risk in organisations
(continued)
Historical
contingent
liabilities
Financial risk
management
Operating risk
exposure Sustainability risk
Innovest
Strategic
Value Advisors,
Inc. (Eco
Value’21
Methodology)
– Superfund
– State and
hazardous
waste
– Toxic torts
– Balance sheet
strength
– Insurance cover
adequacy
– Toxic
emissions
– Product risk
liabilities
– Hazardous
waste disposal
– Waste
discharges
– Supply chain
management
– Energy efficiency
– Resource use
– Product life cycle and recycling
– Shifts in consumer values
– Social ‘licence to operate’
Reputation
Human
capital Operations Legal
Market
authorisation Transparency
Vigeo – Brand
recognition,
claims,
controversies
– Social
acceptability
– Attracting
new skills
– License to
operate
– Stability
of work
relations
and social
conflict
mitigation
– Retention
of skills
and know-
how
– Corporate
culture and
values
– Control of
operating costs
– Competitively
of products
and services
– Effectiveness
of organisation
and processes
– Innovation and
prevention of
technological
obsolescence
– Gains in
productivity
– Efficiency of
strategic
planning
– Litigations,
trials,
legal
proceedings
and fines
– Marketing
and products/
services
acceptance
– Procurement
security and
quality
– Communi-
cation of
required
information
Source: Own creation. Information obtained from agencies reports, corporative webs and
questionnaires.
5 Conclusion
Sustainability indices and ESG agencies are important sources of information for
the socially responsible investor. However, agencies reveal little when explaining the
evaluation criteria used, particularly those related to risk management. As a result, the
direct analysis of this information by investors is difficult. However, investors have other
mechanisms available for including sustainability in their decision making: sustainability
indices. These indices help investors choose investment, but restrict the application of an
investor’s own criteria regarding social responsibility.
Despite the proliferation of sustainability indices and ESG agencies, there is no
standard methodology for the evaluation of companies. This is because each index and
agency give differing weightings to analysis criteria. Despite these differences, most
460 E. Escrig-Olmedo, M.J. Muñoz-Torres and M.Á. Fernández-Izquierdo
indices and agencies rate companies through a combination of positive and negative
criteria; and these are based on an adapted Stakeholder Model and a series of global
standards. There are also differences between the scoring systems because each index and
agency expresses the results in a different structure. Furthermore, information provided
by ESG agencies regarding the measurement of risk is insufficient and very
heterogeneous.
Therefore, companies are faced with a lack of information that makes it difficult for
them to discover which actions would open the door into one of the sustainability indices
– and investors also face difficulties selecting sustainable targets for investment.
The fact that there are so many ESG agencies and that each one uses a distinct
methodology suggests that the future will show a process of mergers – driven by the
strongest agencies in the market. These agencies and indices are displaying increasingly
commercial tendencies as their ultimate objective is survival in the market. This
commercialisation is clearly seen in as much as most agencies offer a range of products
and services to investors. It is worth highlighting the case of the Siri Group, transformed
in 2003 into the Siri Company, and which is the result of the consolidation of the
methodologies of 11 national agencies.
The importance of the ESG agencies is increasing in terms of encouraging the
implementation of responsible corporate policies. Nevertheless, there are some aspects
that can be improved and these include the transparency of the company valuation
process and the criteria; as well as the homogenisation of evaluation scales, risk
definitions, etc.
The aim of the future work is the development of a proposal for a rating system that
includes social, environmental and corporate governance. The system should homogenise
the various criteria so that firms can be rated in all aspects of sustainability: economic,
social, environmental and corporate governance.
Acknowledgements
The authors would like to acknowledge the sponsorship of the CICYT DPI2006-14708
and SEJ2006-08317/ECON projects, as well as the Universitat Jaume I via the
P1•1A2006-16 research project and of the grant FPU-AP2008-01043
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