Dow Jones Sustainability Indices (DJSI)

Summary

  • Launched in 1999, the DJSI is a family of indices and was one of the first global indices to track the largest and leading sustainability-driven, publicly listed companies.
  • The DJSI has the longest-running global sustainability benchmarks worldwide.
  • The DJSI represents the top 10 per cent of the largest 2,500 companies in the S&P Global Broad Market Index based on long-term economic and ESG factors.

Index Family

The Dow Jones Sustainability Index family comprises global, regional, and country benchmarks:

  • DJSI World
  • DJSI North America
  • DJSI Europe
  • DJSI Asia Pacific
  • DJSI Emerging Markets
  • DJSI Korea
  • DJSI Australia
  • DJSI Chile
  • DJSI MILA Pacific Alliance

DJSI indices can also be filtered to exclude organisations with links to controversial activities. Therefore, exclusion criteria include alcohol, tobacco, gambling and adult entertainment.

All DJSI indices are calculated in both price and total return versions and are disseminated in real time.

Objectives

  1. To measure the global stock market performance of the leading sustainable companies in all sectors of every market.
  2. To provide information to investors interested in the long-term sustainability of a company, specific to the industry it is in.

Methodology

SAM, a business unit of S&P Global, invites 5,000 companies (up to 3,600 companies from the DJSI and 1,400 from the S&P ESG Index series) to complete a corporate sustainability assessment questionnaire. The responses are collected and entered into a database of financially material sustainability information. The top 2,500 are authorised for inclusion in the DJSI World Index and the rest qualify for inclusion in the regional indices.

A company’s sustainability performance is awarded a score of between zero and 100 by the index committee. The highest-performing 250 companies across all industries are what makes the DJSI World Index.

Sustainability Accounting Standards Board (SASB)

Summary

  • A non-profit organisation founded in 2011 by Jean Rogers.
  • SASB standards are intended for voluntary use by public companies in making disclosures on material sustainability factors.
  • Joint research by the Global Reporting Initiative (GRI) and the SASB found their framework standards “complement rather than substitute the other… and offer a holistic picture of corporate performance.”
  • In November 2020, it was announced that the SASB and the International Integrated Reporting Council intended to merge into the Value Reporting Foundation. The sole aim of the Foundation is to create a comprehensive reporting framework for investors.

Objectives

  1. To establish industry specific disclosure standards across ESG topics.
  2. To provide a more complete view of a corporation’s performance on material factors likely to affect its ability to create long-term value.
  3. To provide decision-useful information to investors.

Framework

SASB’s sustainability topics are classified under five comprehensive sustainability aspects. These topics include:

  • Environment
  • Social Capital
  • Human Capital
  • Business Model and Innovation
  • Leadership and Governance

These topics form the “Materiality Map.” Every individual industry has its own unique set of corporate activities and has a unique sustainability profile.

Global Reporting Initiative (GRI)

Summary

  • The GRI was established in 1997 in association with the United Nations’ Environment Programme (UNEP).
  • The GRI is the most widely used sustainability reporting standard.
  • In 2016, the GRI guidelines were updated to also include UN Sustainable Development Goals (UN SDGs).

Objectives

  1. To advance the practice of sustainable reporting for organisations.
  2. To help organisations identify their impact on the environment, the economy and society and disclose those impacts publicly.
  3. To allow organisations to become more transparent in order to create a sustainable future.

GRI standards

The sustainability reporting process begins with the organisation identifying relevant topics to report on.

The GRI standards currently encompass “universal standards” and “topic standards”. Each of the standards provide obligatory instructions, recommendations and requirements.

Universal standard

Foundation: this sets out the reporting principles and guidelines that incorporate context, materiality, completeness and stakeholder inclusiveness. Additionally, guidelines are included for preparing the sustainability report under GRI standards.

General disclosures: this is a specification that allows organisations to provide contextual information regarding strategy, governance and stakeholder engagement.

Management approach: this is designed to be used with each material topic in a sustainability report, whether financial or non-financial, to control major risks and opportunities

Topic standard

The topic standard contains disclosures that an organisation can use to account for its impact in relation to its material topic, and how it manages these impacts. For example, an organisation can use the GRI standard on water to report on the impacts it has on the environment because of its water withdrawal and how it manages these impacts.

This approach of identifying and reporting on material topics helps organisations to create sustainability reports that focus on the impact of their activities and operations.

Carbon Disclosure Project (CDP)

Summary

  • The Carbon Disclosure Project (CDP) is a non-profit organisation established in London in 2000.
  • The CDP is the largest climate change-focused data collection and assessment programme. It requests information on greenhouse gas emissions, energy use and the risks and opportunities from climate change from the world’s largest companies.
  • Since 2002, more than 8,400 companies have taken part in data collection for the CDP.

Objectives

  1. To make environmental reporting and risk management a standard practice for businesses.
  2. To create transparency about environmental data. This includes climate-damaging greenhouse gas emissions and water consumption.

Reporting framework

  • The CDP currently offers three questionnaires (Climate Change, Water Security and Forests) which are scored using different methodologies.
  • The questionnaires consist of generic questions alongside sector-specific questions aimed at high-impact sectors.
  • The scoring of CDP questionnaires is conducted by accredited partners trained by the CDP.

Taskforce on Climate-related Financial Disclosures (TCFD)

Summary

  • Created in 2015 by the Financial Stability Board (FSB).
  • The TCFD is chaired by Michael Bloomberg and consists of 31 members who are all selected by the FSB. Members are from both users and preparers of disclosures, representing a wide swath of the G20.
  • The TCFD has developed a framework to help organisations effectively disclose climate-related risks and opportunities.

Objectives

  1. To develop consistent climate-related financial risk disclosures, in providing information to investors and stakeholders.
  2. To provide consistent and transparent information to global markets.
  3. To enable investors to make better-informed decisions when evaluating risk over the short, medium and long term.

Recommendations

The taskforce’s recommendations called for companies to disclose:

  • governance around climate-related risks and opportunities
  • the impact of climate-related risks and opportunities on business strategy
  • the assessment and management of climate-related risk
  • the metrics and targets used to assess and manage climate-related risks.

Implications for the investment management industry

  • Risk assessment: financial advisers can effectively assess climate-related risks to potential investment companies, their suppliers and their competitors.
  • Strategic planning: financial advisers can make better evaluations when considering risks and exposures over the short, medium and long term.
  • The Transition Pathway Initiative (TPI) believes TCFD’s positioning of the implied temperature rise metric will lead to carbon-washing of portfolios and will place a needless cost to asset owners in the long term.

Taskforce on Nature-related Financial Disclosures (TNFD)

Summary

  • A global initiative that is striving to give financial institutions and investors a thorough portrayal of their environmental risks.
  • It is led by two co-chairs: Elizabeth Maruma Mrema, Executive Secretary of the United Nations Convention on Biological Diversity; and David Craig, former CEO and founder of Refinitiv, and Strategic Adviser to London Stock Exchange Group
  • The taskforce is committed to developing a framework by 2023 for organisations to report and act on evolving nature-related risks.
  • The taskforce will consist of approximately 30 members, with an equal representation of financial institutions, companies, and data/service providers from developed and emerging markets.

Objectives

  1. To build awareness in the financial sector about how market and systemic failures are contributing to the rapid desolation of nature.
  2. To tackle data limitations that prevent financial institutions from assessing their nature-related risks on investments.
  3. To shift financial flows from nature-negative to nature-positive.

TNFD Framework

The TNFD framework will be structured around four pillars: governance, strategy, risk management, and metrics and targets.

  • Governance: an organisation’s governance around climate-related risks and opportunities.
  • Strategy: the actual and potential impacts of climate-related risks and opportunities on an organisation’s business, strategy and financial planning.
  • Risk management: the processes used by an organisation to identify, assess and manage climate-related risks.
  • Metrics and targets: the metrics and targets used to assess and manage relevant climate-related risks and opportunities.

For each pillar, an organisation must consider its impact on nature, the dependencies on nature and the resulting financial risk and opportunities.

Complexities

  • Nature-related risk generally involves a more intricate array of factors that are localised, which can be unique.
  • Adopting the TNFD framework will be voluntary for organisations, which could slow implementation.

EU Taxonomy Regulation

Summary

  • Came into effect in July 2020, though only started to apply from January 2022.
  • The Taxonomy Regulation sets performance thresholds (technical screening criteria) for economic activities.

Objectives

  • To encourage investment into companies engaged in sustainable activities.
  • To combat greenwashing by helping investors identify organisations that are sustainable.
  • To provide clarity and transparency on environmental sustainability to investors and financial institutions.

What is the EU taxonomy?

  • The EU taxonomy is a classification system, establishing a list of environmentally sustainable economic activities.
  • The EU taxonomy will provide financial institutions and retail investors with appropriate definitions for which economic activities can be considered environmentally sustainable.
  • The Taxonomy Regulation establishes six environmental objectives.

Environmentally sustainable activities must:

  1. Make a substantive contribution to one of six environmental objectives (listed below) or be enabling or transitional activities.
  2. Do “no significant harm” to the other five environmental objectives.
  3. Meet minimum safeguards, including OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.
  4. Comply with technical screening criteria.

The six environmental objectives

  1. Climate change mitigation.
  2. Climate change adaptation.
  3. The sustainable use and protection of water and marine resources.
  4. The transition to a circular economy.
  5. Pollution prevention and control.
  6. The protection and restoration of biodiversity and ecosystems.

Implications for the investment management industry

  • The Taxonomy Regulation will primarily impact the way in which information is disclosed to investors.
  • A classification system could be used to distinguish genuine sustainable asset managers from those who are only offering a few sustainable funds within their product rage. This will help investors to identify greenwashing at product level.

EU Non-Financial Reporting Directive (NFRD)

Summary

  • Enshrined in the Treaty on the Functioning of the EU
  • The Non-Financial Reporting Directive came into effect in all EU member states in 2018.
  • It introduced obligations for large European companies to disclose information on their sustainability risks and impacts.

The NFRD requires Public Interest Entities (organisations with more than 500 employees or a turnover that exceeds €40,000,000) to disclose:

  • information about their business model, policies, outcomes, risks, risk management and key performance
  • Key Performance Indicators (KPIs) relating to four key sustainability issues: environment; social and employee issues; human rights; and bribery and corruption

Public Interest Entities must further disclose how sustainability issues may affect the company, as well as how the company affects society and the environment.

The NRFD was introduced as:

  • current information is not sufficiently comparable or reliable
  • organisations do not report on all the non-financial information that investors need
  • companies are struggling to decide which non-financial information to report on and how and where to report on it.

Objectives

  1. Incentivise corporate social responsibility.
  2. Promote transparency.
  3. Encourage accountability.

Implications for the investment management industry

  • Asset managers will benefit from the reporting directive, as they will receive greater information regarding sustainability from companies that they are interested in investing in. Therefore, the full environmental/social impact of an investment can be assessed.
  • The directive will allow asset managers to draw on the data to meet obligations set by the SFDR and Taxonomy Regulation.

EU Sustainable Finance Disclosure Regulation (SFDR)

Summary

  • The SFDR became applicable on 10 March 2021.
  • It sets specific rules for how and what sustainability-related information financial advisors need to disclose.
  • The origins of SFDR lie in work undertaken by the EU’s High-Level Expert Group (HLEG) on sustainable finance from 2016 to 2018.
  • The HLEG produced a roadmap for the EU to pursue two goals:

        1. Integrate sustainability considerations into the financial system

        2. Steer the flow of capital towards sustainable investments.

  • SFDR is one of the core pillars of the Sustainable Finance Action Plan.

Objectives

  • To avoid greenwashing of financial products and advice by providing greater sustainability-related information.
  • To provide transparency to ensure investors can make the correct investment choices in line with their sustainability goals.

Firm-level disclosures

  • Information on a firm’s website about its policies on the integration of sustainability risks in its investment decision‐making process.
  • Information on a firm’s website regarding the consideration of principal adverse impacts of its investment decisions on sustainability factors.
  • Information in a firm’s remuneration policies and on its website as to how its remuneration policies are consistent with the integration of sustainability risks.

Product-level disclosures

  • All products, including those that do not promote any ESG factors, must be accompanied with a pre-contractual disclosure that sets out the manner in which sustainability risks are integrated into investment decisions, and the likely impact of sustainability risks on the returns of the product.
  • Firms with more than 500 employees must additionally disclose how the financial product considers principal adverse impacts on the sustainability of the product. Additionally, for smaller firms that have opted out, an explanation of the reasons why they do not consider the adverse impacts of investment decisions on sustainability factors.

Implications for the investment management industry

  • Financial advisers are required to publish on their websites information about their policies on integrating sustainability risks in their investment recommendations.
  • Financial advisers are now required to include in their remuneration policies information on how those policies are consistent with the integration of sustainability risks and publish this information on their websites.

EU Low Carbon Benchmark Regulation

  • Summary

  • Came into effect from December 2019.
  • Led to the introduction of two new categories of benchmark classifications: EU Climate Transition Benchmarks and the EU Paris-Aligned benchmarks.
  • The regulation aims to provide investors with greater transparency when performing due diligence in terms of ESG objectives’ suitability.

Why were new benchmarks necessary?

The benchmark regulation was introduced as previous benchmarks were deemed inadequate and were insufficient in reflecting existing societal sustainability goals (Paris Climate Agreement, UN Sustainable Goals, and the European Green Deal). Prior benchmarks were judged to be ineffective in measuring the performance of sustainable investments. Additionally, research from the European Commission found that various index providers had been forming ESG benchmarks using several methodologies. As a result, the European Commission sought a consistent and transparent methodology for sustainability benchmarks.              

Objectives of the regulation

  1. Allows a significant level of comparability of climate benchmarks while leaving benchmarks’ administrators with an important level of flexibility in designing their methodology.
  2. Increase awareness by providing investors with a tool that is aligned with their investment strategy.
  3. Increase transparency on investors’ ESG alignments.
  4. Prevent greenwashing.

New benchmarks

EU Climate Transition Benchmark: this benchmarks where the underlying assets are selected, weighted or excluded in a way that results in a portfolio/portfolios leading to a “decarbonisation trajectory”. It is most relevant to institutional investors such as pension funds and insurance companies, whose objective is to protect assets against investment risks related to climate change and the transition to a low-carbon economy.

EU Paris-Aligned Benchmark: this benchmarks where the underlying assets are selected, weighted or excluded in a way that results in a portfolio’s carbon emission being aligned with the objectives of the Paris Climate Agreement. It is most relevant for institutional investors that seek to be leaders in the climate change fight.

Effects of the regulations

The regulations will require benchmark administrators to disclose information on how environmental, social and governance factors are reflected in a benchmark’s methodology, and to set minimum standards for specific ESG benchmarks.

Implications for the investment management industry

The benchmarks should help reduce incidences of greenwashing, where institutions claim to be more environmentally sustainable than they are.

Who is affected?

Benchmark administrators:

  • located in the European Union
  • providing benchmarks used in the European Union
  • providing data used as an input in a benchmark.

Administrators of benchmarks that pursue ESG objectives must (i) publish an explanation of how key elements of the methodology reflect ESG factors; and (ii) explain in the benchmark statement how ESG factors are reflected for each benchmark.