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June 2, 2015 6:33 am

Sustainability measurement: index looks to

connect investors
Sarah Murray

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At one time, few might have seen the United Nations as an organisation willing or able to create a
real-time stock index. But as the Global Compact, the UN’s voluntary citizenship initiative, has
looked for ways to connect investors with companies that perform well on social and environmental
sustainability, measuring the financial impact of that performance has become increasingly
important.

The Global Compact 100 index tracks 100 of the companies that are members of the Global
Compact. Back tested for three-years before it was announced in 2013, it benchmarks companies in
the index against the S&P’s global indices of mid- and large-cap companies. And results so far have
been promising.

“From September 2010 to September 2014, if you look at those annual

periods, it outperformed the market in three of those four years,” says Gavin Power, the Global
Compact’s deputy director and head of financial markets.

The index’s performance does not necessarily demonstrate a causal relationship between
sustainability investments and financial performance, says Mr Power. “But there appears to be a
relationship and maybe it’s even a correlation.”

It is the kind of result anyone working to promote greater social and environmental sustainability in
the corporate sector wants to see. And many business leaders understand that unless demonstrable
bottom-line benefits — including improved financial performance — result from their sustainability
investments, those investments will be short lived.

Investors are paying more attention to this, too. “We’ve seen a lot of interest from the investment
community in looking at the data quantitatively and in testing how companies that have been
performing well on ESG [environmental, social and governance] ratings are performing relative to a
benchmark,” says Linda Eling Lee, global head of ESG research at MSCI, the research company.

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When it comes to companies’ environmental impact, one way to link these to financial performance
is to put a price on nature.

For example, the Natural Capital Committee, an independent advisory body set up by the UK
government, is working to integrate into decision making the value of “natural capital” — that is,
parts of the natural environment that generate benefits for humans (including rivers, lakes, oceans,
land, air, species and minerals).

As part of this work, the committee is developing an accounting framework that can be used use to
value natural capital. “We’re putting together a register of the natural capital owned by different
parties, including companies,” says Colin Mayer, professor of management studies at University of
Oxford’s Saïd Business School, who is working with the Natural Capital Committee.

The idea, he explains, is to observe increases or decreases in the quality and quantity of natural
capital and to put a financial value on these assets, including the investments needed maintain them.

“In essence, we’re creating balance sheets for the net asset position of companies, not just in terms
their material and financial capital but also in terms of the value of their natural capital,” says Prof
Mayer.

Of course, the bottom-line impact of corporate responsibility is easier to measure in some areas than
others. Addressing the monetary return for businesses of respecting human rights or promoting fair
labour conditions is harder than, say, calculating the financial impact of energy efficiency.

“Certain things on the environmental side of the equation are easier to measure and have a clearer
business case than social and governance issues,” says Michael Jantzi, chief executive of
Sustainalytics, the responsible investment research firm, which developed the Global Compact’s
index.

To assess companies on their ESG performance, Sustainalytics looks at the exposure they have,
industry by industry, to risks and opportunities, giving different weightings to different
environmental, social and governance issues.

And when it comes to social performance, Sustainalytics has developed a methodology to assess
risks that might materialise in financial terms, such as costs incurred during project delays due to
conflicts with local communities.

“What are we looking for are indicators to see if the company is understanding and managing its
exposure,” says Mr Jantzi. “So we look for the policies and programmes around community
involvement and community development.”

He believes progress is being made in connecting all aspects of corporate responsibility — from
environmental to social and governance — to companies’ financial performance. “The ‘S’ [in ESG] is
lagging behind,” he says. “But that’s changing, and changing quickly.”

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