Dow Jones Sustainability Index: what is it and how is it composed

Related to one of the last articles published on the blog, this article clarifies what the Dow Jones Sustainability Index is and why its definition and composition is, as stated in the mentioned article, so controversial.

DJSI: definition and goals 

The Dow Jones Sustainability Index is not just an Index, but a family of indices. It tracks the stock performance of the world’s leading companies in terms of ESG performance, ESG meaning Environment, Society and Governance. The DJSI is a cornerstone for those who have recognised that green and social issues are worth notice and it is critical in generating long term shareholder value and serves as benchmark for investors who want to integrate ESG investing in their portfolio. 

The family was launched in 1999 and was created jointly by Standard and Poor’s Dow Jones Indices and RobecoSAM, combining the experience of an index provider and a sustainability investment expert. RobecoSAM is indeed an investment boutique focused exclusively on sustainability investing. 
The DJSI index family offers investors a profile similar to S&P Global LargeMidCap Index in terms of risk and financial performance, integrating a higher sustainability consideration and giving higher exposure to sustainable companies.  
The Dow Jones Sustainability Index family comprises global, regional, and country benchmarks as shown in the following list: DJSI World, DJSI North America, DJSI Europe, DJSI Asia Pacific, DJSI Emerging Markets, DJSI Korea, DJSI Australia, DJSI Chile, DJSI MILA Pacific Alliance. 

DJSI exclusion criteria

For investors who wish to limit their exposure to controversial activities, RobecoSAM and S&P Dow Jones Indices also offer the DJSI Indices with exclusion criteria such as Armaments & Firearms, Alcohol, Tobacco, Gambling and Adult Entertainment.
S&P ESG Sovreign Bond index family offers investors exposure to the same sovereign bonds as standard cap-weighted sovereign bond indices but directing attention to more sustainable countries based on RobecoSAM’s country sustainability ranking.
S&P Fossil Fuel Free index family comprises companies in the S&P Global 1200 Index and its regional subsets that do not own fossil fuel reserves. It overweights and underweights companies considering their level of carbon emissions.
S&P ESG Factor Weighted index family tracks the same companies as the underlying benchmark index family but takes into account ESG profile instead of free-float market-cap weights. The scores regarding ESG performance are based on RobecoSAM’s Smart ESG methodology. It is the first global index family to use ESG as a performance factor for smart beta indices.
Multi-factor indices take into account ESG performance and other common factors: low volatility, dividend yield, value or momentum, high beta, growth, quality.

RobecoSAM sustainability assessment

The choice of the companies or states included in the indices is based on RobecoSAM sustainability assessment. 
Corporate sustainability is a business approach that creates long-term shareholder value by valorising and taking into account risks deriving from ESG issues. The corporations are valued with a Corporate Sustainability Assessment that focuses its attention on sustainability performance. The focus on sustainability is based on two guiding principles: first, sustainability practices are fundamental to create long term shareholder value in a world with resource constraints; second, sustainability factors represent opportunities and risks that competitive companies must address. Long term challenges such as resource scarcity and climate change are redefining societal expectations and policies of regulators which influence investment results. Companies that address sustainability issues and risks are considered more likely to create long term shareholder value and therefore to have a good performance in terms of investments and a competitive advantage that will make them emerge as leaders in their industry. 

In RobecoSAM CSA the world’s largest 2500 publicly traded companies are invited to participate to the assessment in order to be included in the index. Moreover, additional companies are invited to participate for the growing regions or country specific indices, with a total of 3400 invited companies. 60 industries are analysed using industry specific questionnaire, without any exclusion of industries from the assessment. Companies are evaluated based on ESG criteria and receive a score between 0 and 100 and ranked according to their score. The top 10% companies of each industry are included in the indices.
The first step is the focus on financial materiality that focuses on specific industry value drivers that contribute to industry performance. Each factor is analysed and ranked according to the magnitude and likelihood of its impact on the company’s business value drivers and financial performance over time. Those factors that are considered to have the greatest impact on the long-term financial assumptions are given the highest weighting in the CSA, and those factors that rarely impact the financial cases either receive a much lower weight or are not included in the CSA.
The CSA is a structured assessment that starts with an industry specific questionnaire in which each question receives a score from 0 to 100, the scores summing overall to 100. For relevant criteria a Media and Shareholder Analysis impact is applied using an MSA multiplier calculation, that can significantly reduce the criterion score. Each criterion is assigned a predefined weight out of the total questionnaire. Criteria weights within each dimension roll up to the total dimension weight. Each dimension weight is the sum of the criterion weight within the respective dimension. Then a total score is determined, the maximum being 100.

The index is therefore an important benchmark that represents a cornerstone for investors that understood that sustainability issues are crucial and want to include in their investment world companies and states that give a substantial importance to ESG factors, thus assuring a long-term perspective of value creation and enhancement. 

Written by Giulia Galli

Sources: Financial Times, The Economist, RobecoSAM website