A subsidiary of credit rating firm Standard and Poor’s (S&P), Crisil Ltd on Wednesday launched an index to track stocks of 50 Indian companies that score high on issues such as corporate governance and business ethics as well as responsibility towards employees, environment and community.
The Environment, Social Governance (ESG) Index, launched in association with environmental research firm KLD Research and Analytics, is a pilot project initiated and sponsored by the International Finance Corp., the finance arm of the World Bank that encourages sustainable economic growth in developing countries. The top 10 companies by weight in the index are Infosys Technology Ltd, ITC Ltd, Aditya Birla Nuvo Ltd, Dr Reddy’s Laboratories Ltd, Wipro Ltd, Jubilant Organosys Ltd, Axis Bank Ltd, GTL Ltd, Reliance Industries Ltd and Hindustan Unilever Ltd.
“A company such as ITC finds a high weightage on the index despite being the largest tobacco maker in the country because it scores high on several parameters such as governance issues and employee initiatives, even though it has a negative scoring on its product,” Alka Banerjee, vice-president, S&P index services, said.
Qualitative aspects such as employee unrest or loss of key staff, health and safety violations, regulatory penalties, loss of brand value and loss of reputation were key issues that were taken into consideration while computing scores.
The index was constituted on a three-stage screening of 500 liquid stocks. The first stage comprised an analysis of the regular disclosures that a company makes—such as analysis of annual reports and other public disclosures. The next was the analysis of the corporate data, the publication of the initiatives that the company disclosed on its website, civil society and government records as well as media reports. At the third stage, company officials had to answer 200 questions related to social and governance issues. The quantitative and qualitative results were then compiled to get a final ESG score.
Subir Gokarn, chief economist, S&P, however noted that companies in India were still not “very willing” to disclose all the information that does not pertain to shareholder interest today.
According to him, companies here are evolving from a stage where corporate social responsibility was a mere public relations exercise and are now “trying to align profit motives with public interest.”
According to Crisil, the companies that feature in the index have performed largely in line with the National Stock Exchange’s 50-share index, the S&P CNX Nifty. Crisil officials believe that any investor who feels the need to invest in a company that gives prime importance to social and governance issues will not be rewarded any lesser in terms of stock market performance.
International experience shows the Bovespa ISE Index, one of the first sustainibilty indices that was launched in Brazil in December 2005, has given returns of 26% to its investors, higher than the 18% offered by IBrX50, the benchmark index of that country. Dutch ABN Amro NV’s Brazilian affiliate launched the first emerging market socially responsible investment fund, based on this index, and was awarded the best performing socially responsible fund since inception out of 221 such funds tracked by Bloomberg.