Is the new corporate bottom line green?

Some corporations are coupling traditional accounting measures of profit and loss with measures of environmental and social performance. Environmentalists claim that such "green" practices are good for the corporate bottom line. One way to track the performance of these corporations is through the so-called Dow Jones sustainability index (DJSI). But how green are these companies and how well has the index done?

The DJSI tracks the stock market performance of more than 300 multinational companies whose business practices have received the green seal of approval from a Swiss outfit known as Sustainable Asset Management (SAM).

  • Environmental performance accounts for only 4.2 percent of the index's weighting in the criteria for selection; regular financial considerations are given much greater weight and thus skew the DJSI closer to an ordinary index of large-capitalisation industry leaders.

  • The DJSI adds and deletes companies more frequently than most indexes – recently replacing more than 70 companies – almost a quarter of the total; and that turnover skews the index's usefulness as a consistent comparative tool with the broad market.

  • Despite these changes, the DJSI has performed poorly compared to the market – the index is down 40 percent from its level at the time of the launch in January 1999, whereas the Dow Jones industrial average is only 13 percent below its level at that time.

    Given the index's performance, observers are sceptical about the significance of efforts to shoehorn sustainability into hard-nosed financial analysis.

    Source: Steven F. Hayward, The New Corporate Balance Sheet: Black, Red - and Green, Environmental Policy Outlook, October 2002, American Enterprise Institute.

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    FMF Policy Bulletin\11 February 2003
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