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Abstract
Sustainability indices are generally created to serve as a benchmark for sustainable investment. In all markets, but particularly in emerging markets, these indices can also contribute to stimulate responsible practices in companies that want to be part of the index and those that are already members. Furthermore, they can contribute to the deepening of the capital markets, not only by serving as a benchmark, but also by developing interest in responsible investment on the part of foreign and domestic institutional investors. To play these roles, the admission, selection and removal process of companies into sustainability indices must have particular characteristics. For example, there should be a relatively large stock of eligible companies. Furthermore, the investment environment in the capital markets must also be relatively developed for investors to appreciate the long-term value of responsible companies and analysts must have the right incentives to promote responsible investments. Under certain conditions, the indices can also help to attract foreign capital, seeking international diversification, to the local capital markets. Even though there are more than 50 general and specialized sustainability indices, there are only seven associated with stock exchanges in developing countries: South Africa, Brazil, Egypt, Indonesia, China, India, Turkey and Mexico. This study analyses the conditions that make for effective sustainability indices in promoting capital market development and responsible practices and the impacts that corporations and investors can expect. This study includes, as an example, evidence from an evaluation of the impact of the BM&FBovespa Sustainability Index in Brazil. We also include recommendations for the design of sustainability indices in emerging markets.
Notes
For the purposes of this study, we exclude South Korea, which is normally classified as an emerging market, but given its relatively developed financial markets, it is not as relevant for less developed market seeking to introduce and deepen sustainability indices.
There have been many cases of companies shown to be irresponsible that have been included in sustainability indices, the most visible recent case being BP, excluded after the Gulf of Mexico oil spill.
These numbers do not include indices developed by private investment management and advisory firms. In this study, we do not include as part of developing markets some countries classified as emerging markets like South Korea.
Assessing and Unlocking the Potential of Emerging Market Sustainability Indices (International Finance Corporation (IFC), Citation2011a. See also Vives 2010 for a critical analysis of the informational content of sustainability indices.
These two categories are developed in Waygood Citation(2011). The broader description of the ‘transmission mechanism’ is presented in Chapter 10 of Vives and Peinado-Vara Citation(2011).
For a complete but dated meta-analysis of studies see Margolis and Walsh Citation(2001). For more recent evidence, particularly on the issue of causality see Schreck (Citation2011).
Similar results were found by Cheung Citation(2011) for the date of inclusion/exclusion, but not for the date of the announcement. This paper also found that liquidity also bounces on that date.
While this may be influenced by day traders, the average holding period for shares traded on the NYSE is about four months (the Economist, 6 August 2011, p. 62).
For the index methodology see www.bmfMB&FBovespa.com.br/Pdf/Indexes/ISE.pdf.
Ethos is the leading institution promoting corporatge responsibility in Brazil.
The full study has not been published (Steward RedQueen Citation2010), but a summary is available in IFC (2010).
The very public and acrimonious spat, reported extensively in the Brazilian press, when Petrobras was not admitted into the index in 2009, after several years of being part, illustrates that the major consequences related to negative publicity. The International Finance Corporation has carried the most comprehensive studies on sustainability indices in emerging markets. See IFC 2011a and 2011b.
This is consistent with a statistical study undertaken to assess the impact of the admission announcement to the Index on stock prices, where it was found that no statistically significant impact could be shown. See Bogea, Campos and Camino Blasco (Citation2008).
PREVI, the pension fund of the Banco do Brasil is one of the signatories and has as many assets under management as the other 17 and, between them, have 60% of the pension assets in the country. PREVI is a national leader in the pension fund industry on ESG issues, and it carries its own ESG analysis, relying on ISE only as a reference.
In its first try, the sustainability index of the Mexican Stock Exchange could only find eleven companies that would qualify as members of the index. Efforts were made to expand this and in the end it was launched in late 2011 with 23 companies. This is a good beginning but it may still be a low number to have an impact on financial markets. See Bolsa Mexicana de Valores Citation2011. For an analysis of the possibility of socially responsible investment in other Latin American countries, see Vives 2012.
In the recent conference ‘Sustainable Stock Exchanges 2010 Global Dialogue’, held in Xiamen, China, held 8 September 2010, some investors presented a discussion report making this recommendation (Responsible Research Citation2010). See also EIRIS 2010 and Ionnou and Serafeim 2011.