CSR INDEX ON STOCK MARKETS

BY: HARSHA MUKHERJEEFOR: BSE AND IICADATE: 22/11/2013

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GOAL & OUTCOMES

Goal:

To invent tools to reward the corporates intangibly or tangibly who are proactively engaged in CSR activities.

• Independent Bench Marking Group committee

• Aligning with Stock Markets

• CSR Exchange

• Other alternative tools

Outcomes:

Giving corporates a reason to be CSR compliant and implement CSR activities beyond the legislation requirements.

• Increasing the corporate level of participation

• Building leaders and bringing talent to the CSR field.

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OVERVIEW 1) Flash back

a. CSR Bench marking tools discussed – LBG and Dutch Transparency model

b. Outcome

2) Present

c. The Stock markets having Sustainability index.

d. Methodology

e. Factors to imbibe in the Indian Stock Markets

3) Future

f. CSR Exchange

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FLASHBACK

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LONDON BENCH MARKING GROUPLBG working methodology:

Services of LBG – Membership formats, Team building, Data collection, Knowledge Exchange, One on One consultation,Differentiates between Corporate Community Investment (CCI).Revenue model – Membership Based.

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DUTCH TRANSPARENCYStarted by Ministry of Economic Affairs, Panel of Experts – 20 they are advising on the parameters and handling objections when scores are assigned, also assessing the 20 highest scoring companies.

Methodology:There are 100 set of questions for every company. They can also do self-assessment and then assure with TB team.Following are the set of areas:Quantitative Criteria: Content Oriented criteria (100 maximum points) Profile (15 points) Strategy and Policy (20 points) Governance structure and Management Approach (25 points) Results (30 points) CSR Reporting Policy (10 points)

Qualitative Criteria: Review criteria (+/- 15)Relevance (20 points)Clarity (20 points)Reliability (20 points)Involvement of Stakeholder (20 points) Contextual Consistency (20 points)

Voluntary Questions

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OUTCOMES

Outcomes of Discussion Session 1 held on 22nd August 2013 at 11:30am at ESSAR House  We covered the below mentioned points:

 1) Discussed the most prominent International Benchmarking tools - LBG and DTB.     - To analyze Tata Sustainability Index, TERI, FV on IFSC website (fvtool.com), Social Cost Analysis, FISC (Dow Jones), ISO 26000, IIRC, Hong Kong Sustainability Index (HKSI), Green index - BSE, BM by FTSE and other CSR index present on stock exchanges. 2) Basic framework for the tool to be made more concrete

3) To build a questionnaire on the value proposition to be given to the corporates for understanding their requirements.

4) To learn if Bench marking have had any impact on the Businesses. 

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PRESENT

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PRESENT LANDSCAPE OF CSR ON STOCK MARKETS AND OUR APPROACH

• There are 30 stock markets globally using sustainability or CSR index to reward companies who are CSR compliant

• We divide the stocks markets in 3 types

1) ESG – Stock markets bench marking taking only ESG as a methodology

2) ESG + XYZ – Stock markets bench marking taking ESG and other local issues as a methodology

3) Others – Stock markets considering methodologies beyond ESG and using innovative modes

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30 STOCK EXCHANGES WITH SUSTAINABILITY INDEX

1. Australian Stock exchange 13. Johanesburg Stock Exchange 25. Singapore Exchange

2. BM&FBOVespa 14. Korea Stock Exchange 26. SIX SWISS Exchange

3. BME Spanish Exchange 15. London Stock Exchange 27. Taiwan Exchange

4. Bolsa de comercio de Santiago 16. Moscow Interbank Currency 28. The Stock Exchange of Thailand

5. Bolsa Mexicana de Valores 17. NASDAQ OMX 29. Tokyo Stock Exchange

6. BSE 18. NASDAQ OMX Nordic Exchange 30. Toronto Stock Exchange

7. Borsa Italiana 19. NSE

8. Bursa Malaysia 20. NYSE Euronext

9. Deutsche Borse AG 21. Philippines Stock Exchange

10. HK Exchanges and Clearing 22. Saudi Stock Market

11. Indonesia Stock Exchange 23. Shanghai Stock Exchange

12. Istanbul Stock Exchange 24. Shenzhen Stock Exchange

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TYPE 1 - ESG

1. Egypt – EGX

2. Sarasin Sustainability Index – Germany and Swiss

3. National Stock Exchange (NSE – India)

4. Singapore Stock Exchange – SGX (Yet to introduce but policy is designed based on ESG and GRI Sustainability Reporting Guidelines)

5. The Stock Exchange of Thailand (SET) follows DJSI – World and DJSI – Emerging Markets

6. Istanbul Stock Exchange

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TYPE 1 - METHODOLOGYEgypt - EGX

• Quantitative scores to each company based on 3 factors of transparency and disclosure - ESG.

• Qualitative scores – The companies having highest quantitative scores in T&D are selected for qualitative process. To evaluate the actual performance of the company scores are given from 1 to 5, 5 being the highest. A final qualitative score is determined for each company.

• Composite Score – It is calculated by summing the qualitative and quantitative score. Based on these scores 30 best stocks would be filtered from a pool of 100 stocks.

• Each companies weight in the index is determined as a function of it’s ESG scoreSarasin Sustainability Index – Sector wise rating

Branch rating: Comparative assessment of the branches on the basis of well-chosen environmental criteria and social criteria. With the branch rating every branch is judged with regard to the chances linked with her and risks for the environment and the social. Besides, for the assessment decisively is her respective environmental relevance (e.g., Airlines are big energy consumers, finance service providers rather small) and social relevance (e.g., the health damages of tobacco).

Enterprise rating: Comparative environmental assessment and social assessment of the enterprises within a branch. The assessment occurs with the help of a grid uniform for all branches of environmental criteria and social criteria. The weighting and the choice of detailed criteria are specific for branches. For the enterprise rating it is examined how every single enterprise handles with the respective branch chances and branch risks.

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TYPE 1 - METHODOLOGYNational Stock Exchange:

• NSE: Indian Index Services and Products Ltd (IISL). The NSE Sustainability Index is sponsored by IFC and is developed in collaboration with CRISIL, KLD, DJI and S&P.

2 pronged strategy – a) To determine ESG score for each company. b) Weighting of index by score.

Out of 500 listed companies ESG is scored and top 150 companies are considered for qualitative measurement. Followed with composite scoring (Quant + Qualitative). The invest ability of the companies is checked which has minimum requirement of transaction Rs. 20BN in 12 months.

• NSE Process and Methodology is similar to EGX – ESG of Egypt.

Istanbul Stock Exchange

The ISESI Project Team is currently reviewing the criteria, and testing the draft criteria with key stakeholders.

DJSI methodology and SAM research partners

Request Sinco for the draft rules

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TYPE 2 – ESG + XYZ

1. Hang seng sustainability index – China and Hong Kong

2. BM&FBOVespa – Brazil (Latin America)

3. Bolsa Mexicana de Valores (BMV) - Mexico

4. Borsa Italiana

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TYPE 2 - METHODOLOGIESHang seng sustainability index – (Reputex Methodology)

• Environmental and social impact, corporate governance and Workplace ethics (ESG + Workplace practices = Workplace Quality, Environmental Protection, Operating Practices and Community Involvement).

• The parameters are evaluated based on exposure and performance assessment by group of Advisors.

• The company is rated as AAA, AA, A, BBB….D following that

BM&FBOVespa – Brazil (Latin America): 100 points to each vertical. It has a mixture of quat+qual Q’s.

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TYPE 2 - METHODOLOGIESBolsa Mexicana de Valores (BMV) – Mexico – Sector wise Rating

Parameters rated upon – ESG+ Climate Change+ Human Rights + Policies and systems to counter bribery.

Eligible companies – Top 50% of the performers of respective industry sector.

Announced in Jan 2012 – EIRIS is forming the framework. EIRIS – Based in USA has formed the framework for DJSI and FTSE4Good too.

FEEMA – Bolsa Italiana

The index starts from the identification of the areas that normally are considered in the literature to assess the sustainability , ie social, environmental and economic , and then find the sub-areas : economic structure, research and development, poverty in the population, social welfare, energy, air quality and natural resources.

FTSE Methodology is used for index

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TYPE 3 - OTHERS

1. MCeX – Montreal Climate Exchange

2. Bombay Stock Exchange (BSE)

3. Indoensia – SRI Kehati

4. Japan – DJSI 40

5. Johannesburg Stock Exchange

6. Bursa Malaysia Stock Exchange

7. NASDAQ OMX – Key Financial parameters, Environment and Social.

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TYPE 3 - METHODOLOGYMontreal Climate Exchange (MCeX)

MCeX works on the “Baseline and credit system” works like this: at the end of each compliance year, the emissions of the large regulated industrial emitters will be verified. Each emitter must then offset its GHG emissions against its intensity-based GHG emissions reduction target established by the government. The discrepancy between the imposed target and the actual emissions may be offset by, among other things, the purchase of units on the domestic market. The initial compliance year is 2010.

Bombay Stock Exchange (BSE)• They measure, scale from 0-100 and assign points to Carbon Intensity (C) from g-trade, Average Free Float Market

capitalization (M) and Average Turnover (T) bi-annually in September and March. After individual points are assigned to each composite points are calculated.

• Rankings are given to the companies based on the composite points

• Mandatory exclusion – existing constituent (assuming C) beyond 28 and mandatory inclusion – existing constituent within 12

Carbon Intensity = Total number GHG emission/ Total revenueBSE utilizes Gtrade to get the GHG number

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TYPE 3 - METHODOLOGYSRI Kehati

SRI along with Kehati an NGO working on Biodiversity Foundation had launched sustainability index in 2009. It performs exercise in 2 phases: Selection phase and Performance review. 25 companies are evaluated bi annually.

Phase 1: Selection Phase – Companies with $1trillion assets, Positive P/E Ratio, Free float of 10% in the market.

Phase 2: Performance review – Companies are judged on 6 criteria's which have several indicators under each. Criteria's: Community Involvement, Good Corporate Governance, Respect for HR, Business Behaviour, Labour Practices.

Japan DJSI – 40 – Sector wise bench marking

Codes of Conduct/Compliance/Anti-corruption policy: 6.0%,Industry specific criteria.- Environmental (33%): Environmental reporting: 3.0%,- Social (33%): Human Capital Development: 5.5%, Talent Attraction & Retention: 5.5%, Labor Practice

Indicators: 5.0%, - Corporate Citizenship/Philanthropy: 3.0%, Social Reporting: 3.0%, Industry Specific Criteria.• Industry-specific criteria have at least 50% weight in the overall score.• The total score for the question is the combination of these weights.• Rankings based on score within sectors.

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TYPE 3 METHODOLOGYJohannesburg Stock Exchange – Socially Responsible Investment (SRI)

• JSE SRI Index and JSE SRI Swix Index

• The Criteria are determined by the JSE in consultation with the Advisory Committee, an independent panel of experts from across the spectrum, which includes investment managers, listed companies, sustainability experts, academics and civil society. FTSE and Kings Code is used to execute the implementation.

• Integrated Reporting and GRI for sustainability reporting guidelines is followed.

Bursa Malaysia – CSR Framework – Sector Wise Bench marking

It focuses on 4 areas – Environment, Workplace, Community and Marketplace.The choice of CSR focus areas depends on the following: • Nature of business• Resources• Company inclinations• Stakeholders expectationsReporting – GRIFrameworks – LBG, OHSAS 18001, ISO 14000, GHG

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APPROACH THAT INDIA SHOULD DISCUSS

• Defining our own indices to measure on and be a part of Type – 2 or Type -3

• Defining Sectors for sector wise bench marking

• Deciding parameters for each industry sector

• Methodology and framework (LBG/DTB/Self- made) to be decided.

• Reporting format to be accepted

• Alternate market reward methods for CSR Compliant Companies.

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FUTURE PROSPECTS

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FUTURE SCOPE OF WORK

• Alternate market reward methods for CSR Compliant Companies.

• CSR Exchange for India

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THANK YOU