Italian SRI Indexes Benchmark European and Global Equity and Bond Markets

As socially responsible investing (SRI) continues to mature and expand worldwide, SRI indexes continue to proliferate globally. In addition to the well-known overseas index providers such as FTSE4Good, Dow Jones Sustainability Indexes (DJSI), and Ethibel, the Italian independent financial firm E. Capital Partners (ECP) offers two equity SRI indexes and five bond SRI indexes.

ECP’s two equity indexes are the Ethical Index Euro and the Ethical Index Global. The Ethical Index Euro measures the performance of 150 large-capitalization companies listed on European stock markets. The Ethical Index Global tracks the performance of 300 companies in 24 countries, not including emerging market countries. Both benchmarks are reviewed biannually and are calculated and published as price indexes and as total return indexes, which include returns from paid dividends.

All securities included in ECP indexes have passed the firm’s ethical screening process. First, ECP implements negative screens to exclude companies operating in sectors deemed unsustainable or that disrespect human rights. Second, ECP employs positive screens to identify companies with high standards of corporate social and environmental responsibility. Third, ECP uses a best-in-class approach to identify companies with the best social and environmental performance in their sectors or countries.

ECP’s bond indexes cover the European and global markets separately, with a government bond index and an agency and supranational bond index for each market. In addition, ECP manages a corporate bond index that covers the European market. Besides passing ECP’s ethical screening process, prospective constituents of the bond indexes must be rated above BAA3 by Moody’s or BBB- by Standard & Poor’s.

While many SRI funds in the United States exclude government bonds because of the exposure to investment in the Department of Defense, ECP’s government bond indexes do not implement such exclusions.

"We do not want to exclude all governments who support defense because we would have to exclude all government bonds," E. Capital Partners Analyst Oliviero Gobbi told "We prefer a positive approach that considers several points of view because we think it is possible to invest in government bonds in a socially responsible way. We analyze countries under several points of view: respect of human rights; compliance with international treaties; compliance with I.L.O. regulations; respect for the environment; and we exclude countries who have the death penalty. . . . [W]e have excluded all the governments deeply involved in military activities from our benchmarks. We exclude, for example, the U.S.A., because of the death penalty."

ECP explained its agency and supranational bond indexes in its November 2002 publication, Ethical Index Management System.

"Agency and supranational benchmarks are a very innovative product," the document states. "Agencies are those who support the local economies or promote social welfare programs and housing projects. All have a social goal and work towards sustainable development."

Some of the agencies included in the ECP indexes are Fannie Mae (ticker: FNM), Freddie Mac (FRE), the Corporacion Andina de Fomento, and the Development Bank of Japan.

"Supranational bonds are issued by organisations created by governments through international treaties," the document continues. "They promote cooperation projects in developing countries and regional integration."

Examples of supranational organizations include the Inter-American Development Bank and the International Bank for Reconstruction and Development (an arm of the World Bank).

Finally, the Ethical Index Euro Corporate Bond concentrates the majority of its weighting (53.03 percent) in the financial sector, with about a quarter of its weighting (23.38 percent) in noncyclical services. The remaining sector allocations are all at or below five percent.

ECP’s SRI indexes have attracted important institutional clients such as Mellon Global Investments, San Paolo Wealth Management, Union Investments, and the Societe Generale.

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