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Applying Sustainability Indexes in the Mining
Sector
In the same way a business email cannot be sent without a disclaimer
these days, companies cannot disclaim their responsibility to the
environment and community they operate in. The Dow Jones Sustainability
Index (DJSI), since its launch in 1999, has been tracking the performance
of companies leading in terms of integrating sustainability in to
their business strategy.
The Dow Jones Global Index of the 2,500 largest companies in market
capitalisation is used as a basis for the DJSI World universe. The
selection of the DJSI components, conducted by Zurich-based SAM
Research, pursues a mixed approach incorporating both numeric and
market capitalisation-weighted elements. The DJSI reflects the selection
of the 10 % best companies in terms of corporate sustainability
in each of the 50 industry sectors, while ensuring that the DJSI
represents at least 20 % of the market capitalisation in each industry.
This approach ensures the DJSI meets the requirements of traditional
indexes and investors' desire to place their money in line with
their values.
For the mining industry, the objective of the DJSI methodology
is to aggregate the performance of a company in terms of mining-specific
criteria into an overall sustainability performance score. The methodology
is based on the hypothesis that companies that continually reinvent
themselves in line with market, social, and environmental challenges
possess the key to profitability. The current industry leader is
Rio Tinto, followed by WMC Resources and BHP Billiton. The new DJSI
components will be announced on September 4, 2003.
The challenge of the mining industry is to convince the stakeholders
of its worth and that it outweigh the costs of disruption to the
environment and livelihoods. The DJSI methodology identifies several
challenges which are measured in our questionnaire sent to mining
companies every year. These challenges, or criteria, address company
competencies in the area of corruption and bribery, occupational
health and safety, greenhouse gas emissions, social impact on communities,
tailings management and mine site rehabilitation, to name a few.
SAM Research's knowledge in interpreting company competencies in
tackling mining challenges owes much to its proprietary database
which tracks the sustainability performance of over 1,000 companies
over the last 4 years, allowing comparative and accumulative analysis.
One of the hurdles of converting sustainability factors into investment
acumen is the process of quantifying these 'soft' issues. SAM addresses
this by assigning weightings to various criteria in accordance to
their materiality, and the result is a single score indicating the
company's overall performance.
The efforts made by the mining industry to provide a sustainable
future for posterity is evident in the improved statistics gathered
by SAM's database. But a lot remains to be done. The industry demonstrates
a wide gap in performance between the best-in-class companies and
those languishing at the bottom of the ladder with abysmal concern
for the environment they operate in.
For instance, the average score of the 31 assessed mining companies
in tackling the issue of waste management, greenhouse gas emissions
and biodiversity are 26, 21 and 25 respectively. However, the top-scoring
companies in the above aspects receive 100, 86.3 and 100 points
accordingly. In the economic dimension, the top mining company scores
over 85 points for their measures to prevent corruption practices,
while the industry average stands at 39. In the social dimension,
the top company scores 95 for its occupational health and safety
implementation, while the average is 34. The statistics reveal the
discrepancy in industry practices and point to the need for more
aggressive, industry-wide initiatives to bring up the average standard.
Bearing in mind the DJSI exercise is a delicate balancing act of
the economic, environmental and social criteria, SAM carries out
a methodology review every year to capture the challenges that are
the most material to mining companies. For example, this year we
have included in our questionnaire a criterion to test companies'
level of commitment to combat the HIV/AIDS epidemic in Africa. In
so doing, SAM aims to provide the industry with a roadmap to sustainability
best practices. We have received encouraging feedback from companies
which benchmark their performance against industry peers using the
criteria measured in the SAM questionnaire.
The DJSI might represent a mere aggregation of numbers, but the
whole is bigger than the sum of its parts if it can serve as a financial
incentive to the industry to mitigate the impact of its activities.
No companies can afford to relax on the pedestal as a member of
the DJSI in view of the inexorable rise of stakeholder demands and
transparency of information.
Yulanda Chung
Sustainability Analyst for the mining, construction and real estate
sectors at SAM Research, based in Zurich, Switzerland.
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