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GreenMoney Journal - publishing since 1992
Fall 2010 issue
Socially Responsible Investing – Better Companies, Better Communities
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KLD Launches First US Index Maximizing Sustainability Factors
New Index Meets Institutional Demands for Full Market Exposure in Social Indexes
KLD Research & Analytics, Inc., a globally recognized leader in social investment indexes has added
the KLD Select Socialsm Index to its family of social indexes.
KLD's new Select Socialsm
Index is the first ever created for institutional and retail investors who seek broad
diversification and increased exposure to companies with strong sustainability characteristics,
such as environmental management, human rights, product quality, and other indicators of good
corporate governance and social responsibility.
The Index addresses one of the principal
barriers facing socially responsible investment: the reluctance of institutional investors to adopt
SRI strategies because of their desire for diversification across the market. Many institutions
believe that traditional SRI screening that excludes industries such as nuclear power, gaming and
defense introduces additional risk into their portfolios. For some institutions, the scale of their
assets forces them to be "universal" investors.
The KLD Select Social Index responds to
these concerns by including companies representing every industry (except tobacco), weighting them
based on their relative social and environmental performance, and explicitly limiting risk
exposure. The Index enables investors to incorporate social and environmental factors into their
investments and enables them to influence corporate behavior with a broad spectrum of large cap
companies through shareholder engagement.
"We have constrained our index through
optimization to deviate from the Russell 1000 by two percent or less," said Peter D. Kinder,
president of KLD. "We want to address the concerns of investors who want to integrate social and
environmental factors into their investments but for whom risk is a critical issue."
What Makes it Different
Three factors make the KLD Select Social
Index unique.
A company's sustainability ranking determines its weight in the KLD Select
Social Index. In comparison to other social indexes, KLD's new index affords greater exposure to
positive sustainability characteristics by modifying the standard practice of weighting index
constituents based solely on their market capitalization.
For example, companies such as
General Mills (GIS) and Wells Fargo (WFC) have considerably more weight in the Select Social Index
than in the Russell 1000® Index. Exxon Mobil (XOM) and General Electric (GE) are the most
underweighted companies in the Select Social Index compared to their weights in the Russell 1000.
(See Table 1.)
KLD Select Social Index
Overweighted & Underweighted
Companies
Most Overweighted Companies
1. General Mills
Incorporated (GIS)
2. Wells Fargo & Company (WFC)
3. Proctor & Gamble Company (PG)
4.
Fannie Mae (FNM)
5. St. Paul Travelers Companies, Inc. (STA)
Most
Underweighted Companies
1. Exxon Mobil Corporation (XOM)
2. General Electric
Company (GE)
3. American International Group, Inc. (AIG)
4. Citigroup Inc (C)
5. Lilly
(Eli) and Company (LLY)
The KLD Select Social Index selects constituents from across the
entire market. KLD applies no industry exclusions except tobacco, whereas most social indexes have
industry screens for such issues as alcohol, tobacco, gaming, military contracting and nuclear
power. In addition, the overall impact of industry weight variations from the Russell 1000 is
limited in the construction of the Select Social Index.
Foods Packaged and Soaps &
Toiletries are the two most overweighted industries in the KLD Select Social Index compared to
their size in the Russell 1000. Electric Utilities and Oil Integrated Majors are the two most
underweighted industries in the Index compared to their size in the Russell 1000. (See Table 2.)
KLD Select Social Index
Overweighted & Underweighted
Industries
Most Overweighted Industries
1. Foods
Packaged
2. Soaps & Toiletries
3. Financial Services
4. Major Banks
5. Medical
Supplies
Most Underweighted Industries
1. Electric Utilities
2.
Oil Integrated Majors
3. Retail Soft Goods
4. Beverages
5. Drugs
KLD uses
explicit risk constraints in the construction of the Select Social Index. The KLD Select Social
Index is constructed to have tracking error of less than 200 basis points compared to the Russell
1000. This means there is a high probability its performance will be within (plus or minus) 2% of
the Russell 1000. Other social and sustainability indexes typically vary widely from conventional
market benchmarks like the Russell 1000.
How It's Constructed
In
constructing the Select Social Index, KLD applied the full range of social and environmental
screens applied to its other indexes, covering such issues as environment, human rights, corporate
governance, diversity, community relations and labor relations. Unlike conventional social indexes,
this Index does not exclude any industry except tobacco. Also, the Index allows each company's
weight to reflect its sustainability performance instead of weighting by market capitalization.
KLD translates each company's social and environmental ratings into an overall company
score and applies the scores as a factor in a mean variance optimization.
The new KLD
index is the first social index to apply optimization to the selection and weighting its
constituents. "KLD is committed to creating innovative social investment tools to support
institutions that want to factor social and environmental issues into their investments," noted Mr.
Kinder.
The optimization chooses the Select Social Index portfolio from the universe of
Russell 1000 and S&P 500® companies. The Index will have a maximum of 350 constituents. KLD will
reconstitute the Select Social Index annually on June 30th and rebalance it quarterly.
Optimization is a mathematical technique for creating portfolios based on specified parameters for
factors such as risk, volatility and liquidity. The optimizer constrains the Index to have a
tracking error of less than 2%, be beta-neutral and limit bias toward growth or value investment
styles relative to the Russell 1000. (Tracking error measures the deviation of expected index
returns from expected benchmark returns. Beta measures the volatility of the Index in relation to
the benchmark.)
Northfield Information Services conducted a ten-year back test on the KLD
Select Social Index on behalf of KLD.
For more details about the KLD Select Social Index,
please see the KLD Select Social Index Description at- http://www.kld.com
Daily
performance and a list of the top 10 holdings of the KLD Select Social Index are available on KLD
website.
About the KLD Family of Indexes
The KLD Select
Social Index joins the oldest and largest family of social, environmental and sustainability
indexes. These include: KLD's Domini 400 Socialsm Index (1990); KLD Catholic Values 400sm Index
(1998); KLD Broad Market Socialsm Index (1990); KLD Large Cap Socialsm Index (2001); KLD NASDAQ®
Socialsm Index (2002).
KLD's Domini 400 Social Index is the established benchmark for
measuring the impact of social screening on financial performance. Launched on May 1990, KLD's DS
400 Index is the first benchmark for equity portfolios subject to multiple social screens. The
Index consists of 400 diversified equities that pass a broad range of social screens. The KLD Broad
Market Social Index is the screened subset of the Russell 3000® Index, and the KLD Large Cap Social
Index is the screened subset of the Russell 1000 Index. The KLD BMS and LCS Indexes were launched
on January 1, 2001.
About KLD
KLD Research & Analytics,
Inc. is an independent investment research firm providing investment management tools used by
professionals to serve clients requiring investment strategies based on social and environmental
responsibility. KLD products and services, including Socrates (a web-based, company research tool)
are used for screening, compliance and asset gathering.
For more information about KLD,
its indexes, or its products and services, please visit our website (www.kld.com (617.426.5270) or
by e-mail kagredo@kld.com .
KLD Index Performance
Releases are posted on its website by the 5th business day of each month. To download KLD's DS 400
performance chart, see http://www.kld.com/benchmarks/dsi-ccp.html
The KLD Select Social
Index is a service mark of KLD Research & Analytics, Inc. The Russell 1000® Index is a trademark of
the Frank Russell Company (FRC). The use of the Russell 1000® Index as the universe for the KLD
Select Social Index in no way suggests or implies an opinion by FRC as to the attractiveness of the
KLD Select Social Index or of the investment in any or all of the securities upon which the Russell
Indexes or KLD Indexes are based. S&P 500 is a trademark of Standard & Poor's, a division of The
McGraw-Hill Companies, Inc
(Source: KLD)
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