How Sustainable is the Jantzi Social Index?

I often have difficulty communicating the benefit of socially responsible investments (SRI). There’s definitely a feel-good element from ‘doing less evil’, but I always felt compelled to measure it. In an attempt to quantify the impact of SRI in Canada, I decided to compare the sustainability scores of companies in the traditional S&P/TSX 60 Index with the scores of companies in the more responsible Jantzi Social Index (JSI). The results were disappointing. The weighted score of the S&P/TSX 60 is 65.86, while the Jantzi Social Index scored only marginally better at 68.03. 

Background

The Jantzi Social Index is the only socially responsible index with an investable ETF so that anyone can purchase it in their RRSP, TFSA, etc. As such, it is the de facto benchmark for responsible investment in Canada. According to their index methodology, they screen out companies generate revenues from Military Contracting, Nuclear Power, and Tobacco. Additionally, whenever a company listed on the index is involved in a controversy, Sustainalytics rates it on a scale of 1-5 (1 being a minor controversy, 5 being a major disaster). Companies with a category 4 or 5 controversy are automatically excluded. Finally, the index has a mandate to include ‘best-in-sector’ companies with high sustainability scores and drop companies who are lagging behind their peers (more on this later).

Research Methodology

I want to thank Lars Boggild who shares a similar nerdiness for responsible investments and helped with the research. We started by listing the underlying companies and portfolio weightings of both the indexes. From there, we inputted each company’s Sustainalytics ESG (environmental, social, & governance) score. Aggregating all of these scores gave us a weight-adjusted sustainability score for each index. If you want the raw data, you can download our Excel spreadsheet.

Results

As you can see from the chart below, The Jantzi Social Index scores higher than the TSX 60, but just barely. The range of scores is the same in both indexes - from 46 (Valeant Pharmaceuticals) to 80 (TD Bank). The scores are widest in the Environment category, and closest in the Governance category.

 JSI_Chart.png

Analysis

 

I was disappointed when I saw the results. I was hoping for a much wider margin (although perhaps that’s my bias shining through). Additionally, I was expecting to see that companies with strong sustainability scores were being added to the JSI to replace those with controversies and low scores. Instead, I found Calfrac Well Services - a company that profits from fracking - a manner of extracting oil and natural gas that does tremendous damage to water systems and the environment. Calfrac is not in the TSX 60, and with a score of only 63, I’m surprised it has been added to the JSI. Meanwhile, good Canadian companies like Innergex and Cascades aren’t included.

Discussion

I was able to connect with Bob Mann, Chief Operating Officer at Sustainalytics, who shed some light on the thinking behind the Jantzi Social Index. According to Bob, the JSI’s mandate is to provide the responsible investment community with a stable, large-cap investment product with a risk/returnprofile similar to the TSX 60. He also explained that the JSI is a market-weighted index (like the TSX 60), and as such, small cap companies like Cascades and Innergex will have no impact on the financial or sustainability performance of the index — their weighting within the index would be less than .5 percent. Based on its mandate, the JSI is limited to choosing companies from the TSX Composite Index and to maintaining a sector weighting similar to the index. According to Bob, these two constraints don’t leave many large Canadian companies to choose from. For investors who want Canadian companies that are doing more good — and are willing to accept a higher risk profile of small and micro-cap companies —Bob suggests looking at the S&P/TSX Renewable Energy & Cleantech Index for which Sustainalytics also does the underlying research.

Additionally, Bob questioned my methodology by suggesting that the Sustainalytics ESG score is not a comprehensive measure of a company’s positive impact. It is intended as an ESG risk assessment tool to compare companies against their sector peers and is not ideal for cross sector comparison. For the index, Sustainalytics uses three layers of assessment: 1) it screens out companies from negative impact sectors (like nuclear power, tobacco, and military); 2) it screens out companies involved in high impact controversies; and 3) within the constraints of the index’s mandate, it selects the companies with the highest ESG score. This lack of cross sector comparability is why a renewable energy company like Brookfield Renewable Energy that produces power from 95% renewable sources can have a lower score (66) than Suncor (74) that produces oil from the tar sands. 

Conclusion

Although certainly the best option for large-cap Canadian equities, I have concerns about the Jantzi Social Index as the primary benchmark for responsible investment in Canada. It is what it is, but my clients are being asked to pay a much higher annual fee (0.55%) to invest in the iShares Jantzi Social Index ETF (XEN) instead of paying 0.17% for the iShares S&P/TSX 60 Index ETF (XIU). Some days, I’m not sure it’s worth it.

 

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commented 2015-06-03 00:31:31 -0400
Hi Tim – returning to this post, I’m curious how the ESG score analysis for the Meritas Jantzi Social Index and IA Clarington Inhance Canadian Equity SRI Class mutual funds would compare to the plain vanilla Jantzi Social Index. Do you think the apparently greater “activist mandates” of these mutual funds would result in significantly higher ESG scores? Although as you mention, this methodology may not be perfect, maybe an overall ESG score comparison would be a good starting point for investors deciding if the higher MER cost of either of these mutual funds is worth paying for.

P.S. Where can I find the Excel spreadsheet that you mentioned in this post?
commented 2014-12-06 12:19:13 -0500
Yup! You’re spot on. XEN has outperformed XIU over the last 5 years 8.48% vs. 7.70% annually. This outperformance does more makes up for the higher MER! I do think XEN is a better option than XIU, but just marginally.
commented 2014-12-04 12:51:36 -0500
Thanks for the interesting post.

What about the reports stating that “more sustainable” companies produce better returns? Could this factor, plus the increased “ESG returns” (albeit marginal) of the Jantzi Social Index be enough to offset the MER difference? Also, if we assume that the S&P/TSX 60 Index and Jantzi Social Index each earn 8% (which is their approximate performance over the last 5 years) and then subtract the respective MERs, 7.83% (S&P/TSX 60) vs. 7.45% (Jantzi Social) could be argued to be somewhat marginal as well. Thoughts?
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