Asian representation on Dow Jones Sustainability Index grows after methodology overhaul

Taiwan and Japan dominate new additions to the global sustainability benchmark, which saw the dropping of some incumbents, including Singapore’s CDL. The real estate giant stayed on the Asia Pacific list for over a decade.

Tokyo skyline
Japan continues to dominate the Dow Jones Sustainability Asia Pacific Index, accounting for over half of the index's constitutents, followed by Australia and South Korea. Image: Alexander Smagin via Unsplash

The number of Asian companies represented on the world’s longest-running sustainability index has jumped up this year, driven by new additions from Taiwan and Japan.

134 Asia Pacific-based firms made it to the Dow Jones Sustainability World Index (DJSI World) after the latest annual rebalance, up from 128 last year, making up about 42 per cent of the total companies on the main list, which also includes entities from the United States, Europe and Africa.

Taiwan’s fresh entrants include three financial institutions Chang Hwa Commercial Bank, Taiwan Cooperative Financial Holding and The Shanghai Commercial and Savings Bank, as well as the world’s largest industrial computer manufacturer Advantech.

They join four other Japanese newcomers: industrial conglomerate Mitsubishi Heavy Industries, printing and materials group Toppan Holdings, retail giant Seven & i Holdings Co – which owns the convenience store chain 7-Eleven – and dairy and confectionery product producer Meiji Holdings.

Globally, the three largest companies added to the main index were Chinese tech behemoth Tencent Holdings, New York-headquartered tobacco firm Philip Morris International and California-based software company ServiceNow.

Meanwhile, three pharmaceutical companies, Swiss multinational Novartis AG, Anglo-Swedish drug manufacturer AstraZeneca and American biotechnology firm Amgen, were dropped from the list.

DJSI World is the main index of the nine DJSI categories. It captures the top 10 per cent of the world’s largest 2,500 companies that score the highest based on rating agency S&P Global’s annual Corporate Sustainability Assessment (CSA), which consists of a set of questionnaires that invited companies fill out.

The other eight groupings include the Asia Pacific and Emerging Markets indices.

Asian entities that fell off the list

The annual review saw Singapore real estate giant City Developments Limited (CDL) being dropped from the Asia Pacific list, breaking its 12-year streak.

The homegrown business was also dropped from the global index last year.

Meanwhile, its five Singaporean counterparts – transport operator ComfortDelGro, agribusiness group Wilmar, real estate investment manager CapitaLand Investment, defense equipment business Singapore Technologies Engineering and infrastructure conglomerate Keppel – retained their positions on the Asia Pacific index, which represents the top 20 per cent of the 600 largest sustainability-centric companies in the region.

A CDL spokesperson told Eco-Business the firm learned of its exclusion from DJSI Asia Pacific effective from 18 December based on the announcement issued by S&P Dow Jones Indices, a subsidiary of S&P Global which oversees the DJSI, on 8 December.

This was despite it scoring similarly to last year, just one point down from its 2022 score of 66 out of the maximum 100 points on the CSA.  

The spokesperson said that its deletion was “likely due to methodology changes in addressing the questions and more stringent scoring worldwide”, noting that fewer real estate companies worldwide made it to all nine indices this year, compared to last year.

Mak Yuen Teen, a professor of practice at the National University of Singapore Business School who specialises in corporate governance, posited that since companies are ranked within each industry, CDL could have been dropped due to the higher average scores in the property sector, which led the firm to underperform its peers.

In response to Eco-Business queries about CDL’s exclusion from the index and whether there are plans for the methodology to consider more company-specific sustainability performance in the future, an S&P Dow Jones Indices’ spokesperson said: “We cannot comment on individual companies that are added or removed from our indices but our indices, including DJSI, follow rules-based methodologies. Index eligibility and ongoing membership in our indices are determined by a combination of different eligibility factors and criteria.”

On the emerging markets front, India’s Adani Enterprises, which was added to the index last year, was notably removed in February this year, following allegations of stock manipulation and accounting fraud.

Addressing inconsistencies in ESG ratings

S&P Global’s recent overhaul to its CSA methodology comes amid intensifying scrutiny of environmental, social and governance (ESG) ratings and data providers over the opacity in their rating methodologies and divergent ratings of the same companies.

Thus far, regulators in the European Union, India, Japan and Singapore have published regulatory guidelines in a bid to improve the transparency and quality of ESG assessment services.

“The different methodologies, lack of full transparency in ESG ratings and possible conflicts of interest between rating providers and companies are concerns, and regulators around the world are rightly looking into this,” said Mak.

Inclusion on major sustainability indices like DJSI matters to a company as it allows for the entity’s incorporation into ESG funds that track these indices and helps to lower its cost of borrowing if continued inclusion on such indices is one of the performance targets tied to its sustainability-linked loans.

However, ESG ratings are often conflicting and highly variable compared to credit ratings. MIT researchers have found that the average correlation in scores among six prominent rating agencies – which include S&P Global – was only 61 per cent on average, compared to a 99 per cent correlation between credit rating scores.

In CDL’s case, despite being dropped from DJSI Asia Pacific, it continues to outperform some of its five Singaporean counterparts listed on the index on other global ESG rankings by other major rating organisations MSCI, Sustainalytics and CDP.

While it has attained the highest possible “AAA” rating from MSCI, Wilmar International and ST Engineering obtained an “AA” and “A” rating respectively. Compared to the other Singapore-based companies, CDL was assessed by Sustainalytics to have the lowest amount of ESG risks. It was also the only firm to obtain the top score of “A” from CDP, where the others scored a range from “B” to “F” – the latter score is given to companies that fail to provide any data to CDP.

Among the updates to S&P’s assessment were the removal of 37 questions for the sake of simplification and two additional questions related to external material issues to capture the “double materiality” concept – which considers an entity’s impact on the environment and society, in addition to how sustainability-related factors impact the financial performance of a business.

The real estate industry questionnaire was also split into two new industries – Equity Real Estate Investment Trusts (REITs) and Real Estate Management and Development – as some questions relating to development activities might not be applicable to many companies, given the diversity of activities within the industry’s value chain, which covers the acquisition, leasing, management and operation of properties as well.

Eco-Business management sits on the boards of ComfortDelGro and Wilmar International.

Correction note: Paragraph 23 has been edited to reflect that CDL has not outperformed the other Singaporean companies listed on the DJSI on all the other ESG rankings mentioned. CapitaLand Investment and Keppel have received “AAA” ratings from MSCI as well.

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