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October 02, 2007

KLD's New Index Finds Sustainable Companies the World Over
    by Anne Moore Odell

KLD launches a Global Sustainability Index Series to benchmark top companies in all sectors across Asia Pacific, Europe and North America. -- Institutional investors have a new guide for finding companies that are performing well on environmental, social, and governance (ESG) matters. On October 1, KLD Research & Analytics launched the KLD Global Sustainability Index (ticker: GSI) and its three area specific sub-indexes.

"KLD created the GSI in response to greater demand within the market for global investment products utilizing a sustainability framework," said Thomas Kuh, Managing Director for KLD Indexes. "Investment managers have told us they want an index of the most sustainable companies and a clearly defined relationship to the market."

The GSI is a broad index, launched with a universe of 687 companies. However, KLD is committed to applying sustainability standards to all its companies. KLD, taking its definition in spirit from the seminal Brundtland Commission, defines sustainability as "the degree to which a company addresses the social and environmental needs of the present without compromising the quality of life of future generations."

With future generations in mind, KLD's ESG framework examines a company's sustainability by studying five important factors. These factors include how a company: relates to its local communities, and society at large; respects and responds to its customers with safe and well-built products; treats its own employees and the employees of it supply chain; defines its relationship and commitment to the environment; and handles governance and ethics issues.

KLD rates corporate ESG performance in light of the environmental and social challenges within each sector.

KLD started the GSI with the universe of companies found on the S&P/Citigroup BMI World Index. From this universe, it selected the top 75% of the market capitalization of each sector in 23 developed market countries. These companies were further narrowed down by application of the KLD's ESG/sustainability framework. This left 37.5% of the sector market capitalization of each sector in North America, Europe and Asia/Pacific. This process creates a sustainability index that is expected to closely track the global market while exhibiting a strong sustainability identity.

The GSI series are float-adjusted, market capitalization weighted indexes. The GSI is sector-neutral as its sector weights match those of the underlying market. Kuh explained that sector bias occurs when the sector weights in an index or investment portfolio vary from those in the underlying market.

Kuh told, "SRI and sustainability indexes are often compared to unscreened market benchmarks such as the S&P 500 or the S&P/Citigroup BMI World to evaluate risk and return differences."
"Sector bias contributes to financial risk, as measured by tracking error - in this case, how closely the GSI tracks a traditional benchmark. By making the GSI sector neutral, KLD reduces the expected tracking error of the GSI and eliminates one factor contributing to financial risk," Kuh concluded.

The KLD Global Sustainability Index is broken down into three regional indexes: the KLD North America Sustainability Index (ticker: NASI), KLD Europe Sustainability Index (ticker: ESI), and KLD Asia Pacific Sustainability Index (ticker: APSI). KLD is also separating out the KLD Global Sustainability Index ex-US (ticker: GSIXUS).

"The creation of GSI sub-indexes provides investors with an opportunity to diversify or target their global exposure," Kuh said. "With the universe provided by the larger GSI, it is possible for KLD to create customized indexes such as a GSI Japan or a GSI Ex-Europe," he added.

The top ten holdings of the GSI include Microsoft, Royal Dutch Shell, BP, HSBC Holdings, Procter & Gamble, Cisco Systems, Johnson & Johnson, IBM, Vodafone Group and Novartis AG.

The GSI index family is built with the knowledge base that KLD brings as a research partner in the Sustainable Investment Research International (SiRi) Company. SiRi researches and analyzes companies worldwide and helps provide socially responsible investing strategies and sustainability solutions for institutional investors. The other SiRi partners are Sustainability Research (The Netherlands), Centre Info (Switzerland), SIRIS (Australia) and Jantzi Research (Canada). SiRi partners help KLD create its ESG rating framework.

At the beginning of September, Northern Funds filed with the SEC for a new mutual fund based on the GSI. The launch date and specifics of the Fund are still to be released.

The GSI is part of a larger global expansion by KLD.

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