Global investment benchmark giant, FTSE Russell, will make it harder for companies to enter its environmental, social and governance (ESG) index – and easier to leave – under new thresholds due to be phased in by 2021.
In its ‘2018 Step Change’ report published last week, the London Stock Exchange-owned (LSE) index provider says companies would need higher scores both to enter and remain in the FTSE4Good stock benchmarks over the next few years.
By 2021 developed world firms would need to score at least 3.5 on the FTSE Russell bespoke ESG scale to enter the index while risking deletion by scoring 3 or below; compared to the current respective inclusion and deletion thresholds of 3.1 and 2.7.
Under slightly more lenient terms, emerging markets companies would require a 3 or above to join the FTSE4Good indices in 2021 while courting ejection with a score of 2.5 and below: currently the cut-off points sit at 2.5 and 2.1, respectively.
The FTSE Russell ESG advisory committee noted last December that its in-house responsible investment gauge had seen scores rise globally “from an average 2.18 to 2.52 over a three year period; an increase of 7.4% per annum”.
But despite the general uplift, FTSE Russell says the rising index thresholds should “catalyze the further improvement of global ESG standards”.
When the benchmark provider tinkered with its ESG scoring process in 2014, over 210 companies – including four NZ listed firms – fell below the deletion thresholds. Of the 212 initially flagged for deletion, 76 were financial firms and almost 110 were domiciled in Japan.
Following an “engagement” program FTSE Russell ultimately booted just 98 companies from the ESG benchmarks with just one NZ stock deleted.
The report says index rules can hold sway over many corporate decisions such as free float requirements, voting rights and ESG behaviour as issuers seek access to “large pools of capital represented by index-tracking funds and other funds benchmarked to those indexes”.
“In fact, benchmarks and indexes, once regarded purely as mirrors of the market, are now increasingly influencing both investor and issuer behavior,” the report says.
Mark Makepeace, FTSE Russell chief, says in the paper: “Now the momentum towards sustainability is building amongst investors globally.”
At the same time, FTSE Russell released another study last week detailing growth in the ‘green economy’ sector, which now represents an estimated 6 per cent of the global stock market value – or US$4 trillion.
“Green companies have shown outperformance with FTSE Russell’s broadest green indexes outperforming their parent benchmarks over the last five years,” the report says. “…No longer a loose concept the green economy is now a measurable and definable investment priority.”
About US$15 trillion globally is benchmarked to FTSE Russell indices.