FTSE to track ethics

Watching Charlie Sheen and Michael Douglas in the 1987 film Wall Street, business linked with ethical behaviour seems a foreign concept. Yet investors are now increasingly attracted to companies with a strong track record when it comes to corporate and social responsibility.

Ten years ago, FTSE unveiled the FTSE4Good Index Series, one of the world’s first to rank companies against globally recognised corporate responsibility standards. The goal was to attract investment to the companies that met certain ethical and, from 2007, environmental standards. FTSE has now upped the stakes further by launching ESG Ratings, a scoreboard that helps investors benchmark about 2,300 companies’ performance against a series of environmental, social and governance (ESG) criteria.

The scoreboard ranks companies on their overall ESG score and breaks that down into six specific themes: environmental management, climate change, human and labour rights, supply chain labour standards, corporate governance and countering bribery.

“The index sets challenging but achievable standards; it is the things companies should be doing,” explains Tony Campos, senior executive for responsible investment at FTSE. “The ratings are measuring best practice. They give a more granular level and let you see how companies are changing their ways to meet the standards.”

The ratings also indicate the level of ESG risk a company is carrying and its success in managing that risk. Companies with higher ESG risk have more to achieve in order to score highly. The collected information is transformed into rankings by a team of experts that uses methodologies available on FTSE’s website to distil information that companies disclose on their websites or in reports, as well as data from their interactions with FTSE and research company Eiris.

“We are relying on data that is not easily quantifiable, such as indigenous land rights,” admits Campos. “But over the 10 years we have been doing this, we have become quite expert at quantifying it.”

Campos says the ratings were launched in response to an increasing awareness of the role ESG factors play in understanding corporate risks and performance, as well as in achieving long-term, sustainable investment returns. He expects more and more institutional investors to take an interest in ESG factors when making decisions as they give an insight into the strengths and weaknesses of a company.

Influencing bottom lines

But the levels must be revised as more companies realise that paying attention to CSR and environmental factors can influence bottom lines in terms of winning business, attracting and retaining talent, and selling their products or services – another job for the oversight team.

“FTSE has been very active in [responsible investment] and, through our work, we have seen a shift in company practice,” says Campos. “ESG is becoming more sophisticated. That is going to keep happening so the ratings have to change. We have to make them harder and harder.”

Policies promoting community investment, reducing CO2 emissions and strong corporate governance have helped UK insurance company Aviva lead the rankings. Marie Sigsworth, Aviva’s corporate responsibility director, says shareholders are very interested in the company’s ESG performance.

“The relationship we have with our customers can span a lifetime; they need to know that how we operate is sustainable,” she says, adding that detailing the company’s corporate responsibility progress in its annual report has made it attractive to investors and employees, as well as existing shareholders. “Investors use [the rankings] to decide whether or not to invest in us. Robust reporting of all ESG factors alongside financial information makes it easier for people and shareholders to understand. And people like to see the company they are working for doing well.”

Campos adds that companies’ investor relations teams are not the only ones pushing their participation quite heavily: finance teams are also very interested to see how they rate against their peers.

“People are aware that being in FTSE4Good adds a significant amount of value to their brands,” says Campos. “And people say to those outside, ‘You’re not in FTSE4Good – why is that?’.”