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March 15, 2006
FTSE4Good Semi-Annual Review Boots 16 US Companies on Environmental Criteria
    by Bill Baue

Of the 19 deletions, only one company was dropped due to human rights (instead of environmental) criteria, and all but three deletions were US-based companies.

FTSE4Good, the UK-based socially responsible investing (SRI) global index provider, just finished its semi-annual review of constituents, resulting in 19 deletions and more than twice as many (40) additions. The FTSE4Good philosophy is to set the bar for corporate social and environmental responsibility at an achievable level, then ratchet it up incrementally to promote progress toward sustainability.

"The FTSE4Good index is a driving force in encouraging companies globally to be more aware of criteria used for socially responsible investment," said Mark Makepeace, Chief Executive of FTSE Group. "We are committed to working with investors, companies and other interested parties to develop and encourage corporate responsible behavior, which enhances shareholder value."

The lion's share (18) of the deletions are due to the environmental criteria (which FTSE4Good beefed up in 2002), with only a single deletion of Canada-based nickel producer Inco (ticker: N) due to human rights criteria (which FTSE4Good strengthened in 2003). Almost all (16) of the environmental deletions are US-based companies, a conspicuous geographic correlation. The US-based environmental deletions also cluster in three sectors.

FTSE4Good booted four US travel and leisure companies--namely Cendant (CD), Darden Restaurants (DRI), Hilton Hotels (HLT), and Starwood Hotels and Resorts (HOT). FTSE4Good also dumped five US retailers--Dollar General (DG), Federated Department Stores (FD), Lowe's (LOW), Nordstrom (JWN), and RadioShack (RSH). The same number of US finance companies have also been censured--Ambac Financial (ABK), Bear Stearns (BSC), Janus (JNS), Northern Trust (NTRS), and Washington Mutual (WM).

SRI ratings can be said to exhibit the Rashomon Effect, a term coined after the 1950 Akira Kurosawa film Rashomon that presents the same event in radically different interpretations, suggesting the highly subjective nature of human perception. In this instance, FTSE4Good just deleted Bear Stearns, while the Dow Jones Sustainability Indexes (DJSI) just added the company in September 2005.

FTSE4Good sources its SRI research from UK-based Ethical Investment Research Service (EIRIS), while Switzerland-based Sustainable Asset Management (SAM) Group provides the SRI research for DJSI. The two index providers have different approaches to their analysis. DJSI takes a best-in-class approach that rewards best practice on sustainability across all sectors, while FTSE4Good screens certain sectors altogether. However, the difference in the evaluation of Bear Stearns decision is unclear based on this distinction.

The geographic concentration of deletions may significantly impact the FTSE4Good US Select Index, the underlying benchmark of the Vanguard FTSE Social Index Fund (VFTSX)--which just last year switched from tracking the Calvert Social Index (CALVIN).

Interestingly, FTSE4Good additions span a broad geographic range of 10 countries, with the highest concentration being the UK (13) and Japan (8), followed by the US (6) and Australia (4). The additions also span a broad range of sectors.

One decision displaying consistency (or the opposite of the Rashomon Effect) between FTSE4Good and DJSI is the recent addition of Goldman Sachs (GS) by both indexes.

Controversy will always accompany decisions to add certain companies to SRI indexes, and FTSE4Good's new additions are no exception. For example, the list of additions includes Bridgestone (5108.T), the defendant in a November 2005 Alien Tort Claims Act (ATCA) case alleging "forced labor, the modern equivalent of slavery" on the Firestone Plantation in Harbel, Liberia.

It also includes Smithfield Foods (SFD), a former defendant in three lawsuits alleging violation of environmental laws by allowing hog waste to contaminate North Carolina rivers and streams. Smithfield settled two of these suits in January 2006 through an agreement with the Waterkeeper Alliance to improve environmental management of its hog farms. This follows up on the company's 2005 achievement of ISO 14001 environmental certification of its environmental management system (EMS) for all its US hog production facilities and all pork and beef processing facilities (except for recent acquisitions.) These developments no doubt factored in to FTSE4Good's inclusion decision.


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