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October 04, 2006
FTSE4Good Deletes Nine Companies on Environmental and Supply Chain Labor Standards
    by Bill Baue

FTSE4Good criteria promote incremental progress in corporate social responsibility performance, and climate change is the latest topic covered in newly proposed standards.


Last month FTSE4Good announced the addition of 24 companies and the deletion of nine from its global socially responsible investing (SRI) index series resulting from its semi-annual review. Deletions included Enel (ticker: EN) for acquiring a nuclear power producer, Hasbro (HAS) for falling short on supply chain labor standards, and Harley-Davidson (HDI) and six others for failing to meet environmental criteria.

The FTSE4Good philosophy calls for setting challenging but achievable standards on specific social and environmental issues, then ratcheting those criteria up periodically to inspire incremental improvement in corporate social responsibility (CSR) performance. The fact that FTSE4Good segments its criteria means that a deletion can result for falling short in a specific area, such as human rights, regardless of how well the company performs on other environmental, social, or governance (ESG) issues.

"The intention is that both companies and index users can see exactly what issue companies have failed to improve their corporate responsibility performance on," explains Will Oulton, head of the responsible investment unit for FTSE.

Mr. Oulton, one of the architects of FTSE4Good, points out that this transparency on specific reasons for deletions helps guide shareowner engagement by investors to promote corporate improvement on that very issue. Mr. Oulton cites the example of State Street Global Advisors (SSgA), which uses FTSE4Good on investments where it also employs the Responsible Engagement Overlay (REO).

One interpretation of the relatively low number of deletions is that the standards lack sufficient rigor to hold companies accountable for social and environmental transgressions. However, another interpretation is that the FTSE4Good methodology of raising the bar to promote improved CSR performance is functioning as intended.

"We conduct reviews twice a year to see which companies have failed on which elements of the criteria, so we do get turnover of companies that are unwilling or unable to meet the more demanding criteria," Mr. Oulton tells SocialFunds.com. "We don't want to have large turnover of companies coming in and out, which makes an index an expensive benchmark to use because of the expenses associated with turnover."

FTSE4Good tries to manage turnover to within three to five percent, in keeping with other indexes, while also remaining stringent enough to push CSR improvement.

"We have a history of evidence where we can point to reaction from not ones or tens but hundreds of companies that have changed their policies, management processes, or reporting in reaction to FTSE4Good criteria," Mr. Oulton said. "I wouldn't say that has been the only driver, but it's certainly something we can use to measure what companies do, by when, and track whether they meet the criteria or not."

For example, in April 2003 only three of the 21 companies in the global resource sector met new FTSE4Good human rights criteria: BP (BP), Shell (RD), and BHP Billiton (BHP). Ten resource companies, including Statoil (STO), Total (TOT), and Repsol (REP) improved their human rights performance sufficiently to remain in FTSE4Good. Eight, including Amerada Hess (AHC), PetroCanada (PCZ), and ConocoPhillips (COP), were deleted in previous reviews.

In addition to the semi-annual review last month, FTSE4Good also released a consult paper outlining the criteria for extending its current coverage of global warming into a new standard that will cover climate change. Criteria are established by an independent policy committee consisting of diverse stakeholders from business, academia, SRI firms, and nongovernmental organizations (NGOs). The criteria also go through a public comment process to ascertain a consensus viewpoint on what specific standards and thresholds to set.

"If we get 80 to 85 percent plus support on specific aspects of the criteria, we consider that a consensus view," Mr. Oulton says.

Most interestingly, the criteria call for compliance with the Greenhouse Gas Protocol--not only Scope One covering direct emissions from company operations and Scope Two for indirect emissions from electricity use, but also Scope Three on emissions from product use.

"The responsibility of companies for emissions created from its supply chain or its product range is an area of continuing debate," Mr. Oulton states. "There's a view that companies should take more responsibility for that, and some of the leading companies are doing that, but the majority aren't."

"What we want to do is put that signal out that we're going to start looking at this in a systematic way," he adds. "It is open to stakeholder review."

 

 
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