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April 28, 2011
FTSE and EIRIS Launch Ratings of Corporate ESG Performance
    by Robert Kropp

The Ratings build upon ten years of collaboration on the FTSE4Good Index Series, and aim to provide institutional investors with a system for measuring the ESG practices of public companies.


For ten years, FTSE and EIRIS have collaborated on the FTSE4Good Index Series, which, along with the Domini 400 (now the FTSE KLD 400 Social Index) and the Dow Jones Sustainability Indexes (DJSI), was among the first indexes to employ sustainable criteria in the selection of constituents.

According to FTSE, its indexes "are widely used to run funds and structured products…These include tracker funds, ETF's, OTC derivatives and exchange listed derivatives and products." Investment products based on the indexes are available for retail and institutional investors.

Earlier this month, FTSE and EIRIS announced the launch of the FTSE4Good ESG Ratings. The Ratings, FTSE stated, provide institutional investors with "a comprehensive, transparent and objective system to measure the Environmental, Social and Governance (ESG) practices of over 2,300 public companies worldwide."

The ESG-related themes on which companies are rated include environmental management, climate change, human and labor rights, supply chain labor standards, countering bribery, and corporate governance. With the exception of corporate governance, each theme classifies companies as high, medium, or low risk, according to their industry sector. "The ratings are risk-relative," FTSE stated. "This means companies with higher ESG risks have more to achieve in order to obtain a high score."

For each theme, FTSE and EIRIS measure corporate performance according to public policy, management systems, and public reporting criteria.

In an email to SocialFunds.com, Stephen Hine, the Head of Responsible Investment Development at EIRIS, wrote, "Every company in every sector within the FTSE All World Developed Index is researched in an objective manner. We use publicly available information after which we provide the researched companies with their company profile and ask targeted questions ensuring we have all of the information needed to build a company profile and in turn to arrive at an accurate ESG score."

"Companies have public access to the online methodology used to rate them and they are contacted by FTSE to tell them their score," Hine continued. "The idea behind this is that companies will actually use the ratings and we will hopefully encourage companies to enhance their ESG attributes if the methodology behind the outcome is completely transparent."

Companies are ranked both regionally and by industry supersector. Among the 65 companies indentified as top five leaders in the 13 supersectors, only three are headquartered in the US: NYSE Euronext and Western Union in Financial Services, and Boston Property in Real Estate.

US-based companies identified as regional leaders are Ford Motor, Dr Pepper Snapple Group, Walt Disney, and Yahoo.

The leading countries in the overall average ratings are Norway, the Netherlands, and Sweden. The global average ESG rating is 2.76. The US is rated 2.62.

Also this month, STOXX and Sustainalytics announced a new series of ESG indexes. Bob Mann, Managing Director, North America for Sustainalytics, told SocialFunds.com, "These indices are groundbreaking in the amount of disclosure we're providing."

In response, Hine wrote, "FTSE and EIRIS have spent years doing market and client consultation and feeding this information to each other to devise the thorough and balanced criteria used for the ratings. This consultation going forward will continue to ensure that the ratings are capturing information that is deemed fundamental and up to date with emerging areas in SRI (socially responsible investing)."

'This criteria development process is overviewed by a policy committee that is formed of independent experts," Hine continued. "Our expert and thorough research are then applied to these well defined criteria to grade all companies in the global index."

According to FTSE, the ESG Ratings "follow clearly defined risk and performance thresholds defined in publicly available criteria."

Institutional investors can use the ESG Ratings in a number of ways. They can use the Ratings to assess the degree to which their asset managers are integrating ESG factors into investment decision making. The Ratings can also be used to support shareowner engagement with investee companies, manage risk, research historical trends, and define eligible investment universes.

Regarding the methodology, Hine stated, "It also ensures that investors have broad coverage with the ability to carry out analysis of trends and correlations with a three year data history and the ability to review overall pillar ESG areas or the underpinning six individual themes - this provides opportunity to investors to review company ESG practices and use the information in numerous facets such as creating customized indices or defining a unique eligible investment universe, risk management for a large set of securities, integration evaluation and engagement purposes."

EIRIS has regularly issued reports on corporate performance based on its analyses of companies in FTSE indexes. For three years, it has published Climate Change Tracker reports, which analyze the performance in addressing climate change of the world's 300 largest FTSE-listed companies. Its 2011 report applied its traditional methodology to the world's top 100 brands, as identified by Interbrand.

A report published by EIRIS in December assessed policies on biodiversity among 1,800 companies in the FTSE All-World Development (AWD) Index, and found that "Only 6% of…high impact companies are assessed by EIRIS as having a good policy on biodiversity."

 

 
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