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May 23, 2002
Social Indexes Beef Up Environmental Criteria to Promote Corporate Social Responsibility
    by William Baue

FTSE4Good announces tougher environmental criteria for inclusion on its indexes, and answers critics who question whether this strategy will elicit corporate change.

On Tuesday, the global equities index firm FTSE announced more stringent environmental criteria that companies must meet for inclusion in the FTSE4Good indexes. Skeptics raise questions about what effect social indexes, and the investment products that track them, actually exert. FTSE answers critics who perceive the indexes as mere window dressing by pointing to real change these benchmarks can induce.

"By introducing more stringent environmental criteria, the FTSE4Good series will continue to encourage more companies to meet and disclose corporate social responsibility (CSR) initiatives," said FTSE Group Chief Executive Mark Makepeace. "The new criteria is designed to be challenging but still achievable, and should prompt companies to become more transparent on environmental issues," added FTSE4Good Advisory Committee Deputy Chairman Craig MacKenzie.

Mr. MacKenzie recently engaged in an extended correspondence in The Ecologist, discussing the merits and limitations of the FTSE4Good indexes with Rob Cartridge, campaigns director for the London-based anti-poverty initiative War on Want. Mr. MacKenzie introduced the argument against FTSE4Good as a means of refuting it.

"The inclusion of such companies [as BP (ticker: BP) and Shell (RD)] has led some people to suggest that FTSE4Good is just stock market capitalism dressed up as social responsibility," wrote Mr. MacKenzie. "I believe that this view is wrong. However, I don't pretend that FTSE4Good isn't stock market capitalism. Of course it is. The question is whether or not FTSE4Good is taking a socially responsible position regarding stock market capitalism."

Mr. MacKenzie believes that FTSE4Good will reform capitalism by encouraging companies to adopt socially and environmentally responsible practices. FTSE deliberately set the bar low on its criteria for social and environmental performance, intending to raise its bar, which it has now done, as a means of encouraging improvement of corporate social and environmental practices.

"One consequence [of this strategy] is that many companies listed in the index are not squeaky clean; indeed, many face major environmental and ethical challenges. This is perhaps the main reason why people doubt that FTSE4Good is really socially responsible," Mr. MacKenzie wrote. "But this misses the point: FTSE4Good is not designed to contain only squeaky clean companies, it's function is to encourage progress toward greater corporate social responsibility in the business world."

Mr. Cartridge labels such tactics as watering down the movement to reform capitalism by enabling companies to pass off lukewarm commitment to progress as corporate social responsibility. FTSE4Good 's incentives for improving CSR are moot if the market does not register a quantifiable effect of exclusion from the index, stated Mr. Catridge. He cited the examples of Tesco (TEO) and Safeways, whose stock prices dropped upon their exclusion from FTSE4Good, but rebounded within a week. He further criticized FTSE4Good for opening its doors to companies it at first excluded.

"Tesco, after heavy lobbying, has now been admitted," Mr. Cartridge charged.

Such inclusion proves the efficacy of incentive, Mr. MacKenzie responded. FTSE4Good included Tesco not due to lobbying, he maintained, but because the company reported more transparently on its environmental policy, allowing investors to assess whether such disclosure was sufficient. For Tesco and other listed companies to remain on the index, they will have to continually improve their social and environmental performance as FTSE increases its threshold.

Jane Staunton, president of FTSE Americas, pointed out that there are seven investment products, available to both institutional and retail investors in the UK and Europe, that track the series. The North American market has yet to introduce a product tracking FTSE4Good.


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