FTSE Russell, the global index, data and analytics provider, has identified 208 companies listed on the FTSE4Good All World that have failed to meet new more stringent environmental standards first introduced at the FTSE4Good 8th June 2021 semi-annual index review.
The companies represent 13.5% of the 1,546 stocks in the FTSE 4Good index series which is designed to measure the performance of businesses with strong environmental, social and governance (ESG) practices.
Of the 208 companies at risk of deletion,105 are from higher-emission sectors.
It is tracked by a range of exchange traded funds and investors such as the Japanese Government Pension Investment Fund, the world’s largest pension fund.
The changes, which also set minimum climate scores for FTSE4Good index inclusion, give constituents until the June 2022 semi-annual index review to meet the required standard or be deleted from FTSE4Good Index Series.
The new climate standards are based on parameters devised by the Transition Pathway Initiative (TPI), which is backed by more than 100 investors collectively managing nearly $25tn in assets.
Thresholds are determined by FTSE Russell’s classification of developed and emerging markets, as well by a company’s sub-sector classification, with the most carbon intensive sectors set higher standards
Companies in “primary impact subsectors” — such as fossil fuel, forestry, mining, transport and utilities — must show that the risks and opportunities of the transition to a low-carbon economy are integrated into their operational decision making.
All other developed market companies need to show they are “building capacity” towards this, while their peers in emerging economies must acknowledge climate change as a business issue.
Companies are also rated on whether their carbon emissions targets are compatible with the global targets enshrined in the 2015 Paris Agreement.
“These tougher climate requirements reflect a groundswell of investor demands for companies to develop credible climate transition strategies and emission reduction targets,” said Arne Staal, CEO, FTSE Russell.
“He adds, “The introduction of the TPI score will impact all companies but set the highest hurdles for those in the most carbon-intense industries. Over the next 12 months, we will work closely with constituents at risk of deletion to ensure they understand what is required to retain index membership.
It has been 20 years since the launch of FTSE4Good, which has proven to be a leading ESG benchmark family around the world, with a proven track record of driving improvements in corporate standards and environmental, social and governance performance.”
In July 2020, FTSE Russell issued a market consultation on whether to revise its climate standards for the FTSE4Good index series in recognition of the growing importance of climate considerations in ESG indexes. Respondents were overwhelmingly supportive of the proposed enhancements to the existing Climate Change theme within FTSE Russell’s ESG Ratings.
“We have been managing FTSE4Good benchmarks for over 15 years on behalf of our clients,” said Chad Rakvin, Global Head of Index Funds, Legal & General Investment Management (LGIM). “The industry has moved very fast with respect to the integration of more advanced metrics and best thinking in terms of index construction.
Given our support as a Research Funding Partner of the Transition Pathway Initiative (TPI) and our experience in working with FTSE Russell to bring the TPI scoring frameworks into one of our flagship Future World Funds, we are delighted to see this evolution of the FTSE4Good series.”
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