ESG Viewpoint: FTSE Russell

# RepRisk interviews Sarah Williams, Sustainable Investment Strategy Manager at FTSE Russell

Sarah Williams: As a Sustainable Investment (SI) Strategy Manager in the Benchmarks and Indices business at FTSE Russell, my main responsibilities are to develop an overarching SI strategy for the index business and use that as the basis for driving consistency in our SI priorities, product positioning, and innovation. The SI solutions team also works on developing SI reporting and analytics capabilities for index clients and producing client-focused insights and analysis on SI data and benchmark universes. We work closely with the SI Product teams to design ESG and climate indices, which can incorporate criteria related to listed fixed income and equities’ ESG scores, involvement in controversial products or conduct, carbon emissions, involvement in green solutions, and so on.

SW: The availability of SI indices allows passive investors to participate in sustainable investing, which was previously thought to be a realm exclusive to active investors.

ESG or SI indices enable passive investors to allocate capital in a manner that incorporates ESG or other sustainability considerations. Indices can target sustainability improvements (e.g., overweighting stocks with higher ESG scores, those producing green solutions, etc.) or can reduce sustainability risks (e.g., removing or underweighting stocks with poor scores or involvement in controversies) at the same time as maintaining the risk/return characteristics of mainstream benchmarks.

Indices can promote sustainable practices in corporates via the signalling provided. Index rules are clear and transparent. It is clear what is required to be included or overweighted in an index, and companies can therefore target improvements in the metrics used to assess them. On a basic level, corporates can improve disclosure of their sustainability practices to improve their ESG scores or change their behaviour to avoid being screened out on the basis of controversial conduct.

SW: Applying baseline exclusions to SI indices is an area FTSE Russell has been exploring, to ensure all SI indices remove certain products and behaviours at a minimum, regardless of the indices’ other objectives. The ‘baselines’ that have been identified include controversial behaviour, as well as involvement in production of tobacco, controversial weapons, and thermal coal. The list of minimum exclusions is published in the Guide to the Construction and Maintenance of Exclusion Lists used in FTSE Russell indices.

Screening for controversial conduct is a component of nearly all our SI indices launched, with SI-focussed investors wishing to avoid companies found to be complicit in environmental degradation or social harm as a standard.

Regulatory developments also typically include either explicit or implicit requirements for sustainable investments to exclude companies which cause harm, and controversial conduct data is frequently used as a lens through which to determine this.

SW: : RepRisk’s data is used in the calculation of the FTSE4Good Index Series, which is one of the world’s first global ESG index families.

FTSE Russell assesses high-risk companies by using RepRisk data:

◾ FTSE Russell combines current and peak RepRisk Index (RRI) scores for each company, creating a derived ‘combined RRI’ score.

◾ Companies shown to have high-risk exposure related to controversial conduct based on the combined RRI scores which would place them in the top 5% of companies in the FTSE Developed universe are not eligible for the index and are monitored.

◾ Non-constituent companies that are on the final list at an index review are prevented from joining the FTSE4Good index.

SW: FTSE International Limited is an authorised benchmark administrator, regulated by the FCA under the UK Benchmark Regulation (BMR). BMR includes requirements for ESG disclosures such as those published on the SI metrics page, as well as minimum methodology criteria for EU Climate Transition Benchmarks and Paris Aligned Benchmarks. We also closely observe incoming regulations that impact index users as well as emergence of global standards, including the International Sustainability Standards Board's inaugural global sustainability disclosure standards.

SW: ESG indices, in general, have the benefit of being clear and transparent regarding their objectives, methodologies, and outcomes. Indices by their nature are calculated using defined rules, giving users the ability to understand what factors are considered and if the methodology suits their needs or aims or values. As investor and beneficiary focus on sustainability grows, indices are well placed to meet divergent needs.

Focus areas in the ESG index space will likely be in exploring opportunities to address social issues and biodiversity/nature, following where addressing climate issues in passive index frameworks has become well established.