FTSE to track ethics

Watching Charlie Sheen and Michael Douglas in the 1987 film Wall Street, business linked with ethical behaviour seems a foreign concept. Yet investors are now increasingly attracted to companies with a strong track record when it comes to corporate and social responsibility.

Ten years ago, FTSE unveiled the FTSE4Good Index Series, one of the world’s first to rank companies against globally recognised corporate responsibility standards. The goal was to attract investment to the companies that met certain ethical and, from 2007, environmental standards. FTSE has now upped the stakes further by launching ESG Ratings, a scoreboard that helps investors benchmark about 2,300 companies’ performance against a series of environmental, social and governance (ESG) criteria.

The scoreboard ranks companies on their overall ESG score and breaks that down into six specific themes: environmental management, climate change, human and labour rights, supply chain labour standards, corporate governance and countering bribery.

“The index sets challenging but achievable standards; it is the things companies should be doing,” explains Tony Campos, senior executive for responsible investment at FTSE. “The ratings are measuring best practice. They give a more granular level and let you see how companies are changing their ways to meet the standards.”

The ratings also indicate the level of ESG risk a company is carrying and its success in managing that risk. Companies with higher ESG risk have more to achieve in order to score highly. The collected information is transformed into rankings by a team of experts that uses methodologies available on FTSE’s website to distil information that companies disclose on their websites or in reports, as well as data from their interactions with FTSE and research company Eiris.

“We are relying on data that is not easily quantifiable, such as indigenous land rights,” admits Campos. “But over the 10 years we have been doing this, we have become quite expert at quantifying it.”