FTSE4Good tightens index entry

In 1997 the UK, along with several other countries, signed the
Kyoto
agreement which set targets to reduce greenhouse gas (GHG) emissions by 2008-12.

Now, with the new deadline looming, the government has finally been forced
into action – and companies are its main target for legislation. Recognising
this, stock market index compiler FTSE Group has strengthened the requirements
needed to join its
FTSE4Good
index.

The FTSE4Good index, which started five years ago, is an investment index set
up by FTSE for socially responsible investment. The three main criteria it
covers are:
• Working towards environmental sustainability;
• Developing positive relationships with stakeholders; and
• Upholding and supporting human rights.

In February this year, FTSE added climate change to its criteria. As a
result, several companies, including Cadbury Schweppes, Liberty, Prudential and
Marks & Spencer, will need to change their ways if they want to remain on
the index.

The key principles of the new climate change criteria are:
• Policy – To establish a commitment to climate change impact,
with an aim to support and contribute to scientific understanding and to
participate in strengthening public policy.
• Management – Companies that operate in high-emission
industries should use targets as part of an effective management system. Those
companies which operate in lower-emission sectors should initially focus on
disclosure.
• Disclosure – To disclose reliable, consistent and comparable
data on GHG emissions. As there is no single global standard of methodology for
compiling GHG data, FTSE4Good will allow flexibility in reporting at the early
stages of implementation.
• Performance – The main way in which to measure a company’s
action towards climate change is through GHG emissions and to ensure it reduces
over time. At present, it is difficult to measure and compare reductions in an
objective manner. The FTSE4Good hopes to measure corporate performance
accurately and to further develop performance criteria.
• Scope – Companies have the greatest responsibility to reduce
their impact on climate change for activities most under their control.
Therefore, this criteria applies to companies’ operational GHG emissions and
their product GHG emissions.

Targeting high emissions
All companies, regardless of the type of business they run, emit some greenhouse
gases. Like the carbon trading scheme, the criteria will initially be focused on
industries with the highest level of emissions. It has included sub-sectors and
classified the companies and sub-sectors into high operational impact (HOI) or
medium operational impact (MOI).

The industries listed under impact categories are as follows, although the
lists are not complete.
• HOI – General mining; electricity; delivery services;
airlines; and building materials and fixtures.
• MOI – Defence; trucking; travel and tourism; pharmaceuticals;
and home construction.

Certain sectors have been highlighted for possible re-categorisation at a
later date to high impact. Included on that list are:
• Heavy construction; brewers; distillers and vintners; soft drinks; farming and
fishing.

Strict requirements
An independent panel will audit the companies that choose to be included on the
FTSE4Good index and are comprised of committee members from Legal and General
Investments, Barclays and Business in the Community, among others.

According to Mark Makepeace, CEO of the FTSE Group, only 50 of the 250
high-impact companies included on the index at present are expected to meet the
criteria.

To implement the climate change criteria, companies must adhere to the
following guidelines:
Policy governance
• Board level or senior executive responsibility.
• Public statement/policy identifying climate change relevant to the business
and the need to address it.
Management strategy
At least one of these two criteria must be met. However, if a company meets its
performance criteria it is not necessarily required. It is not required of MOI
companies:
• Identifying the long-term strategic goal of reducing its GHG over more than
five years, which should be made publicly available.
• Short/medium targets for GHG reduction over less than five years.
Disclosure
Public disclosure of both of the following. MOIs will only have to disclose one
and can disclose their operational energy consumption instead of a total
operational disclosure.
• Total operational disclosure of GHG emissions, in tonnes of C02 or equivalent.

• Sector metric or efficiency ratio where established as norm.
Performance
• One of the following must be met. Currently not applicable to MOIs, but this
will be reassessed.
• 5% reduction in carbon intensity over last two years.
• The company can demonstrate that over the previous two years it is in the top
quartile of companies in its sector based on carbon efficiency metrics.
• Transformation initiative is implemented.

The FTSE4Good hopes to re-categorise in the next two years and has set the
following deadline for companies wishing to remain or to join its index. Policy
governance and disclosure requirements must be implemented by January 2008 for
HOI companies and July 2008 for MOI companies. Management and performance
requirements to be implemented by HOI in July 2008 and MOI by January 2009.

Click here
for more information on the new FTSE4Good climate change criteria.