Page 5: Creating a standard for socially responsible investment (SRI) - FTSE4Good
In February 2001, FTSE launched a new family of indices named FTSE4Good. These are designed to help create a global standard enabling investors to identify and measure the performance of companies who practice a recognised, acceptable standard and social behaviour. Investment in ethical and socially responsible funds had grown rapidly. FTSE responded to this investor interest by creating the FTSE4Good Index. Additionally, in July 2000 the UK government set out a new requirement that occupational pension funds must state in their investment policies the extent to which they take account of ethical, social and environmental issues in investment.
Today, it is particularly important that companies operate in a socially responsible way. Investors and other key stakeholders in companies are increasingly concerned that the companies in which they are involved behave in an ethical way. To be included in FTSE4Good Index a company must meet a number of important criteria. Research indicates that over 50of companies in the four regions (UK, Europe, US and Global) to which a FTSE4Good Index applies do not today meet the criteria. The creation of the new indices indirectly puts pressure on companies excluded from the index to change their ways and so become eligible for consideration for inclusion to the index.
The FTSE4Good indices have been developed in conjunction with the Ethical Investment Research Service (EIRIS). EIRIS is the UK's leading independent provider of research into the social, environmental and ethical performance of companies and has partnerships with similar organisations all over the world.
For inclusion in FTSE4Good, companies need to satisfy standards in three types of criteria:
- Environmental criteria
- Social and stakeholder criteria
- Human rights criteria.
These criteria address three key questions:
- What is the company doing to protect the environment?
- How well is the company safeguarding the interests of the society in which it operates and the interests of its stakeholders e.g. employees, suppliers and customers?
- How far does the company comply with the requirements of human rights legislation?
The criteria for inclusion in FTSE4Good is detailed, but important features are that:
- They are more demanding in sectors that are likely to have a higher impact e.g. agriculture and chemicals have a higher impact on the environment than do most media and entertainment companies
- They relate to company policy, management and reporting arrangements
- They are challenging but achievable standards and will continue to get tougher for companies to meet.
The process through which companies qualify for inclusion in the FTSE4Good indices
The requirements are tough. To meet the environmental criteria, for example, a high impact company (e.g. a paper mill or fast food chain) must have:
- a detailed environmental policy covering all parts of the company
- an effective system for managing the environment
- reporting procedures that provide data on environmental indicators.
A further key benefit of the FTSE4Good Index is that all licensing revenues are being given to UNICEF. FTSE has supported UNICEF for a number of years and is now working closely with this global children's charity. In the first year following the launch of FTSE4Good, licensing revenues raised US$1 million for UNICEF. For FTSE, further benefits of the new indices have been increased involvement with the companies included in the index and an increased awareness of ethical issues. FTSE's staff have benefited from the opportunity to work with UNICEF, creating a greater sense of achievement and motivation for all involved. FTSE has also benefited from positive coverage in the media and has been able to engage with governments through this project.