How to get into the FTSE4Good index series.
Updated: Sep 24, 2020
The FTSE4Good indices are an exclusive series of global indices comprising listed companies which FTSE Russell, part of the London Stock Exchange, evaluate to be socially responsible. Membership can help your company attract investors - be it those following index-linked strategies, or as another positive factor in an individual investment decision.
In this post we explain how to get your company gets into the FTSE4Good index series.
Check your eligibility.
Each FTSE4Good index is a sub-set of a larger FTSE Russell index. A prerequisite for FTSE4Good membership is therefore being a constituent of a relevant underlying index. For UK companies, this is a listing in the FTSE All-Share. Currently 225 companies from the 613 companies in the FTSE All-Share index form the FTSE4Good UK Index.
Companies operating in certain sectors are excluded from membership. These include tobacco, weapons, coal and investment trusts. Significant corporate controversies may also prevent admission to the index.
Engage in the assessment process.
The assessment process for all FTSE4Good indices is the same and follows the following three stages:
FTSE Russell will determine the specific ESG (environment, social and governance) assessment criteria applicable to your organisation and evaluate your company's performance against these, based on publicly available information. This will largely come from your latest annual report and corporate website.
FTSE Russell will notify your company of their preliminary findings and will give you a short period of time (typically three weeks) to review and respond to their assessment. This is a critical time for maximising your company's score.
FTSE Russell will review your company's response and confirm a final ESG rating ranging from 0 - 5 (5 being the highest rating). The score required for membership to the FTSE4Good UK Index is 3.3 or higher (note the score required varies for other FTSE4Good indices).
Whilst the assessment process can take place at any time during the year, entry to the FTSE4Good will only occur during the bi-annual index re-balancing (June and December). If you believe you're eligible for assessment and haven't been contacted, then get in touch with FTSE Russell directly via firstname.lastname@example.org.
Understanding the scoring method.
The assessment criteria for each company is unique. There is a pool of 14 ESG themes linked to 300 standard indicators. The ESG themes relevant to your company, and the associated indicators (on average 125), will form your assessment.
Your overall rating is based on the weighted average score for each ESG theme. Each indicator is scored, and a theme score is then calculated based on the percentage of total available indicator points that a company has “met” in each theme. This percentage is converted in a score on a scale of 0 (low) to 5 (high).
Each theme is given a weighting on a scale of 0 to 3 (high) based on the company's relevance/exposure to the theme. Where the exposure is 1 or above the theme indicators will apply to your organisation.
The total company score is the weighted average of the theme scores.
5 steps to increase your FTSE4Good rating.
Identify the quick wins. FTSE4Good ratings are based on publicly available information. With large corporate websites and hefty annual reports for assessors to sift through there is always the possibility that something is missed. The FTSE4Good assessors will detail the evidence they are using for each indicator in their online portal. Check that this is the correct source of information and, if something is missing, provide them with the relevant text and source link.
The devil is in the detail. The assessment is objective not subjective, so check the detail of every indicator. For example, often three years' worth of performance metrics are required, thus reporting the standard two years will not be sufficient for full points.
Choose your wording carefully. All information that you put in the public domain must be a true reflection of your business. Many of the indicators however are very specific and so you should also be in your communications. Mirror the assessment wording where appropriate. For example, if it is your company policy to not use child labour, you might state on your corporate website that, "We are committed to the prevention of child labour and comply with all relevant local legislation." Whilst this commitment will score you some points in the assessment, full points are only available if you have a company policy stating this commitment, and thus you must actually state that this is company policy. Share a link to the revised text with FTSE Russell, and better still, provide a public link to your company policy.
Prioritise where it matters. The weighting of the 14 ESG themes heavily impacts the final company rating. Seek to implement business changes for the themes to which you have the highest exposure rating (i.e. an exposure value of 2 or 3). The number of indicators per theme also varies so calculating the relative importance of each indicator can further help you prioritise your efforts.
Don't wait for the assessment. The assessment process is short, giving you only a few weeks to respond after the initial evaluation. More effective communication of what your business already does is very possible in these timescales but both implementing a business change, and communicating it publicly, is often not. Use your previous assessment, or the expertise of a company like Rawstone Consulting, to target areas for business improvement that will increase your score. It is also prudent to consider the FTSE4Good indicators when producing your annual report. Presenting the information upfront will streamline the assessment process.
Once you've successfully achieved FTSE4Good Index membership it's important to retain it. Your company's performance will continue to be scrutinised against the indicators on approximately an annual basis however the score required for retaining membership is lower than that for initial entry. For example for the FTSE4Good UK Index constituents must continue to achieve a score of 2.9 or higher, and score above 0 for any ESG theme deemed to have a high exposure (i.e. weighting of 3), for continued membership.
The author, Caroline Johnstone, has assisted multiple companies in their FTSE4Good assessments, notably increasing a $3bn turnover company's ranking by more than 10%. If you'd like some help with your FTSE4Good assessment, or with incorporating FTSE4Good information in your annual report, then please contact Rawstone Consulting here.