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FTSE Russell

Service Providers Framework 2019

You are in Strategy and Governance » Policy on ESG beliefs

Policy on ESG beliefs

SG 01. Responsible investment policy

01.1. Describe how your organisation’s philosophy incorporates environmental, social and governance factors, and the link to your business offerings.

For more than 17 years, since the launch of the FTSE4Good Index Series, FTSE Russell has been at the forefront of the accelerating trend towards Sustainable Investment. Our ESG Philosophy and approach is underpinned and guided by four pillars:

  1. Supporting capital markets (investors, issuers and intermediaries) in the transition to a sustainable and green economy
  2. Facilitating dialogue on sustainability and improving data along the investment chain to help integrate sustainability into financial markets and capital allocation
  3. Enabling market participants to integrate sustainability into investment strategies and engagement/ stewardship
  4. Championing transparency and fostering both wider access and improved quality of the ESG data available to market participants

These four pillars inform all of our Sustainable Investment activities. More information on FTSE Russell's ESG Philosophy can be found here: http://bit.ly/2DlayBD

01.2. Indicate whether you have policies that formalise the incorporation of your ESG beliefs in your business offerings.

01.3. Indicate the components/types of your internal policy and provide the URL and/or an attachment of the document/s if they are publicly available.

Policy components/types

01.4. Indicate how these are put into practice internally across the organisation.

01.5. Additional information [OPTIONAL]

In addition to the ESG Philosophy set out above, FTSE Russell has developed detailed policies and guidance that support our Sustainable Investment activities (i.e. Data and Research; and Index Creation and Delivery).

More specifically, our ESG and Green Revenues data models - the building blocks of our Sustainable Investment indexes - are based on detailed, proprietary methodologies. We use these methodologies to assess companies across our core global benchmarks (e.g. the FTSE Global Equity Index Series). Additional details of our Sustainable Investment methodologies can be found here: http://www.ftserussell.com/financial-data/sustainability-and-esg-data

Related to this, LSEG (our parent company) published a Guide to ESG Reporting for issuers in 2017. The aim of this guide was to improve both dialogue and the flow of "investment grade" ESG data from issuers to investors. The LSEG ESG reporting guide can be found here: http://bit.ly/2FK4Q1s


SG 02. Norms used to develop policies

02.1. Indicate what frameworks and guidelines you have used to develop your organisation’s policies. Tick all that apply.

          Sustainable Stock Exchanges initiative
        

02.2. Additional information. [OPTIONAL]


SG 03. Policy offerings to clients

03.1. Indicate whether you offer standard, off the shelf, policies to clients as part of your product offerings, and/or whether you create tailored versions for individual clients.

Off the shelf
Tailored
Asset class-specific RI guidelines
Sector-specific RI guidelines
Screening/exclusions policy
Engagement policy
(Proxy) voting policy
RI guidelines set out within the Investment Policy Statement (IPS)
RI guidelines set out in a freestanding RI policy
Multi-year RI implementation project plan
Conflict of interest management policy
Stockbroker allocation policy
Securities lending policy
Other, please specify (1)
Other, please specify (2)
Other, please specify (3)
None of the above

03.3. Additional information. [OPTIONAL]

FTSE Russell does not sell advice to clients on their own RI / ESG policies. Our Sustainable Investment research methodologies - for ESG Ratings and Green Revenues - have their own sector and related classifications but these are used for our own (research) purposes.

 

 


SG 04. ESG/RI in business offerings

04.1. Briefly describe how you include ESG/RI factors as part of your business offerings.

Business area

Research and Data Provision

How you include ESG/RI factors

FTSE Russell has more than 17 years of experience with Environmental, Social, and Governance (ESG) data and indexes. We provide investors with the ESG models and data tools necessary to understand a company from two perspectives – its operational practices and its product-related opportunities. These perspectives are provided via our two core ESG data models:

  • ESG Ratings and data model
  • Green Revenues data model

The ESG Ratings and data model allows investors to understand a company’s exposure to, and management of, ESG issues in multiple dimensions. The ESG Ratings are comprised of an overall Rating that breaks down into underlying E, S and G “Pillars” and Thematic Exposures and Scores. The Pillars and Themes are built on 300+ individual ESG indicator assessments that are applied to each company’s unique circumstances.

The Green Revenues data model tracks companies that generate revenue from a broadly defined set of green products and services. In our view Green Revenues are a critical component missing from current sustainability models. Using Green Revenues data investors can accurately identify and support their investment in companies that are engaged in the transition to a green economy with consistent, transparent data and indexes.

 

Other, specify (1)

          Index Creation, Delivery, and Maintenance
        

How you include ESG/RI factors

FTSE Russell has been an innovator in the area of sustainable investment indexes since the launch in 2001 of the FTSE4Good Index Series – one of the longest running global ESG index series. In the 18 years since then, FTSE Russell has continued to create market-leading ESG indexes - such as our Environmental Markets Index Series, launched 10 years ago - and, more recently, our Smart Sustainability framework which allows investors to combine alternative risk premia (factors) and ESG parameters. 

Indexes such as FTSE4Good and the Environmental Markets series combine traditional market capitalisation based indexes with ESG considerations using a rules-based approach to determine index weightings. Our Smart Sustainability indexes use FTSE Russell's multi-factor tilting methodology to determine index weightings (up or down) based on the specific ESG parameters under considerations e.g. Carbon emissions, fossil fuel reserves and Green Revenues. Other index families using the same factor tilting method to incorporate ESG considerations into index design include our ESG, Green Revenues and EPRA Nareit Green Index Series. 

Details of our multi-factor tilting approach can be found here: http://www.ftserussell.com/files/research/multi-factor-indexes-power-tilting. 

Information on all of our Sustainable Investment indexes can be found on our website e.g. here: http://www.ftserussell.com/financial-data/sustainability-and-esg-data/sustainability-esg-indexes 

See SG5.6 for further information.

04.2. Indicate the roles in your organisation, and indicate for each whether they have oversight and/or implementation responsibilities for ESG/RI within the organisation.

Roles present in your organisation
Oversight/accountability for ESG/RI
Implementation of ESG/RI
Board
Directors
Chief Executive Officer (CEO), Chief Financial Officer (CFO)
Chief Operating Officer (COO), Chief Information Officer (CIO)
Other chief-level staff

Please specify

          FTSE Russell's Chief Research Officer (CRO) and Chief Data Officer (CDO) have both oversight and implementation responsibility for Sustainable Investment.
        

Please specify

          FTSE Russell's Chief Research Officer (CRO) and Chief Data Officer (CDO) have both oversight and implementation responsibility for Sustainable Investment.
        
Other heads of department

Please specify

          An ESG Steering Committee was established in 2017 to oversee and implement a firm-wide ESG integration strategy. The ESG integration strategy will include all major FTSE Russell business functions (e.g. Analytics, Benchmarks, Data Operations, Products, Research and Sales & Marketing).
        
Dedicated ESG/RI staff
Other role, specify (1)
Other role, specify (2)
Other role, specify (3)
None of the above

04.3. Indicate how you ensure ESG/RI expertise for the roles where there are RI oversight/accountability or implementation responsibilities.

04.4. Indicate whether your organisation has any ESG/RI linked incentives for its employees.

04.5. Describe the ESG/RI linked incentives.

All FTSE Russell employees that are focused wholly or partly on Sustainable Investment have ESG/RI related objectives. This includes members of the Sustainable Investment as well as the Marketing, Products, Research, Data Operations and Sales teams. Via the ESG SteerCo, members of FTSE Russell’s Senior Management are also accountable for the integration of ESG into core functions within the business.

04.7. Additional information [OPTIONAL]

In addition to our established, ‘off the shelf’ Sustainable Investment indexes, FTSE Russell works closely with investor clients to develop indexes to meet their specific Sustainable Investment objectives. One example of a recent Sustainable Investment index that is now available to the wider market is the FTSE All-World Climate Balanced Comprehensive Factor Index which was originally created with the UK-based Merseyside Pension Fund. 

Merseyside Pension Fund (MPF) is one of the UK’s top local government pension schemes. MPF’s climate strategy is to align its responsible investment policy and activities with the goals of the 2015 Paris Climate Agreement. As a part of this, the Fund wanted to capture climate change risk and opportunities arising from climate change in their passive investment portfolios.

FTSE Russell worked closely with Merseyside Pension Fund to develop the FTSE All-World Climate Balanced Comprehensive Factor Index.

This index is designed to target improved long-term risk-adjusted returns through:

  • Incorporating protection from climate change risks - through reduced exposure to carbon emissions and fossil fuel reserves
  • Benefiting from the transition to a lower carbon economy - via increased exposure to companies with "green revenues" , and
  • Balanced exposure to four financial risk premia factors (value, size, quality, low volatility and momentum)

The index uses the above risk premia factors and climate parameters to "tilt" constituent weights either towards or away from desirable characteristics within individual companies.


SG 05. Outsourcing of services (Private)


SG 06. Providing training/education

06.1. Indicate whether you provide training/educational services on ESG/RI. Tick all that apply.

06.4. Additional information. [OPTIONAL]

FTSE Russell does not sell training services. However, as part of our role as an index and data provider we will provide support and materials to our clients to aid their knowledge and understanding of sustainable investment.


SG 07. Applying, advancing and promoting the PRI principles

07.1. Describe how your organisation applies, advances and promotes the PRI Principles.

FTSE Russell was part of the group that helped to develop the PRI and its Principles, and went on to be a founding signatory as well as the first Index Provider signatory. We have therefore been a promoter of the PRI since inception.

FTSE Russell's ESG Philosophy - and by extension all of our ESG products and services - are aligned with the objectives of the PRI e.g. the incorporation of ESG information into investment analysis and decision making, transparency, facilitating dialogue on sustainable investment etc. 

Our ESG Philosophy and approach is underpinned and guided by the following four pillars:

  1. Supporting capital markets (investors, issuers and intermediaries) in the transition to a sustainable and green economy
  2. Facilitating dialogue on sustainability and improving data along the investment chain to help integrate sustainability into financial markets and capital allocation
  3. Enabling market participants to integrate sustainability into investment strategies and engagement/ stewardship
  4. Championing transparency and fostering both wider access and improved quality of the ESG data available to market participants

These four pillars overlap with the six principles of the PRI, in particular Principles 1 (ESG integration), Principle 2 (active ownership) and 3 (ESG disclosure). This report provides our commitment to Principle 6 (signatory reporting). 

FTSE Russell has for many years had active involvement in collaborative activities within the industry - including initiatives created by the PRI (Principles 4 and 5).

We continue to be represented in and contribute to key industry policy initiatives - for example, most recently sitting on the EU Commission's High Level Expert Group on Sustainable Finance and the UK Government's Green Finance Task Force. FTSE Russell is also an active participant in the PRIs Working Group on passive investment and its Policy Reference Group.

 

07.2. Highlight whether there are any ways that your organisation would like to engage further with the PRI. [OPTIONAL]


SG 08. Actions taken to promote responsible investment

8.1. Indicate which of the following actions your organisation has taken to promote responsible investments during the reporting year, independently of collaborative initiatives.

8.2. Additional information. [OPTIONAL]

As briefly described above, FTSE Russell has for many years been an active participant in industry initiatives that support the broader adoption of sustainable investment and the objectives of the PRI. 

In 2018, FTSE Russell released the STEP Change report to showcase how we work with corporates, NGOs and investors to improve disclosure and foster transparency for the long-term benefit of the market and ultimately the societies we all operate within. See details here: https://www.ftserussell.com/step-change.

Growing numbers of asset owners, asset managers and others involved in the investment chain now routinely consider stewardship and sustainability themes as core investment priorities. Around the world, they are taking action to integrate sustainability themes such as climate change into central aspects of their investments and operations.

Especially since the financial crisis, there has been widespread concern about shorttermism in institutional asset management, with investment managers often trying to maximize returns over each quarter, but potentially generating sub-optimal longterm returns as a result.

There is a growing view that insights from environmental, social and governance (ESG) data, the structuring of investment mandates to incentivize a longer-term performance outcome, and strong investor stewardship and engagement with the management of investee companies will collectively help address this potential market failure, and potentially contribute to better long-term risk-adjusted returns.

FTSE Russell has a long-standing commitment to sustainable investment and has been at the forefront of this trend for nearly two decades, since the launch of the FTSE4Good Index Series in 2001. Now the momentum towards sustainability is building amongst investors globally.

In addition, FTSE Russell has deep academic collaborations and partnerships. This includes funding industry research on sustainable investment and engagement, and organising the annual World Investment Forum which is focused on leading academic research.

Details of our Sustainable Investment activities - including examples of our thought leadership - are available here: http://www.ftserussell.com/index-series/index-spotlights/esg


SG 09. Long term trends

09.1. Indicate which of the following long-term trends are addressed in your product outputs.

09.2. Explain how this long-term trend affects your product outputs.

FTSE Russell maintains a range of indexes that capture climate change considerations from different perspectives - these include:

  • FTSE Environmental Markets Index Series​: In partnership with Impax Asset Management, FTSE Russell created the FTSE Environmental Markets Index Series, which is broken down into two sub-series: (1) the FTSE Environmental Technology Index Series and (2) the FTSE Environmental Opportunities Index Series. Both sub-series are based on the FTSE Environmental Markets Classification System (EMCS) - details of which are available here: https://www.ftse.com/products/downloads/env-mkts-class-sys.pdf?226. The family has been developed under the direction of the independent FTSE Environmental Advisory Committee, which is composed of clean technology analysts, scientists and experts drawn from asset owners/pension funds and market participants.
  • FTSE Divest-Invest Index Series: This index series is designed to combine fossil fuel divestment with thematic investment in low carbon and green solutions. By excluding companies from certain fossil fuel sectors and replacing them with companies that provide products that are helping to enable to the transition to green economy, the indexes provide the basis for investing according to “divest-invest” principles.
  • FTSE Green Revenues Index Series: This index series is designed to obtain increased exposure to companies engaged in the transition to a green economy, based on FTSE Russell’s Green Revenues data model. The indexes are designed to capture changes in the revenue mix of companies as their business models shift to the delivery of goods, products and services that allow the world to adapt to, mitigate or remediate the impacts of climate change, resource depletion and environmental erosion. Further information on FTSE Russell's Green Revenues data model can be found here: http://bit.ly/2bc0NtP 
  • FTSE Global Climate Index Series: This index series is designed to reflect the performance of a global and diversified basket of securities where their weights are varied based on three types of climate-related analysis - carbon emissions, fossil fuel reserves, and green revenues data. The index therefore incorporates both the risks and the opportunities associated with climate change and the transition to a green economy.
  • FTSE EPRA Nareit Green Index Series: This index series provides investors with a useful tool for integrating climate risk into their listed real estate portfolio. These indexes provide a sustainability-focused extension to the FTSE EPRA Nareit Global Real Estate Index Series, the world’s leading series of listed real estate benchmarks. The FTSE EPRA Nareit Green indexes weight constituents based on two sustainable investment measures; green building certification and energy usage, and follows the FTSE Global Factor Index Series methodology to address concerns about liquidity, capacity, diversification and turnover.

Full details of all of the above index series - including factsheets and ground rules - can be found on ftserussell.com under the Sustainable Investment section of the "Index Series" page. 

09.2. Explain how this long-term trend affects your product outputs.

FTSE Russell's Green Revenues data model and indexes are designed to capture changes in the revenue mix of companies as their business models shift to the delivery of products and/or services that have a positive environmental utility: that help prevent, restore and adapt to issues deriving from climate change, natural resource limitations or environmental degradation. Further information on FTSE Russell's Green Revenues data model can be found here: http://bit.ly/2bc0NtP.

The Pollution and Resources theme within the ESG Model also captures the theme of resource scarcity.

09.2. Explain how this long-term trend affects your product outputs.

The development of green and lower carbon technologies is a core aspect of our Green Revenues data model and index series, details of which are summarised above. 

 

          Diversity
        

09.2. Explain how this long-term trend affects your product outputs.

Diversity and equality is an increasingly high profile global trend, in particular the issue of gender equality. Many initiatives now exist around the world to promote greater representation of women on corporate boards of directors. In some markets specific targets have been introduced in order to increase female representation on corporate boards.

The FTSE Women on Boards Leadership Index Series is designed to integrate leadership in gender diversity into a broad market benchmark. These indexes increase exposure to companies based on the strength of their diversity leadership at the board level and how well they manage wider impacts on society. This is achieved by the use of a tilt (or stock weight adjustment) to integrate gender diversity and social impact.

The FTSE Women on Boards Leadership Indexes can be used to assist in the integration of gender diversity and social impact into a diversified investment strategy. These indexes also provide a strong basis for corporate engagement by highlighting those companies that demonstrate leadership in these two areas. Thus, the FTSE Women on Boards Leadership Index Series contributes to the gender diversity movement to promote awareness and improve inclusive environments at all levels.

Detailed information, including factsheets, index ground rules can be found here: http://www.ftse.com/products/indices/women-on-boards

In addition, a white paper on the issue is available here: http://www.ftse.com/products/downloads/incorporating-diversity-into-passive-investments.pdf.

In addition, more diversity measures were added to the ESG model for the current research cycle.


SG 10. Interaction with asset owners (Not Applicable)


SG 11. Aligning approach with investor goals

11.1. Describe how you typically align your organisation’s philosophy and approach to ESG/RI with your investor clients’ goals.

For more than 17 years, since the launch of the FTSE4Good Index Series, FTSE Russell has been at the forefront of the accelerating trend towards sustainable investment. Our ESG philosophy and approach is underpinned and guided by four pillars. 

  1. Supporting capital markets (investors, issuers and intermediaries) in the transition to a sustainable and green economy
  2. Facilitating dialogue on sustainability and improving data along the investment chain to help integrate sustainability into financial markets and capital allocation
  3. Enabling market participants to integrate sustainability into investment strategies and engagement/ stewardship
  4. Championing transparency and fostering both wider access and improved quality of the ESG data available to market participants

These four pillars inform all of our Sustainable Investment activities. More information on FTSE Russell's ESG Philosophy can be found here: http://bit.ly/2DlayBD

11.2. Additional information. [OPTIONAL]


SG 12. ESG recommendations not aligned with investor goals

12.1. Describe what steps you take, if any, when your ESG recommendations are not in line with your investor clients’ goals.

12.2. Additional information. [OPTIONAL]


SG 13. Seeking feedback from clients

13.1. Indicate whether you seek feedback from clients on your RI/ESG services and product offerings

13.2. Describe how you use this feedback in your RI/ESG services and product offerings.

Client and market feedback is an important element of the ongoing process of creating and refining the products we offer to investors.

In developing and refining our ESG methodology we receive detailed feedback from investors, companies and other experts including NGOs. This feedback is used to make enhancements to our criteria and methodologies, which are implemented annually in May. This varies from introducing whole new Themes (e.g. Tax Transparency)) through to indicator modifications, and to varying the applicability of criteria to different industrial Subsectors.

The process of obtaining client and market feedback is an extension of our approach to developing our Sustainable Investment data and index methodologies, which have always been developed based on independent expert input, provided by two separate Advisory Committees:

  1. The FTSE Russell ESG Advisory Committee, and
  2. The FTSE Environmental Markets Advisory Committee.

By incorporating the independent views and expertise of our Advisory Committee members - both individually and collectively - we are able to build objective and robust sustainable investment products. Additional information on these Advisory Committees (including details of the Committee members) can be found on ftse.com (e.g. page six of this document: https://bit.ly/2FSFUl4).


SG 14. Managing conflicts of interest

14.1. Indicate whether your organisation has a policy for managing potential conflicts of interest.

14.2. Describe how you manage potential conflicts of interest.

FTSE Russell has an established reputation for transparent, robust, rules-driven index construction methodologies and is committed to leading global best practice standards in index governance.

In line with this philosophy, FTSE Russell publishes a Statement of Compliance with respect to the recommendations made by the International Organization of Securities Commissions (IOSCO) in the Principles for Financial Benchmarks Final Report (the IOSCO Principles). Independent assurance of the assertions by FTSE Russell in its Statement of Compliance has been received from KPMG LLP.

FTSE Russell fully embraces the IOSCO Principles and endorses IOSCO’s objective to address conflicts of interest in the benchmark-setting process, enhance the reliability of benchmark determinations, and promote transparency and openness.

The current version of the Statement of Compliance is published on our website and can be viewed at http://www.ftse.com/products/indices/iosco.  Principle 3 of the IOSCO Principles states “To protect the integrity and independence of Benchmark determinations, Administrators should document, implement and enforce policies and procedures for the identification, disclosure, management, mitigation or avoidance of conflicts of interest. Administrators should review and update their policies and procedures as appropriate.”  FTSE Russell’s response to this principle can be found in its Statement of Compliance beginning on page 43.

14.3. Describe how you ensure that company employees do not derive any personal gain from the use of information collected during your work process.

See response provided under 14.2.

14.4. Additional information. [OPTIONAL]


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