Evolving towards greater clarity
While the majority of asset managers and pension funds are taking SRI seriously, it is still a minority interest in terms of proportion of total assets under management. One of the reasons for this is insufficient clarity in the industry in terms of defining SRI.
That said one of the great providers of clarity has been the emergence of SRI indices. One of the most significant of these is the FTSE4Good series which was first launched three years ago and in September added a Japanese SRI index to its global, US, European and UK indices.
The evolutionary approach is one of the guiding principles of the FTSE4Good indices. “When the index was launched the idea was that companies would be challenged going forward to improve their corporate responsibility practice,” says Will Oulton strategic adviser for the FTSE4Good index series. “This would become a key element of companies entering into and remaining in the index.”
Globally just over 40% of the companies that are screened qualify for inclusion in the FTSE4Good index. The companies that are already in the index have to respond and meet the requirements or risk losing their place in the index.
But for there is some leeway for those that can at least demonstrate commitment. “Some companies do find it challenging to meet what are often quite demanding timetables that we set for these changes,” says Oulton. “The policy committee that oversees this process for FTSE takes a view that where there is evidence that companies are progressing but not quite meeting that standard by the given deadline, they are given an extended deadline to deliver that end result. However, where we clearly get a signal from a company that is not willing to make any progress then they are removed.”
In September there were 900 companies in the index. The expectation that companies would respond to increasingly stringent criteria has been fulfilled. “In the last year we added about 100 companies,” says Oulton. “Although the requirements are becoming stricter we do find that more companies are moving to meet the index criteria.”
This is also borne out by turnover within the index. The index is reviewed every six months when companies are added or ejected. The turnover in the most recent review was around 2%. “I would have expected it to be 5% for an SRI index,” Oulton notes.
The process of evolution can also be seen in the themes that the index is incorporating. “It is evolving in a structured way,” says Oulton. “When the index launched that it was declared that the first area we would review would be environment because there was enough information in the market place for us to be able to create a higher standard for companies. Human rights followed.”
At the end of this year FTSE4Good will announce a set of criteria for labour standards in supply chains for the FTSE4Good companies. Criteria for bribery and corruption and also for climate change are also in the pipeline.
Some sectors are excluded prior to being evaluated because of their business activities; tobacco and armaments are examples. But here too the index is evolving as circumstances change. Where appropriate the exclusions are being removed, although strict qualifying criteria are applied.
Part of the skill of an index provider is deciding what is achievable for the industry. “It is a huge challenge,” says Oulton. “We try to find where there is consensus of opinion and work from there. We get the majority in support but clearly we will never get everybody.”
Oulton explains that the decision is reached via open consultation. “When we did this on human rights we received 200 detailed submissions from all over the world: from investors, SRI specialists, NGOs trade unions and governments.”
He believes that the broad support that the index has received has been key to its recognition among participating and aspiring companies. “FTSE4Good now has such a high profile globally and also gets such a lot of support from various interest groups for what the index is trying to achieve.”
Unicef is FTSE Group’s chosen charity. It receives all of FTSE4Good’s licensing fees which amount to some $2m (E1.6m) to date. “That is a very successful positioning of the index and FTSE sees this as a huge benefit,” says Oulton.