Public awareness of environmental issues has never been greater.
Consumers are increasingly turning their backs on single-use plastic products and packaging, with sales of items such as reusable
coffee cups rising. This trend is also reflected in investment considerations with investors demanding access to more socially responsible financial products, without compromising on performance.
When FTSE Russell, London Stock Exchange Group’s global index and data business, launched its FTSE4Good index series back in 2001, Environmental, Social and Governance (ESG) factors didn’t routinely form part of an investor’s investment considerations when assessing companies.
While we have come a long way over the last 17 years, it’s still a common misconception that investors need to sacrifice fund performance when incorporating stewardship and sustainability themes in their portfolios.
Today, the green economy represents a significant investment opportunity - almost $4 trillion in market capitalisation - that should not be ignored. There are plenty of funds tracking ESG indexes that offer similar or better performance than those benchmarked against traditional market-cap indexes.
In fact, performance of specialist indexes such as the FTSE Environmental Markets Opportunities Index and FTSE Ex-fossil fuels index have outperformed the more general FTSE All-World Index over the last five years.
Demystifying the data
While there’s a substantial shift toward ESG investment, there is still a lack of consistent reporting of ESG data and confusion among companies about how and what they should be disclosing.
To address this, in 2017 the London Stock Exchange Group launched its ESG reporting guidance to help companies understand what best practice ESG disclosure looks like, including real life examples of how other companies are already reporting this data. FTSE Russell’s approach to stewardship,
promoting transparent ESG methodologies and assessments is designed to catalyse market wide
improvement in company conduct as well as disclosure levels.
By disclosing the information that investors want, issuers can provide reassurance that they are
effectively managing business risks and identifying opportunities. In the meantime, investors
equipped with a more holistic set of information can make more informed decisions about the likely
long-term success of companies in their investment portfolios.
There is growing evidence that issuers that publish high quality information on the longer-term
implications of ESG for their business are more likely to attract and retain long-term investors. These
issuers can also reduce their overall cost of capital.
Tapping into the ‘social’ element of ESG, this month marks the first anniversary of the launch of the FTSE Women on Boards Leadership Index series, designed to integrate gender diversity into a broad market benchmark.
The index constituents are weighted based on the companies’ gender diversity at board level as well as how the firms manage their wider social impact.
A recent study by the International Finance Corporation found that companies with more gender diverse boards and senior leadership were more likely to have strong ESG standards and enhanced corporate performance.
The FTSE Women on Boards Leadership Index series provides investors with a useful tool to identify those companies demonstrating leadership (or those who need to be doing more) on the gender diversity and social impact.
Increasingly, a wide range of ESG issues that are linked to investment risks and opportunities are being factored into the everyday investment decisions of investment professionals.
FTSE Russell is proud to be engaging with the market to offer information and investment tools that help support investors in achieving their goals, while encouraging improvements in corporate standards globally.