With ESG Interest Growing, FTSE Launches Benchmark

(April 6, 2011) — In a move highlighting the rising awareness of Environmental, Social and Governance (ESG) factors among institutional investors, FTSE has announced the launch of a data service that provides a way to measure more than 2,300 public companies worldwide.

In recent months, there have been multiple examples around the world of institutional investors adopting ESG principles. Last month, Danish pension insurance groups PensionDanmark and PKA agreed to buy a 50% stake in an offshore wind farm project, reflecting greater acceptance of clean energy as an investment. In the US, where ESG practices have been slower to gain traction, the California Public Employees Retirement System (CalPERS) issued a report in November describing its aims to invest $500 million in a ‘green’ portfolio in an effort to limit greenhouse-gas emissions and improve the environment. Another example further illustrating the pursuit of responsible investment comes from a group of institutional investors with approximately $558 billion in assets under management, which, in September of last year, pushed global listing authorities and stock exchanges to demand that sustainability reporting become a part of their listing rules.

FTSE’s index illustrates the gradual demand and embrace of responsible investment. The index will measure against six ESG criteria themes including environmental management, climate change, human and labour rights, supply chain labour standards, corporate governance and countering bribery. “Institutional investors around the world are integrating ESG into both their investment and stewardship approaches,” Tony Campos, FTSE Group’s senior executive of responsible investment, told aiCIO. “This is evident from the growth in signatories to the UN Principles for Responsible Investment, which now has 227 asset owners and 496 asset management signatories, representing over 25 trillion USD, that are committed to integrating ESG.”

The increasing awareness, Campos said, stems from a desire by institutional investors to achieve long-term, sustainable returns, and, due to the long-term investment horizon, they see ESG factors as material issues that can impact value. “However, they need reliable, objective data on ESG issues that can be brought into conventional investment analysis. FTSE is in a unique position to help provide this, building on over 10 years of expertise in providing innovative ESG investment benchmarks and data tools,” he said.

In response to FTSE’s ESG index, Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), asserted in a statement: “Pension funds naturally have a long-term focus. With the introduction of the Stewardship Code this is highly topical as there is a real need for good data such as this, to use in engagement and dialogue with investee companies.”

Additional evidence pointing to the adoption of ESG principles comes from a study from Mercer — titled Climate Change Scenarios – Implications for Strategic Asset Allocation — which asserted that institutional investors could lose trillions of dollars over the coming decades as a result of “continued delay in climate change policy action and lack of international coordination.” Opportunities, the report said, lie in an increased allocation to infrastructure, real estate, private equity, agriculture land, timberland and sustainable assets, with investment opportunities in low carbon technology reaching up to $5 trillion by 2030.