Today is Earth Day. Today is the day the Paris Agreement will open for approval and ratification at the UN in New York City. This agreement is the result of the 2015 annual United Nations Climate Change Conference that took place in Paris in December. The goal of the treaty is to globally reduce carbon emissions and limit global temperature increases as soon as possible. To become fully effective, at least 55 countries who produce at least 55% of global carbon emissions need to sign the document.
The US and China who together account for 40% of global carbon emissions have both stated their intention to approve the agreement. This effort among the world’s largest economies to reduce climate change, demonstrates the global sentiment of concern for our environment. It is no surprise then that investors have been increasingly seeking out investments in companies that are leaders in environmental and ethical initiatives.
The FTSE4Good Index Series was designed using an environmental, social and governance (ESG) rating system to address these concerns. ESG refers to the three central pillars considered when rating the sustainability and ethical impact of an investment.
As a background, the FTSE Russell ESG rating system takes a holistic approach to screening for companies with the best environmental practices. As illustrated below, the rating system has four levels on which companies are measured. From a climate change perspective, the ESG rating system derives scores in the following manner:
Source: FTSE Russell
Environmentally conscious investors can use this rating system to identify specific components they find most valuable and use them to suit their individual needs. Customized indexes can be created to use as tools for index-tracking products or as benchmarks for the performance of an environmentally conscious portfolio. The ratings may also be used as a research tool in seeking out environmentally responsible companies or as a way for investors to measure their own environmental initiatives.
In addition to these customized options, FTSE Russell has also developed eight benchmark FTSE4Good Indexes and four tradable indexes that conform to the ESG rating methodology. The tradable indexes include the FTSE4Good Global 100, FTSE4Good US 100, FTSE4Good Europe 50 and FTSE4Good UK 50. Each index contains 100 or 50 of the largest ESG eligible companies in their stated regions – subject to investability weight caps. ESG eligibility requirements are reviewed semi-annually and companies must have a minimum total ESG score of 3.3 out of 5 to be considered for inclusion in the index.
As investor environmental activism is clearly on the rise and global companies have become increasingly environmentally conscious, it's important to have a standard criterion by which investors can identify the right indexes or investments to contribute to this growing global cause.
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