ESG FTSE PUBLICATIONSFTSE ESG Ratings

Integrating ESG into investments
and stewardship

Adding value to your investment

Overview
There is a growing demand for Environmental, Social andGovernance (ESG) factors to be incorporated into investment
decision making and stewardship. The FTSE ESG Ratings
provide objective ESG exposure and performance data thatis based on clear and easy to apply methodologies.

This document:(i)	Summarises the FTSE ESG Ratings
methodology, which is used to compile
the ESG Ratings and as the engine driving
the selection of constituents for the
FTSE4Good Index Series.
(ii)	Provides an overview of the range of waysthat investors can and are using this data
to inform investment decision making andstewardship.
The FTSE ESG Ratings comprise of an overall
ESG Rating that breaks down into underlying
Pillar and Thematic Scores that themselves
are built on more detailed indicator
assessments which allow investors tounderstand a company’s ESG practices in
multiple dimensions.

The model consists of three pillars;
Environment, Social and Governance.
These Pillars are divided into fourteen
Themes which are applied to a large global
universe of stocks applying the methodology
set out here to produce ESG Scores andRatings.

Adding value to your investment

FTSE ESG Ratings: Data Structure Overview
Data is compiled at four hierarchical levels, for each stock this allows for;
Data hierarchy

Score assessment

Exposure assessment

Top Level

1 ESG Rating

Second Level

3 Pillar Scores
Environmental, Social, Governance

3 Pillar Exposures
Measures the relevance of each of
the 3 Pillars to each company

Absolute ESG Pillar Score:
0-5 to 1 decimal point
Absolute ESG Pillar Exposure:
0-5 to 1 decimal point
ESG Supersector relative ESG Pillar Score:
1-10 decile

Third Level

14 Theme Scores
e.g. Anti-Corruption, Climate Change,
Health & Safety

14 Theme Exposures
Measures the relevance of each of
the 14 Themes to each company

Absolute ESG Theme Score:
0-5 to 1 decimal point
Absolute ESG Theme Exposure:
0-5 to 1 decimal point

Fourth Level

350 Indicators
Typically 10-35 per Theme
An average of ~ 125 indicators apply
per company

Indicator applicability is relative to
Theme Exposure

Points assigned per indicator met

Absolute ESG Rating: 0-5 to 1 decimal point
ESG Supersector relative ESG Rating: 1-100
percentile

Score Assessments:
measuring practice and performance
A diverse range of indicators are employed to tailor for all
areas of a given Theme. These cover (i) qualitative indicators
assessing quality of management and approach, (ii)quantitative indicators measuring corporate data disclosure,(iii) sector specific indicators tailored for different industrial
sectors and (iv) performance indicators that use thequantitative data to make performance judgements.
The FTSE ESG Model is under constant review andwill be updated on an annual basis.

Data range

Exposure Assessments:
measuring relevance and materiality
The Exposure is measured primarily through (a) the ICB
Subsectors where a company is active and (b) its presencein specific countries. The specific Subsectors and countries
which are applicable varies by Theme. All the Theme
Exposures are determined using a rules based methodologythat is derived from publically available information and data
sources. For Exposure each company is categorised as High,
Medium, Low or Not Applicable for each of the 14 Themes.

FTSE ESG Indicator Table – High Level Summary
Strategy and Practice

Quantitive, Sector Specific and Performance

Climate Change

GHG* emissions and energy reduction
Collaborative initiatives
Board oversightShort-term quantitative targets
Long-term quantitative targets
Adaptation to physical impacts
Quantified progress against targets
Financial quantification of costs and R&D
Independent verification of GHG or energy
Intensity of GHG emissions reported

Targets to reduce fleet GHG emissions
Progress against targets on product GHG
GHG emissions per unit of revenue
GHG emissions per MWh produced
Coal reserves per unit revenue
Total energy consumption
Disclosure of oil and gas reserves
Fleet fuel efficiency by country/region

Water Use

Policy commitment to address water use
Risk assessment in water stressed regions
Actions taken to reduce water use
Quantified progress against targets
Independent verification
Collaboration with others on efficient water usage

Total water usage
Percentage of water recycled
Quantified water usage targets

Biodiversity

Policy commitment on biodiversity
Commitment to net positive biodiversity impact
Biodiversity targets
Assessment of biodiversity risks
Biodiverse habitats near operations, or restored
Biodiversity Action Plans (BAPs) and audits
Participation in biodiversity certification schemes

Commitment to rehabilitation of mining sites
Round Table for Sustainable Palm Oil (RSPO)
Percentage certifications for palm oil
Percentage certifications for forest products
Percentage certifications for responsible/sustainable seafood

Pollution & Resources

Policy to reduce pollution, waste, resources
Targets to reduce pollution, waste, resources
Progress on targets for pollution, waste and resources
Quantified water discharge and resource use
Independent verification
Financial quantification of costs and R&D
Life cycle assessments and industrial ecology

NOx and SOx emissions
Volatile Organic Compounds
Recycled and non-recycled waste
Cost of environmental fines and penalties
Percentage of sites covered by ISO14001 or EMAS*

Environmental Supply Chain

Policy addresses energy use and GHG emissions
Policy addresses water use and biodiversity
Policy addresses environmental issues and pollution
Policy addresses waste and resources
Risk assessment and due diligence
Monitoring including audits and results
Communication and training of suppliers
Encourage suppliers to reduce and report

Property portfolio policy on environmental issues
Property portfolio targets on GHG, energy, water use
Certification to a building management standard“Green leases” for tenants of property portfolio
Building management systems, smart meters, biodiversity
Aggregate GHG emissions on properties
Aggregate energy data on properties
Aggregate water usage data on properties

Health & Safety

Policy addresses health & safety and contractors
Commitment to continuous improvement
Targets to reduce incidents
Board oversight and presence of H&S Committee
Address global health (HIV/AIDS, malaria, TB)
Performance and progress against targets
Risk assessment and due diligence
Employee involvement in improvements
Performance monitoring and management
Incidents investigated, reported and action taken
Independent verification
Programme for a global health issue

Policy and procedures for unplanned plant shut-downs
Policy and procedures for radiation incidents and events
Policy and procedures for radiation hazard assessment
Policy and procedures for radiation to employees and community
Policy and procedures radioactive waste
Work-related fatalities over 3 years per 1000 employees
Percentage of sites with OSHAS* 18001 certification
Number of staff trained on health and safety standards
Lost time incident rate over last 3 years
Number of unplanned plant shut downs over 3 years
Number of incidents on IAEA INES* event scale
Total weight/volume of radioactive waste over 3 years
Radiation exposure for community and employees over 3 years

Labour Standards

Policy addresses core ILO* conventions
Policy addresses non-discriminiation
Policy addresses working hours and living wage
Commitment to frameworks on labour standards
Policy on under-privileged and youth unemployment
Policy translated and communicatedRisk assessment and due diligence
Actions to address labour issues and improve diversity
Incidents of non-compliance and action taken

Black Economic Empowerment
Full time staff voluntary turnover rates
Percentage of employees that are contractors or temporary
Amount of time spent on employee development training*GHG Greenhouse Gasses; EMAS Eco-Management and Audit Scheme; OSHAS Occupational Health and Safety Advisory Services; IAEA International Atomic Energy
Agency; INES International Nuclear and Radiological Event Scale; ILO International Labour Organisation

Strategy and Practice

Quantitive, Sector Specific and Performance

Human Rights &Community Indicators

Support for international standards
UN Guiding Principles on Business and Human Rights
Children’s Rights and the Business Principles
Commitment to local employment
Impact assessment on new and existing operations
Stakeholder engagement consultations and reports
Grievance mechanisms in place
Disclosure of human rights incidents and actions
Participation in external schemes
Output of community investments quantified

Policy addresses freedom of expression
Policy addresses data privacy
Policy/Principle/Code on indigenous rights
Policy addresses security guard issues
Donations/community investments made to not-for-profit
organisations

Customer Responsibility

Responsible advertising and marketing
Policy on negative impact on customers
Membership of industry initiatives or use of Codes
Guidelines and training
Vulnerable groups or their issues recognised
Initiatives to protect vulnerable groups
Research and development

Responsible selling for client-facing sales staff
Access to medicine strategy and programmes
Access to nutrition strategy and programmes
Adoption and adherence to WHO* Code on Infant FormulaNon-compliance and corrective action on BMS* marketing
Verification and reporting on marketing of BMS

Social Supply Chain

Policy addresses the core ILO Conventions
Policy addresses working hours and living wage
Policy addresses health and safety
Policy translated and communicatedRisk assessment on new and existing suppliers
Results of supplier monitoring/auditing
Policy integrated into buyer training and purchasing
Capacity building in suppliers
Member of recognised supply chain initiative

Property policy on social issues and community engagement
Property accessibility: disabled persons, also public transport
Signatory and reporting to UN PRI*ESG integration into investment, and long term investment
Engagement with companies in portfolio on ESG issues
Signatory and reporting to Principles for Responsible Insurance
ESG integration into insurance process
Signatory to UN SSEI (Sustainable Stock Exchange Initiative)
Support ESG products, and guidance for issuers on ESG disclosure
Member of and reporting to the Equator Principles
ESG integrated into lending policies and strategies
Results of supplier monitoring/auditing and actions on
non-compliance

Anti-Corruption

Policy addressing countering bribery
Policy addressing anti-corruption
Board oversight of anti-corruption policy
Risk assessment of operations and intermediaries
Due diligence of new business partners
Whistle-blowing mechanism in place
Communication and training
Procedures for high risk operations

Political contributions madeNumber of staff dismissals due to non-compliance with
anti-corruption policy
Cost of fines, penalties, settlements in relation to corruption

Tax Transparency

Policy commitment to tax transparency
Align tax payments with revenue generating activity
Tax policy oversight by Board
Public statements on tax transparency by CEO/CFO

Verification of tax data
Disclosure of corporation tax paid globally

Risk Management

Code of Conduct
Risk management framework
Reference to external standards
Board oversight over Code and risk management
Whistle-blowing mechanism in place
Non-compliance procedures and reporting
Reviews of Code compliance against Code of Conduct
Committee or senior executive responsible for risk
Scenario planning and stress testingResponse plans and emergency procedures

Legal and compliance leads have Board access
Board oversees risk management
Non executive board risk management expertise
Repeated fines/settlements >$100m
BIS* Tier 1 Capital Ratio
BIS Core Tier 1 Capital Ratio
Leverage Ratio (Tier 1 Capital to Total Exposures)
Liquidity coverage Ratio (LCR)
Provisions for fines and settlements in audited accounts

Corporate Governance

Separate chairman and CEO
Details of Directors expertise and experience
Commitment to diversity on the Board
Board meeting frequency and attendance rate
Committee and Charter for remuneration
Remuneration has long-term mechanisms and ESG
Disclosure fixed and variable remuneration
Disclosure of fees paid to auditors
Shareholder voting rights
Provisions to protect minority shareholders
Disclosure of voting results

Part of variable remuneration deferred for 3 years or more
Claw-back or malus exists for remuneration
Bonuses are capped at a particular % of salary
Variable compensation considers performance relative to risk
Percentage of Independent Directors on the board
Percentage of women on the Board
Number of days before AGM agenda published
Maximum number of years for which executive remuneration
is deferred
Percentage executive remuneration deferred
Percentage of executive salary to which bonuses are restricted
Percentage of salary of other staff to which bonuses are restricted*WHO World Health Organisation; BMS Breast Milk Substitutes; UN PRI United Nations Principles for Responsible Investment; BIS Bank for International Settlements

Adding value to your investment

Key Features• F lexibility and Customisation: The designof the system is to allow clients the ability
to extract data at multiple levels in order toassess and apply it in a variety of ways. Some
components will be more and less valuable
to different users of the data so it is designed
to be easily sliced and diced.
• Materiality: Exposure Relative Scoring.
Higher exposure companies are assessedusing tougher standards than lower exposurecompanies. More indicators apply to higher
Exposure companies and the Theme scoresare derived using threshold bands which arecalibrated higher for companies with a higher
exposure. Furthermore, the calculation of
Pillar Scores and overall ESG Ratings are not a
simple mean average of all the Theme Scores,
instead a weighted average is calculated
whereby each Theme is weighted by its
Exposure Level; Low Exposure has a weightof 1, Medium Exposure a weight of 2, High
Exposure a Weight of 3 and for some Themes
companies will not be assessed and hence
categorised as “Not Applicable”.

• I ndustry relative Ratings and Scores.
These are calculated by comparing acompany’ s Score or Rating to others within
the same ICB Supersector. This provides
scores in deciles for Pillars and percentiles forthe overall ESG Ratings. For example, for theoverall ESG Ratings, a “1” means a company
is in the bottom 1% and “100” means acompany is in the top 1%.
• F ocus on relevance, performance andoutcomes. Over 100 indicators are sector
specific and a further 60 are quantitative
or performance indicators.
•T aking transparency and governancefurther. The criteria are based only on
publicly available data, and in assessing
ESG practice FTSE does not accept data
or information privately provided bycompanies. This improves the credibilityof data and enhances transparency acrossthe market. The FTSE ESG Ratings also fallunder the oversight of an independent
committee comprising experts from theinvestment community, companies, NGOs,
unions and academia. They meet regularly
to oversee ESG Rating reviews andmethodology development.

Adding value to your investment

The FTSE ESG Ratings model
The FTSE ESG Ratings use a company’s Theme Exposure and Theme level score assessment to calculatea range of assessments that allow investors to understand a company’s ESG practices in multiple dimensions.

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1 ESG Rating
A cumulative calculation of total
ESG performance
3 Pillars
A cumulative Score & risk foreach of Environment / Social /Governance
14 Themes
A Score & risk for the issues ineach ESG Pillar, such as Climate
Change / Anti-Corruption>300 Indicators
Individually researched factors
which focus on key operational
issuesGood practice210

No disclosureAdding value to your investment

Using FTSE ESG Ratings in practice
The FTSE ESG Ratings offer an objective and flexible service integrating ESG considerations into investments and stewardshipapproaches. The FTSE ESG Ratings can be used in a variety of ways, building a basis for active portfolio management, company
engagement, customised indices, ESG risk analysis or research and analysis.

Manager selection and evaluation.

When selecting and evaluation asset managers,
institutional investors are increasingly assessing how
far they integrate ESG factors into their processes.
The FTSE ESG Ratings can help you assess the range,
average and variance of asset manager portfolios
against ESG themes, and their exposure to different
ESG exposures.
ExampleThe ratings reveal a portfolio manager’s exposure
to companies with poor anti-corruption scores.
This allows the asset owner to raise a concern with
their asset manager.

Engagement and stewardship.

As part of their stewardship responsibilities, anincreasing number of fund managers and pension
funds are engaging investee companies regarding
their ESG practices. The FTSE ESG Ratings provide
an independent and objective measure to identify
companies for engagement and track progress.
ExampleIdentifying high-exposure companies with lowscores on labour standards as priority engagement.

Exposure management.

Research and analysis.

Custom solutions.

Active portfolio management.

The ratings enable you to identify where the greatest
ESG exposures exist in a portfolio by revealing
securities with the highest exposures and poorestscores. Through these insights, you may wish to
analyse the securities further, engage with thecompanies, or exclude them from the portfolio.
You can also use the ratings alongside conventional
exposure analysis to provide a complementaryperspective on risk.

The ratings allow you to create indices by theme,
pillar, geography, score, exposure impact, or any
combination of these, according to investor needs.
Additionally, they help you create quantitative
ESG indices, such as a customised weighted index
bases on a particular ESG exposure factor. ESG
factors can also be used alongside fundamental
or risk efficient methodologies.
ExampleA client wishes to use a fundamentally weighted
index that includes climate change scores as anadditional factor.

When identifying and measuring the risk and return
relationships of different ESG factors, the FTSE
ESG Ratings provide a comprehensive data set
for research and analysis.

You may use the scores to define an eligible investment
universe or apply the data into a propriety quant or
fundamental model.
Example 1
Defining an investment universe limited to companies
achieving high scores in environment management
and achieving moderate scores in other themes.
Example 2
Including the Human Rights and Community scorewithin an inhouse security evaluation model todetermine a buy, hold or sell decision.

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