Market consultation

FTSE Russell Client Consultation:
Enhancing Climate Change scoresin ESG Ratings and FTSE4Good
Indexes

ftserussell.com

July 2020

FTSE Russell client consultation:
Planned enhancements to the assessment ofclimate change management in ESG Ratingsand FTSE4Good indexes
Summary
Investor focus on climate risk has grown significantly in recent years. In response to this, FTSE Russell has developed
a number of data and index tools to better measure and manage these risks. As part of these efforts, FTSE Russell isalso reviewing the way climate change is addressed as part of its ESG Ratings.
Through this consultation, clients and other stakeholders are invited to provide feedback on proposed enhancements
to the climate change assessment of corporate issuers in ESG Ratings with implications for a number of indexes that
rely on these Ratings and related enhancements to the FTSE4Good index rules. These can be summarised asfollows:
Proposal 1: Enhancing the Climate Change theme score within ESG Ratings.
Proposal 2: Introducing minimum Climate Change score thresholds to the FTSE4Good Index Series
inclusion rules.

Key Rationale•

The enhancements to the calculation of Climate Change theme scores will more accurately capture corporate
performance on climate change.

•

Investors globally are placing a greater focus on climate risk and transition and the proposed changes deepen
the way this theme is represented in the ESG Ratings and associated indexes.

•

They involve no new indicators, lower the reporting burden for corporates, whilst more closely aligning andunderpinning key global investor climate initiatives.

•

Previously the methodology has been enhanced to align with Task Force on Climate Related Disclosures(TCFD) and the current proposed refinements achieve further alignment with the TCFD and the Transition
Pathway Initiative.

•

Introducing minimum Climate Change score thresholds within FTSE4Good will raise corporate standards onthese issues and ensure that companies in carbon intense sectors can only maintain membership if they takeclimate risks seriously.

Proposed timelines:
The proposed changes would be effective from the December 2020 index review:•

Companies would be informed of changes in July 2020; giving them approximately 18 months' notice to meetcriteria to maintain FTSE4Good membership.

•

Enhanced Climate Change scores are first incorporated within ESG Ratings from December 2020.

•

New FTSE4Good inclusion rules applied to companies from their next review, with 12 months to improve if
criteria are not met.

Responding to the Consultation
Please submit your response to the questions included in this consultation online at https://www.surveymonkey.co.uk/r/PL5MVYZ
All responses will be treated as confidential. FTSE Russell may publish a summary of the consultation results, but no individual
responses will be published and no respondents will be named.

FTSE Russell

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Proposal 1: Enhancing the Climate Change theme score within ESG
Ratings
FTSE Russell proposes two key enhancements to the calculation of the Climate Change theme score – one of 14
themes within the ESG Rating.1
1. The enhanced Climate Change theme will focus on 16 core indicators drawn from the existing theme. These
16 indicators mirror key disclosures recommended by the Task Force on Climate Related Disclosures (TCFD)
in the form of tangible data and targets.2 Please see Appendix 1 for more details on these indicators.
2. Companies will be assessed on a “staircase”, requiring specific indicators to be met to achieve eachsubsequent level. Scores will be between 0 (worst) and 5 (best). For example, emissions disclosures andtargets must be disclosed for a company to move beyond Level 3. Please see Appendix 2 for therequirements that must be met at each level.

Impacts
The proposed enhancements will drive modest decreases in both average Climate Change theme scores and ESG
Ratings.
There is a strong correlation (0.86) between existing Climate Change theme scores and those based on the enhanced
methodology outlined above. However, the enhanced methodology sets a somewhat higher bar for corporates,
resulting in lower Climate Change theme scores (0.89 lower on average) and a smaller reduction in average overall
ESG Ratings (0.11 lower on average).3

Question 1: Do you support the proposed enhancements to the Climate Change theme of FTSE Russell’s ESG
Ratings model?
a) Yes, fullyb) Yes, with amendments (please comment below)c) No (please comment below)d) Other (please comment below)
Please enter your comments here:

1 These enhancements are the result of two years of intensive collaboration between FTSE Russell and the Grantham Institute of the London

School of Economics in the context of the Transition Pathway Initiative. Adoption of the proposed enhancements would align the Climate Change
theme with the Transition Pathway Initiative’s Management Quality (MQ) score, which itself uses data inputs from FTSE Russell’s Climate Change
theme to assess companies’ readiness for transition to a low carbon economy. Note that Level 5 in the enhanced theme will correspond to a 4*score in TPI’s MQ methodology.
The Transition Pathway Initiative (TPI) is a global initiative led by asset owners and supported by asset managers. Aimed at investors and free touse, it assesses companies’ preparedness for the transition to a low-carbon economy, supporting efforts to address climate change. Launched in2017, it is rapidly becoming the "go-to" corporate climate action benchmark and aligns with the recommendations of the Task Force on Climaterelated Financials Disclosure (TCFD). For further information, please visit the Transition Pathway Initiative’s website:
https://www.transitionpathwayinitiative.org/
2
Recommendations of the Task Force on Climate-related Financial Disclosures
3
Based on FTSE All World Index constituents as at 24/06/2019, with scores representing 99.32% of index weight.

FTSE Russell

3Proposal 2: Introducing minimum Climate Change score thresholds
to the FTSE4Good Index Series inclusion rules
Proposed enhancements to FTSE4Good Index series inclusion rules:
The proposed changes to inclusion rules would raise corporate standards for the management of Climate Change
issues within the FTSE4Good Index Series and related indexes, including FTSE Blossom Japan Index, FTSE4Good
TIP Taiwan ESG Index, FTSE4Good Bursa Malaysia Index and FTSE/JSE Responsible Investment Index Series. 4
Through the introduction of minimum thresholds based on the Climate Change theme score, companies will be
required to make specific, salient climate disclosures to be constituents of these indexes.
The proposed thresholds (Figure 1) are tailored to industry (high emitting or other industries) and market (developedor emerging) types, reflecting the differing levels of climate risk that each face. “High emitting” industries are definedas those in four ICB Industries: Oil & Gas, Basic Materials, Industrials, and Utilities.5 Companies operating in highemitting sectors can only maintain their membership if they take climate risks seriously, disclose their emissions andare setting reduction targets.
Figure 1. Proposed minimum Climate Change score threshold for index inclusion8

FTSE4Good Developed & related
indexes6
High emitting
industries
All otherindustries

FTSE4Good Emerging & related
indexes7

Score of 3 required

Score of 2 required

Score of 1 required

Impacts
The “worst-case” impact of this proposal (and Proposal 1) on FTSE4Good index membership if it was implemented
immediately without the grace period can be seen in Figure 2. The actual impact on index turnover is expected to besignificantly lower due to ongoing improvements in climate disclosures and the effect of corporate engagement in
improving company scores.
Figure 2. Maximum potential impact of proposed enhancements on index membership9
FTSE4Good
Companies currently in Engagement (2020thresholds)
Added to engagement with enhanced
Climate Change theme score integrated
within ESG Ratings (Proposal 1)Companies added to engagement withminimum Climate Change score thresholds(Proposal 2)

FTSE Blossom

Number

WeightNumber

Weight

81

4.1%

10

1.6%

+77

+3.0%

+9

+1.9%

+248

+5.4%

+12

+5.8%

4

Proposed changes would not be applied to the FTSE4Good US Select Index
https://www.ftserussell.com/data/industry-classification-benchmark-icb
6
Includes FTSE Blossom Japan Index
7
Includes FTSE4Good TIP Taiwan ESG Index, FTSE4Good Bursa Malaysia Index and FTSE/JSE Responsible Investment Index Series
8
Note that we expect standards to align between developed and emerging markets over time9
Based on data as at 24/06/2019 with December 2020 inclusion thresholds applied
5

FTSE Russell

4

Question 2: Do you support the introduction of Climate Change minimum theme score thresholds to the FTSE4Good
Index Series inclusion rules?
a)
b)
c)
d)

Yes, fully
Yes, with amendments (please comment below)
No (please comment below)
Other (please comment below)

Please enter your comments here:

FTSE Russell

5Proposed timelines
The proposed changes would be effective from the December 2020 index review:•

Companies would be informed of changes in July 2020; giving them approximately 18 months' notice to meetcriteria to maintain FTSE4Good membership.

•

Enhanced Climate Change scores are first incorporated within ESG Ratings from December 2020.

•

New FTSE4Good inclusion rules applied to companies from their next review, with 12 months to improve if
criteria are not met.

Figure 3. Proposed timeline for implementation

July 2020

December 2020

June 2021

Consultation andannouncement

Implementation at
the index review

June 2021 Index
review

December 2021
index review

June 2022 index
review

Consultation withstakeholders
finalised.

Companies updated
for the December
2020 index review will
receive new ESG
Ratings calculatedusing the enhanced
Climate Change
scores.

Companies
updated for theJune 2021 index
review will receive
new ESG Ratings
calculated using
the enhanced
Climate Change
scores.

Engagementcompanies from theDecember 2020
review will bedeleted if they havenot moved to meetthe minimum
thresholds.

Engagementcompanies from theJune 2021 review
will be deleted ifthey have not
moved to meet theminimum
thresholds.

Changes publicly
announced.
Companies
informed of thechanges and thetimelines involved.

Constituents below
new minimum
thresholds will be
required to improve by
December 2021.

December 2021

June 2022

Constituents below
new minimum
thresholds will be
required to improveby June 2022.

Question 3: Do you support the timelines for implementation proposed?
a)
b)
c)
d)

Yes, fully
Yes, with amendments (please comment below)
No (please comment below)
Other (please comment below)

Please enter your comments here:

FTSE Russell

6Additional comments
Do you have additional comments on the proposals?
Please enter your comments here:

FTSE Russell

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Appendix
Appendix 1: Indicators in enhanced Climate Change theme
Indicator
legendIndicator type

Indicator description

ECC01

Qualitative

Climate Change impact including CO2 /GHG emissions – Policy orcommitment statement to:a. Address the issue
b. Reduce or avoid the impact or improve efficiency

ECC43

Qualitative

Recognition of climate change:a. As a relevant risk and/or opportunity to the businessb. Discloses time horizon (short/medium/long term) of risk/opportunity

ECC03

Qualitative

Demonstrating support for mitigating climate change through:a. Membership of business associations
b. Company position on public policy and regulation

ECC38

Qualitative

Short term (up to 5 years) quantitative targets to reduce
GHG emissions (which could include scope 1 and/or scope 2 and/or scope
3):a. Unquantified, process targets
b. Quantified targets**Details of quantified targets will be recorded.

ECC39

Qualitative

Long term (more than 5 years) quantitative targets to reduce GHG emissions(which could include scope 1 and/or scope 2 and/or scope 3):
a. Unquantified, process targets
b. Quantified targets**Details of quantified targets will be recorded.

ECC08

Qualitative

Board oversight of climate change:
a. Evidence of board or board committee oversight of the managementof climate change risks
b. Named position responsible at Board Level

ECC41

Qualitative

Independent verification of operational GHG emissions data:a. Independent verification by third partyb. International assurance standard used and level of assurance
declared

ECC14

FTSE Russell

Quantitative

Three years of total operational GHG emissions data (Scope 1 & 2) isdisclosed8

IndicatorlegendIndicator type

Indicator description

ECC44

Qualitative

Impact of climate-related risks and opportunities. The company:
a. Details how they incorporate climate change risks and opportunities
in their strategy (mitigation, new products, R&D, etc.)
b. Discloses the impact of climate change risks and opportunities on
financial planning (OPEX, CAPEX, M&A, debt)

ECC45

Qualitative

Climate scenario planning:a. The company mentions the 2 degree scenario in relation to businessplanning, or confirms it has conducted climate related scenario
analysisb. The company describes the business impact of one or more climate
scenario analysis

ECC49

Quantitative

Scope 3 emissions (3 years) split by category

ECC50

Qualitative

Climate-related risk management procedures:a. Integrated into multi-disciplinary company-wide risk managementb. Specific climate-related risk management process

ECC51

Qualitative

Internal carbon price:a. Company has an internal price of carbon
b. Company discloses the price of carbon

ECC73

Qualitative

The company discloses:
a. Its memberships of trade associations that engage on climaterelated issues.
b. Its involvement in these trade associations.

ECC74

Qualitative

The company has a stated policy or commitment to ensuring:a. Consistency between its climate change policy and the positions
taken by the trade associations of which they are members.
b. For responding appropriately in those instances where the tradeassociation position is significantly weaker than or contradicts that of
the company.

ECC75

Qualitative

Does the company’s remuneration for senior executives incorporate climatechange performance?
a. CEOb. At least one other senior executive.

FTSE Russell

9Appendix 2: Indicators required at each level of the enhanced Climate Change theme*Companies in the following ICB Subsectors must disclose Scope 3 Use of Sold Product Emissions: Automobiles, Coal, Commercial Vehicles & Trucks, Exploration & Production, General Mining,
Integrated Oil & Gas, Pipelines.

FTSE Russell

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11About FTSE Russell
FTSE Russell is a leading global index provider creating and managing awide range of indexes, data and analytic solutions to meet client needs
across asset classes, style and strategies. Covering 98% of the investable
market, FTSE Russell indexes offer a true picture of global markets,
combined with the specialist knowledge gained from developing local
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FTSE Russell index expertise and products are used extensively byinstitutional and retail investors globally. For over 30 years, leading asset
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derivatives. FTSE Russell indexes also provide clients with tools for asset
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A core set of universal principles guides FTSE Russell index design andmanagement: a transparent rules-based methodology is informed byindependent committees of leading market participants. FTSE Russell isfocused on index innovation and customer partnership applying the highest
industry standards and embracing the IOSCO Principles. FTSE Russell iswholly owned by London Stock Exchange Group.
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