Market consultation

FTSE Russell Sustainable
Investment Consultation

ftserussell.com

May 2019

FTSE Russell consultation on planned
enhancements to sustainable investment
products
Introduction
FTSE Russell is committed to ensuring that our benchmarks and data solutions remain representative of themarkets they are intended to track, and continue to address the needs of our users. As part of that, we would
like to consult with market participants to understand how they use our sustainable investment products andhow we can implement enhancements to further support clients.
The feedback received from this consultation will assist FTSE Russell in making decisions related to thetopics considered. We value your input and participation.

Responding to the Consultation
The proposals set out in this consultation document are included in order to gather feedback andmay or may not result in changes to our indexes or data solutions.
Please submit your response to the questions included in this consultation online athttps://www.surveymonkey.co.uk/r/7JWWRNZ
All responses will be treated as confidential. FTSE Russell may publish a summary of theconsultation results, but no individual responses will be published and no respondents will be named.
If you have any questions about this survey, or if you encounter any technical issues, please contact
rpawson@ftserusssell.com.

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Background to the consultation
In this first section we would like to know a bit more about your firm and the way in which you use
sustainable investment data or indexes.
Contextualising your feedback
FTSE Russell Sustainable Investment products can be used for a range of purposes. To help us understandhow different clients interact with our products, it would be useful to understand the nature of your main role:
Question 1: Business sector☐ Academic, Asset manager, Asset manager (predominantly passive), Asset owner, Corporate
Advisory/consultant, Investment consultant, Sell-side broker, Other
Question 2: Business type

☐ Consulting role, Investment role, Lending role, Stewardship role, Other
Question 3: Main working location☐ Asia-Pacific, Europe, Middle-East and Africa, North America, South America
Question 4: Sustainable investment integration
The following questions seek to understand your firm’s approach to sustainable investment as:☐ Do you offer specific sustainable products or options?
☐ Do you integrate sustainability data into investment decisions within some asset classes?
☐ Do you integrate sustainability data into investment decisions across most asset classes, forexample: equities, fixed income and alternatives?

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Question 5: Your source of sustainable investment (SI) data and indexes
Does your firm source sustainable investment data or indexes:☐ Mostly from FTSE Russell☐ A combination of FTSE Russell and others☐ My firm does not use FTSE Russell SI data or indexes, but does use SI data from other providers☐ My firm uses SI data developed in-house☐ My firm does not use sustainable investment data or indexes from any source

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FTSE Russell’s capabilities
In this section of the consultation FTSE Russell is seeking the views of stakeholders as to the direction of its
current and new capabilities.
FTSE Russell has developed a broad offering of products including sustainable investment indexes, ESG
data, and green revenue data. Further information about these can be found here:
https://www.ftserussell.com/financial-data/sustainability-and-esg-data
Question 6: Sustainable investment data types
We wish to seek market feedback on the relative priorities that clients place on the following. We appreciatethat some of these categories could overlap. Please indicate the relative priority of these for your institution,using the ranking tool in the online answer form:☐ Asset-level data (including from satellite or geo-spatial sources)☐ Broad/comprehensive ESG data (drawn from company disclosures)☐ Carbon data and metrics☐ Corporate controversies☐ Ethical negative product screens☐ Green revenues (revenue from products that provide environmental solutions)☐ New, technology-led insights (AI, sentiment or other “Big Data”)☐ Social revenues (including towards the Sustainable Development Goals)

Question 7. We would be grateful to receive further comments on the sustainable investment datatypes that are important to you

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5Question 8: Emerging sustainable investment topics
We also wish to seek market feedback on other emerging themes within the sustainable investment
space that clients would like to see available in data or index solutions. Please indicate the relativepriority of these for your institution:☐ Animal welfare☐ Civil liberties (e.g. comms & tech companies protecting freedom of expression and association)☐ Social inequality☐ Technology risks (incorporating cyber security, data privacy and the ethics of alternative intelligence)☐ Use of plastics☐ OtherQuestion 9: We would be grateful to receive further comments on your views on emerging
sustainable investment topics:

Question 10: Using sustainable investment data
We wish to seek market feedback on the ways in which clients use sustainable investment data. Pleasechoose all that apply to your institution:☐ Active investment decisions☐ An input into investment research☐ As a tool to assist engagement with portfolio holdings☐ Exclusions in passive and/or active portfolios☐ Portfolio monitoring and/or risk control☐ Tilting security weights in passive investment
We would be grateful to receive further comments on this question or other requirements not set out above:

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Question 11: Quality and transparency of quantitative sustainability data
Given the large gaps in ESG information reported by corporates, some quantitative data such as carbon
emissions need to be estimated for approximately 50% or more of listed large and mid cap companies.
We wish to seek market feedback on this data, and hence whether FTSE Russell should help provide
solutions.
Please tick all with which you agree:☐ Existing estimated quantitative data is of high quality☐ There is a high level of transparency of how estimation models work
☐ I believe existing data estimation models are not transparent and/or of poor quality☐ I do not have a strong preference on this issue

We would be grateful to receive further comments on this question or other requirements not set out above:

Question 12: Using sustainable investment data
We wish to seek market feedback on the asset classes we should prioritise for sustainable investment
data collection. Please indicate the relative priority of these for your institution, where 1 is greatest:☐ Corporate fixed income☐ Equities☐ Real estate☐ Sovereign, municipal, or supranational fixed income
We would be grateful to receive further comments on this question or other requirements not set out above:

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Question 13: Any other feedback
If you have any other feedback on this survey, questions we could have included, or the market forsustainable investment in general we would be grateful to receive these here:

FTSE4Good Index Rules
The following questions are specifically for users of the FTSE4Good Index Series.
Throughout its history the FTSE4Good Series has helped to catalyse improvements in corporate practices
with respect to global environmental, social and governance standards. This has been achieved throughincremental enhancements to the methodology that have raised the bar for index inclusion over time.
FTSE Russell supports companies in the index through a programme of positive engagement, giving them aclear timeline to meet the enhanced requirements and to avoid index deletion. More details on this can befound in our Step Change report here1.
Since inception in 2001, the FTSE4Good Developed index has seen approximately half of the companies 2 inthe underlying indexes qualifying for index inclusion. This has been achieved through gradual changes to theindex inclusion methodology and through improving corporate practices3. The introduction of the new ESG
methodology with phased company deadlines to meet the new thresholds was completed in 2017. With noadditional significant threshold or criteria changes, the proportion of companies included has recently grown
to approximately 60%3 indicating that the criteria should be strengthened further.
A number of indexes’ rules are aligned to that of the FTSE4Good Index Series, including the FTSE Blossom
Japan Index, FTSE4Good TIP Taiwan ESG Index, and the FTSE JSE Responsible Investment Series. Thisalignment supports clarity of communication with companies and positive engagement.
In order to continue to raise the bar for inclusion in the FTSE4Good Index Series, FTSE Russell would like toreceive feedback on the following proposals.
Question 12: Increasing the ESG Ratings inclusion thresholds
There are a number of criteria to enter and maintain inclusion in the FTSE4Good and related indexes;
central to these are the achievement of a minimum ESG Rating.
1

http://www.ftserussell.com/sites/default/files/ftse_russell_step_change_2018_report.pdf
Measured by free-float market capitalisation
3
Note that although over the years hundreds of companies have been deleted for not keeping pace with the enhancements in criteria
these have been replaced by others newly meeting the criteria for the first time.
2FTSE Russell

8Proposal: Consistent with the aim of the indexes to encourage further improvements in ESG practices overtime FTSE Russell would like to gradually increase these Ratings thresholds in the coming years,
whilst allowing sufficient time to clearly communicate and explain the change to clients andassessed companies.
The communication of this change to constituent companies facing potential deletion is expected to catalyze
companies to improve to meet the higher threshold before implementation. This is a continuation of theFTSE4Good approach to raise the bar over time.
Please provide your response below.

☐ A; I support the principle of raising the ESG Ratings thresholds over time;☐ B: I do not support these proposals.
We would be grateful to receive further comments on this question:

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9Question 13: Engaging with the weakest companies
The FTSE Russell ESG Ratings assess companies on up to fourteen Themes, covering a range of ESG
topics. For each of the Themes a company receives an Exposure assessment, to determine the relevance ofthe ESG issue to its operations, and a Score that captures how well the company’s controls, practices andperformance are for that particular area.
As part of their inclusion criteria, the FTSE4Good Developed and FTSE Blossom Japan Indexes do not
admit companies that for any of the 14 Themes receive a combination of the highest Exposure (materiality)
assessment with the lowest Score (0 or 1). This rule prevents a company from entering the indexes that
performs poorly in an ESG Theme that is highly relevant, even if their overall ESG Rating is above thethreshold.
At present this rule only applies to potential entrants to the Developed market indexes and not current
constituents (or to those from emerging markets).
FTSE Russell is proposing two changes to this rule:••

Apply this rule to existing FTSE4Good Developed constituents to harmonise with the entry rule. This
would lead to FTSE Russell communicating to Developed constituents, with an assessment of aExposure level of 3 and a Score of 0 or 1, that they could be deleted following a significant notice
period.
Apply this rule to entry in the FTSE4Good Emerging Markets indexes as well as the Developedindexes. This would prevent Emerging market constituents being added to the Indexes if they fail thesame criteria.

Please provide your response below.

☐ A; I support these proposals☐ B: I do not support these proposals
We would be grateful to receive further comments on this question:

Q12 History
FTSE Russell continually reviews its sustainable investment methodologies to ensure they capture theevolution of market standards (e.g. TCFD, SASB, EU Taxonomy). Within this process we aim to find abalance between consistency in our methodologies whilst also incorporating important new datapoints andmethodology enhancements. All of this occurs in consultation with our independent advisory committees. Akey decision when collecting new data is the length of history required.
When you are considering using a sustainable investment index, what length of history should be provided?
Please tick the box for each one that you feel is appropriate for each level of history:

1 Year: Not acceptable/ desirable/ essential

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

3 Years: Not acceptable/ desirable/ essential
5 Years: Not acceptable / desirable/essential
10 Years: Not acceptable/ desirable/essential
I do not use sustainable investment indexes
CommentFTSE Russell

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12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
benchmarks around the world.
FTSE Russell index expertise and products are used extensively byinstitutional and retail investors globally. For over 30 years, leading asset
owners, asset managers, ETF providers and investment banks havechosen FTSE Russell indexes to benchmark their investment performanceand create investment funds, ETFs, structured products and index-based
derivatives. FTSE Russell indexes also provide clients with tools for asset
allocation, investment strategy analysis and risk management.
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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