Market Consultation

Minimum Exclusions for Sustainable
Investment Indicesftserussell.com

January 2022

A minimum set of exclusions for sustainable
investment indices
FTSE Russell is consulting index users on whether a minimum set of exclusions1 should apply to FTSE
Russell’s standard2 sustainable investment indices and is soliciting feedback on the following:i.

whether there should be a minimum set of exclusions for FTSE Russell’s sustainable investment
indices and what this ‘minimum’ should be;ii.

how subsidiaries, instances of minority ownership, and missing or incomplete company data
should be treated; andiii.

the implementation of a minimum set of exclusions.

This consultation has in its scope FTSE Russell’s standard equity and fixed income3 sustainable investment
indices.
The potential application of a minimum set of exclusions will be subject to further review by FTSE Russell’sinternal governance forums and decided by FTSE Russell’s Index Governance Board. FTSE Russell
reserves the right to conduct further consultations as necessary.
This consultation will close on 25 February 2022 and will be run according to FTSE Russell’s Policy forBenchmark Methodology Changes.

‘Exclusions’ are defined in this consultation as business activities that lead to a company being removed from an index. Exclusions andscreening are terms that are often referred to interchangeably
2
Does not include bespoke or custom indices3
In particular, the scope of this consultation includes corporate universes i.e., not sovereign bond indices
1

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2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 indices or data solutions.
Index users and other stakeholders are invited to respond by 25 February 2022. The responses will
be reviewed by the FTSE Russell Index Governance Board and an update on FTSE Russell’s
proposed approach will be communicated in due course.
Please submit your response to the questions included in this consultation online athttps://www.surveymonkey.co.uk/r/minimumexclusions
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
committeesecretary@ftserussell.com.

FTSE Russell

3Introducing a minimum set of exclusions
Market conventions, fund labels and regulation in the sustainable investment market have evolved, andcontinue to evolve, at pace. To reflect these developments and investors’ sustainable investment productrequirements, FTSE Russell is considering whether a minimum exclusion standard should be applied to allstandard sustainable investment indices, irrespective of geography and asset class.
ProposalBuilding on its Guide to the Construction and Maintenance of FTSE Exclusion Lists, FTSE Russell’s current
thinking and latest proposal is outlined below. This proposed minimum set of exclusions references the EU
Benchmark Regulation exclusions for EU Climate Benchmarks and the activities that FTSE Russell’s clientsfrequently request to be excluded. Additional exclusions can be applied above this minimum standard to fulfil
additional investment objectives, mandates or restrictions.
Businessactivity

Scope of exclusion

RationaleTobaccoproduction

0% revenue threshold:all companies engaged
in the production of
tobacco and/or tobacco
products are excluded

The use of tobacco generates a significant health and economic
burden on society. Tobacco is routinely excluded from sustainable
investment portfolios and indices (e.g., it is in the EU Benchmark
Regulation Climate Benchmark exclusions).

ThermalCoal
extraction

Companies thatgenerate 50% or moreof their total revenue
from the extraction ofthermal coal areexcluded

Controversial
Weapons
production

0% revenue threshold:all companies engaged
in the production ofcontroversial weapons
are excludedFor the purposes of this set of minimum exclusions, tobacco retail
activity is not in scope.
In order to limit global warming to two degrees Celsius or below,
investor and wider market guidance – such as the IIGCC Net Zero
Investment Framework and the IEA Net Zero by 2050 Roadmap –support limiting or reducing investments in thermal coal extraction.

Although there is no universal understanding of what the term
‘controversial weapons’ includes, weapons are normallyconsidered controversial where they are disproportionate,
indiscriminate and are restricted under international agreements.
For the purposes of this minimum set of exclusions, controversial
weapons are defined as anti-personnel mines, cluster munitions,and chemical and biological weapons. The minimum standard
does not exclude other categories of weapons such as nuclear
weapons, conventional military weapons, and firearms.

Controversial
Conduct

Companies deemed tobe acting in a way thatis inconsistent with
global norms areexcluded

Investors increasingly exclude companies that face allegations ofcontroversial conduct. This can be due to ethical considerations,to avoid the financial risks associated with corporate
controversies, or to prevent reputational risk associated withcompanies facing allegations of controversial business conduct.
Violations of the United Nations Global Compact Principles or theOrganisation for Economic Cooperation and Development(OECD) Guidelines for Multinational Enterprises is a requiredexclusion in some regulatory standards (e.g., EU Sustainable
Finance Disclosure Regulation, EU Benchmark Regulation).

FTSE Russell

4Application
The expectation is that this minimum set of exclusions would be applied by default to new, standard
sustainable investment indices, whereas the transition of existing, standard sustainable investment indiceswill be gradual, and subject to further client engagement. Many existing standard sustainable investment
indices such as the Russell US ESG Indices and the FTSE EU Climate Benchmarks Index Series alreadyinclude these minimum and other exclusions.
The proposed minimum set of exclusions would follow FTSE Russell’s existing approach to parent
companies, subsidiaries, financial firms, and the treatment of companies with “no data”. The approach toboth of these is outlined in FTSE Russell’s Guide to the Construction and Maintenance of FTSE Exclusion
Lists (“Exclusion Guide”) and is also included below.
Parent/subsidiaries•FTSE Russell’s current approach is outlined in the Exclusion Guide as follows:
oif a parent company holds shares contributing 50% or less of the ownership of a subsidiarycompany that is involved in an excluded product or conduct-related activity, it will not be
placed on the FTSE Exclusion List in relation to that activity (as the parent company isdeemed not to have effective ‘control’ over the subsidiary company);owhere a parent company engages in an excluded product or conduct-related activities, asubsidiary company will not be placed on the FTSE Exclusion List provided that thesubsidiary itself does not engage in the excluded product or conduct-related activities. Thisis regardless of the level of ownership by the parent (as the subsidiary company is deemed
not to have effective ‘control’ over the parent company).

Financial firms•FTSE Russell’s current approach is outlined in the Exclusion Guide as follows:ofinancial firms (e.g., banks, asset management, insurance) are not placed on the FTSEExclusion List if they invest in, or provide loans to, a company that engages in excluded
product or conduct-related activities; andoInvestment Trusts are not placed on the FTSE Exclusion List if invested in companies thatengage in excluded product or conduct-related activities.

Treatment of companies without data•

FTSE Russell’s current approach is outlined in the Exclusion Guide as follows:

FTSE Russell

oin addition to the FTSE Exclusion Lists that are maintained for each excluded product oractivity, FTSE Russell maintains an additional “No Data” FTSE Exclusion List of companies
for which their exclusion status has yet to be ascertained; andothis No Data FTSE Exclusion List contains companies that are new to the Research
Universe, including IPOs, and new entrants to the Underlying Indices that have yet to beresearched.

5Consultation questions
1. Should a minimum set of exclusions be applied to FTSE Russell’s sustainable investment indices?

☐ Yes
☐ No
☐ Do not have an opinion
Please enter any comments here:

2. Should the same minimum set of exclusions be applied to FTSE Russell’s equity, fixed income andmulti-asset indices?

☐ Yes
☐ No
☐ Do not have an opinion
Please enter any comments here:

3. Should the same minimum set of exclusions be applied across all geographies, including both emerging
and developed markets?

☐ Yes☐ No☐ Do not have an opinion

FTSE Russell

6Please enter any comments here:

4. Do you agree with the proposed 0% revenue approach to excluding all companies engaged in theproduction of tobacco and/or tobacco products? (Please see page four)

☐ Yes
☐ No
☐ Do not have an opinion
Please enter any comments here:

5. Regarding thermal coal extraction, do you agree with the proposed 50%+ revenue threshold forexclusion, as a minimum standard? (Please see page four)

☐ Yes
☐ No
☐ Do not have an opinion
Please enter any comments here:

6. Do you agree with the proposed 0% revenue approach to excluding all companies that produce or
manufacture controversial weapons? (Please see page four)☐ Yes☐ NoFTSE Russell

7☐ Do not have an opinion
Please enter any comments here:

7. Do you agree that companies deemed to be acting in a way that is inconsistent with global norms should
be excluded as standard? (Please see page four)☐ Yes☐ No☐ Do not have an opinion
Please enter any comments here:

8. Do you have any feedback on the proposed scope of the minimum set of exclusions and whether
sectors or activities should be added to, or removed from, the list of minimum exclusions?
Please enter any comments here:

9. Do you have any comments on the approach to parents, subsidiaries, financial firms or the treatment ofcompanies with “no data”? (Please see page five)

FTSE Russell810. Please share any additional thoughts or feedback that you or your firm may have on the way in which aminimum set of exclusions could be implemented.

FTSE Russell

9For more information about our indices, please visit ftserussell.com.
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10About FTSE Russell
FTSE Russell is a leading global index provider creating and managing awide range of indices, data and analytic solutions to meet client needs
across asset classes, style and strategies. Covering 98% of the investable
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