FTSE Russell has ejected dozens of companies from a family of stock indices for failing to meet more stringent environmental standards, the first time it has taken such a step.
The index provider has removed 34 groups from its FTSE4Good All-World benchmark after deciding they failed to meet its newly introduced Climate Change Score.
The 34 were among 208 companies put on a watchlist in June 2021 for potential deletion if they did not meet FTSE Russell’s new requirements.
They include US broker Charles Schwab, Luxembourg-based media conglomerate RTL Group, mining companies Fresnillo and MMG, Japanese advertising group Hakuhodo DY Holdings and UK construction company Galliford Try.
The vast majority are from emerging markets, however — despite a lower bar being set for EM companies — with 14 from India alone, including Oil & Natural Gas Corporation, Power Grid Corporation of India and Asian Paints. Air China and compatriot Cosco Shipping Energy Transportation are also on the exclusion list.
“Many of the constituents placed on our watchlist due to these tougher climate change standards in 2021 have worked hard to improve against the Transition Pathway Initiative scores we use to make this assessment and therefore retain index membership,” said David Sol, head of policy at FTSE Russell.
“However, despite ongoing dialogue, some have unfortunately not reached the required standard and were therefore deleted.”
The expulsions are relevant for investors in many index-tracking exchange traded funds and mutual funds, given that FTSE’s range of “sustainable” investment indices, which include the FTSE4Good range, are tracked by more than $260bn of passive money.
FTSE4Good’s new climate standards are based on parameters drawn up by the Transition Pathway Initiative, which is backed by 130 investors collectively managing $50tn in assets.
Adam Matthews, chief responsible investment officer at the Church of England Pensions Board and chair of the TPI, said the ejected companies had had more than enough time to reach the requisite standard for continued inclusion in the indices.
“The year that FTSE4Good gave companies was ample time,” Matthews said. “Some companies have clearly been responsive, which is good, and there is a group that hasn’t been.
“I would question the boards of those companies why they are not able to respond to these limited expectations at this point, given the time they have had to do that.”
The FTSE4Good indices were among the earliest sustainable indices worldwide when they were introduced in 2001. Until now companies have only needed to meet minimum broad environmental, social and governance (ESG) standards to ensure inclusion, although businesses involved in industries such as tobacco, coal and the manufacture of some types of weapons are also excluded, as well as those embroiled in “significant” controversies. This is the first time a specific climate criteria has been imposed
Companies in “primary impact subsectors” — such as fossil fuel, forestry, mining, transport and utilities — must show that the risks and opportunities of the transition to a low-carbon economy are integrated into their operational decision-making.
All other developed market companies need to show they are “building capacity” towards this, while their peers in emerging economies must acknowledge climate change as a business issue.
“It’s pretty basic level disclosure expectations on something that is a material business risk,” said Matthews.
“If you have a business that has any relationship with carbon then you will have investors expecting that you understand that relationship and that you are developing a credible strategy to address the risks.”
“These are very fair and reasonable expectations that any climate-conscious investor would expect a company to be undertaking.”
RTL Group said it “regretted” being removed from the indices and was “committed to reaching climate neutrality by 2030”.
“By 2025, all company-related emissions will be reduced as much as possible and the remaining emissions will be compensated [offset]. The second step is to include and compensate all remaining emissions from the production of RTL Group’s programmes,” it said in a statement.
Galliford Try said it was “committed to operating sustainably” and that “we have been advised that FTSE4Good are reviewing our inclusion and understand the omission relates to a timing technicality where we did not meet certain new criteria at the initial review in March 2022, but resolved this in July 2022. We look forward to shortly being reinstated to the Index.”
One company involved, which declined to be named, said “there are a multiplicity of ratings out there. We need to adapt our climate goals to our own strategy, not to every single rating. This whole field of measurement is still developing.”
The other named companies declined to comment or could not be reached immediately.
The deletions will have limited impact on the composition of the 1,658-stock FTSE4Good All-World Index, although India’s weight did drop from 2.19 per cent at the end of November to 2.01 per cent after the changes were applied.
This is unlikely to be the end process for companies’ climate change commitments, however.
“There is an absolute expectation that companies will have to further increase the steps they are taking,” said Matthews.