ESG Viewpoint:
FTSE Russell
# RepRisk interviews Sarah Williams, Sustainable Investment Strategy Manager at FTSE Russell
# August 2023
1. RepRisk: Please provide some details about your specific role at FTSE Russell and the work that you and your team do.
Sarah Williams: As a Sustainable Investment (SI) Strategy Manager in the Benchmarks and Indices business at FTSE Russell, my main responsibilities are to develop an overarching SI strategy for the index business and use that as the basis for driving consistency in our SI priorities, product positioning, and innovation. The SI solutions team also works on developing SI reporting and analytics capabilities for index clients and producing client-focused insights and analysis on SI data and benchmark universes. We work closely with the SI Product teams to design ESG and climate indices, which can incorporate criteria related to listed fixed income and equities’ ESG scores, involvement in controversial products or conduct, carbon emissions, involvement in green solutions, and so on.
2. RR: In broad terms, how is ESG relevant to the work of indices and what role do indices play in promoting sustainable market practices?
SW: The availability of SI indices allows passive investors to participate in sustainable investing, which was previously thought to be a realm exclusive to active investors.
ESG or SI indices enable passive investors to allocate capital in a manner that incorporates ESG or other sustainability considerations. Indices can target sustainability improvements (e.g., overweighting stocks with higher ESG scores, those producing green solutions, etc.) or can reduce sustainability risks (e.g., removing or underweighting stocks with poor scores or involvement in controversies) at the same time as maintaining the risk/return characteristics of mainstream benchmarks.
Indices can promote sustainable practices in corporates via the signalling provided. Index rules are clear and transparent. It is clear what is required to be included or overweighted in an index, and companies can therefore target improvements in the metrics used to assess them. On a basic level, corporates can improve disclosure of their sustainability practices to improve their ESG scores or change their behaviour to avoid being screened out on the basis of controversial conduct.
3. RR: What are FTSE Russell's priority areas for ESG integration and risk management, particularly in relation to exclusions?
SW: Applying baseline exclusions to SI indices is an area FTSE Russell has been exploring, to ensure all SI indices remove certain products and behaviours at a minimum, regardless of the indices’ other objectives. The ‘baselines’ that have been identified include controversial behaviour, as well as involvement in production of tobacco, controversial weapons, and thermal coal. The list of minimum exclusions is published in the Guide to the Construction and Maintenance of Exclusion Lists used in FTSE Russell indices.
Screening for controversial conduct is a component of nearly all our SI indices launched, with SI-focussed investors wishing to avoid companies found to be complicit in environmental degradation or social harm as a standard.
Regulatory developments also typically include either explicit or implicit requirements for sustainable investments to exclude companies which cause harm, and controversial conduct data is frequently used as a lens through which to determine this.