FTSE4Good should reward best practice in all industry sectorsApril 2001
The launch of the FTSE4Good family of ethical indexes has symbolic as well as practical value. It shows that one of the world’s leading equity index managers thinks socially responsible investment is important enough to justify creating both a tradable and a benchmark ethical index.
It also sets a benchmark of a different sort. FTSE expects to raise $1m (£700,000) for the United Nations Children’s Fund in FTSE4Good’s first year. This is a good example of a partnership between a company and a charity.
The fact that FTSE has recognised SRI in this way will help to dispel the still common view among investors that social and environmental issues are not relevant to investment decisions. It will raise awareness of SRI in markets outside the US and Europe: the family will include a global ethical index.
Symbolic value is one thing. Practical value quite another. FTSE4Good will help fund managers and independent financial advisors to market SRI products to investors. Now it is up to the skill of the fund managers to ensure funds based on the new indexes do not underperform financially relative to conventional indexes. If this happens, FTSE4Good will not be a very effective marketing tool.
FTSE has suggested it will exclude ‘activities commonly excluded from SRI funds’, such as tobacco manufacture. There is also talk of arms makers being excluded. If this happens, FTSE4Good will give no incentive to these companies to improve their environmental performance and back human rights.
The danger is that FTSE4Good turns out to be FTSENot4Bad. It is relatively simple to create an ethical index based on avoidance criteria. Identifying companies that are best in their class is much harder. FTSE’s solution to this dilemma is to rely on an advisory board. Much will depend on the decisions that this board takes. There needs to be a wider debate about the scope of FTSE4Good between now and its launch in June. The debate should involve the companies, for they are the principal actors in corporate social responsibility.
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