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FTSE4Good will drop exclusion policy

September 2001

Tobacco manufacturers, arms makers and nuclear power companies will eventually be allowed to qualify for inclusion in the FTSE4Good indices.

Six of the eight socially responsible investment indices in the FTSE4Good family went live on 31 July. They currently exclude companies with a certain level of involvement in these three sectors.

But FTSE, which runs the indices, says its long-term aim is to bring the companies into the fold and measure their ethical performance against specially devised benchmarks.

Craig Greaves, corporate social responsibility co-ordinator at FTSE4Good, told EP: ‘The aim over time is to develop the indices in such a way that exclusions will be removed. We had to start somewhere and we will be looking to develop the selection criteria from that starting point.’

The process could begin as early as this month, with the announcement on 18 September of conclusions from the first review of the indices carried out by the 16-person FTSE4Good advisory committee.

The decision to exclude these three sectors from the indices has been criticized as simplistic and too reliant on the traditional negative screening approach.

Michael Hopkins, chair of the International Centre for Corporate Responsibility and Business Performance at Middlesex University, said: ‘Simply eliminating companies whose products you do not agree with is half-baked social responsibility. A better approach would be to grade the baddies on a CSR scale then reduce the portfolio investment in them, but not eliminate them altogether.’

FTSE claims a ‘market consultation exercise’ conducted earlier this year showed there was ‘widespread international support’ among financial and SRI experts for exclusions of tobacco, nuclear power and arms companies. But Greaves added: ‘The whole thing about FTSE4Good is that it’s going to evolve along with the SRI debate.’

The six indices – two UK, two European, one US and one global – use research provided by the UK-based Ethical Investment Research Service to select companies the advisory committee believes are ‘working towards environmental sustainability’, developing ‘positive relationships with stakeholders’ and ‘upholding universal human rights’.

Apart from the excluded sectors, all businesses in either the FTSE All-World Developed Index or the FTSE All-Share Index are eligible for inclusion.

Among the criteria FTSE uses in choosing companies for the indices are: evidence of corporate standards on the environment; a commitment to stakeholder involvement; environmental and social reporting; a human rights policy; a code of ethics; an equal opportunities and diversity policy and flexible working.

Companies that did not qualify for the indices included Nestle, Novartis, Telefonica and TotalFinaElf.

FTSE says that research for FTSE4Good during the next year will concentrate on three areas: measuring labour standards in supply chains, and criteria on human rights and on bribery and corruption.

The indices will be reviewed twice a year, in March and September.


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