FTSE4Good Index Series

The FTSE4Good Index Series is a list of environmental, social, and governance (ESG) stock indexes created and maintained by the Financial Times Stock Exchange-Russell Group (FTSE). Learn more about these indexes and how they work.

What Is the FTSE4Good Index Series?

The FTSE4Good Index Series is a collection of socially responsible, or ESG stock indexes administered by the Financial Times Stock Exchange-Russell Group (FTSE). The purpose of these indexes is to highlight companies that score highly in measures of corporate social responsibility (CSR).

The indexes each follow strict environmental, social, and corporate governance criteria that make them suitable for benchmarking purposes and can be used as tools in the creation of financial products, such as institutional and retail funds, exchange-traded funds (ETFs), and derivatives.

How the FTSE4Good Index Series Works

Socially responsible investing (SRI) has been a growing trend among investors. Due, in part, to the leadership of organizations such as the United Nations Principles for Responsible Investing (PRI), there has been a growing demand in recent years for investment products tailored to the needs of socially conscious investors.

The FTSE4Good Index Series, which launched in 2001, is one such example. Rather than referring to a specific equity index, the FTSE4Good Index Series instead encompasses several SRI indexes, each with its own geographic focus. For example, the series includes specific indexes for companies in the United States, Australia, Japan, and Latin America, among others.

Transparent management and clearly-defined environmental, social, and corporate governance criteria make FTSE4Good indexes suitable tools to be used as:

• Financial products: as tools in the creation of index-tracking investments, financial instruments, or fund products focused on sustainable investment.
• Research: to identify environmentally and socially sustainable companies.
• Reference: as a transparent and evolving global ESG standard against which companies can assess their progress and achievement.
• Benchmarking: as a benchmark index to track the performance of sustainable investment portfolios.

Investors can thus use the index as a reference point for individual stock selection, such as by selecting investments from the index’s top holdings. As of April 2023, for example, the top 10 holdings of the U.S.-based index included several well-known technology companies, such as Apple Inc. (AAPL), Microsoft Corporation (MSFT), NVIDIA Corporation (NVDA), and Alphabet Inc. (GOOG).

Alternatively, investors can select products that use the FTSE4Good Index Series as an investment benchmark. One such example is the Vanguard FTSE Social Index Fund (VFTSX), a mutual fund whose performance is measured against the FTSE4Good US Select Index.

ESG Methodology

The FTSE4Good Index Series uses a score-based methodology to determine the overall quality of a company’s management of ESG issues. It does this by breaking down a total score and rating a company on three pillars and 14 themes using over 300 indicators.

Three Pillars

Companies are rated on environmental, social, and governance issues. They receive a score and an exposure assessment based on their management of each pillar.

14 Themes

The three pillars are then broken down into themes, with companies receiving a score and an exposure assessment based on their management of each theme. Environmental themes include biodiversity, climate change, pollution and resources, supply chain, and water security. Social themes include customer responsibility, health and safety, human rights and community, labor standards, and supply chain. Governance themes include anti-corruption, corporate governance, risk management, and tax transparency.

Indicators

The Series uses over 300 indicators to help assign scores to each pillar and theme. Each theme contains 10 to 35 indicators, with an average of 125 indicators applied per company. Companies that operate in developed markets are considered for constituent selection if they have an ESG rating over 3.3, while companies operating in emerging markets must have a rating of 2.9 or higher. Conversely, developed market companies are removed if their rating falls below 2.9 while emerging market companies are removed if their rating drops under 2.4. The rating methodology outlined above ensures only companies demonstrating strong ESG management are included in The FTSE4Good Index Series.

Using the FTSE4Good Index Series

In order to be included in the FTSE4Good Index Series, companies must score highly in measures of environmental, social, and governance (ESG) practices. In practice, this requires companies to have strong policies in areas such as respect for human rights, internal labor relations and workplace safety, lack of real or perceived corruption, and the environmental sustainability of their supply chains.

Importantly, some companies are categorically excluded from the index series on account of their business models, including tobacco companies and weapons manufacturers. Oil and gas companies are not dismissed out-of-hand; instead, they are evaluated based on their efforts to reduce the production of fossil fuels and evolve their business into more environmentally friendly operations.

Examples of FTSE4Good Indexes

Several stock indexes are included as a FTSE4Good product. The following is excerpted from the FTSE-Russell Website:

• The FTSE4Good E criteria are applied to the FTSE4Good Emerging Indexes, which covers over 20 emerging countries, and was launched in 2016.
• The FTSE4Good ASEAN 5 Index constituents are selected and screened in accordance with transparent and defined ESG criteria designed to identify those companies listed on the leading ASEAN financial markets.
• FTSE Group has partnered with Bolsas y Mercados Españoles (BME) to create the FTSE4Good IBEX Index. Constituents comprise companies in the BME's IBEX 35 Index and the FTSE Spain All Cap Index that meet the FTSE4Good Index Series eligibility criteria.
• FTSE4Good Developed Minimum Variance Index seeks to achieve reduced index volatility based on historical return information. The series is designed to reflect market participants' desire for an index that offers potential improvements to the risk-reward ratio while maintaining full allocation to the relevant equity market.
• The FTSE4Good Bursa Malaysia Index constituents are selected from the constituents of the FTSE Bursa Malaysia EMAS Index and screened in accordance with the transparent and defined ESG criteria.
• FTSE Russell has partnered with Taiwan Index Plus (TIP) Corporation on the FTSE4Good TIP Taiwan ESG Index. The index is designed to measure the performance of companies on the Taiwan Stock Exchange.

The Bottom Line

The FTSE4Good Index Series is a collection of socially responsible stock indexes that score highly in measures of corporate social responsibility. Investors can use the indexes for individual stock selection or to gain benchmark exposure to ESG investing through mutual funds and ETFs. The Series uses a score-based methodology for constituent selection, rating companies based on their performance relating to ESG pillars, themes, and indicators. Only companies that receive high ratings are included in the Index Series.