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.

Key Takeaways

  • The FTSE4Good Index Series is a series of SRI/ESG equity indexes that include companies with positive reputations for corporate responsibility.
  • It contains several individual stock indexes, each tailored for a particular geographic region.
  • Investors can use the indexes either for individual stock selection or as the basis for investment products such as mutual funds and exchange-traded funds (ETFs).

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 their 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 December 31st, 2019, for example, the top 10 holdings of the U.S.-based index included several well-known technology companies, such as Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), and Facebook (FB).

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.

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.

To determine whether these standards are being maintained, an independent committee of experts, in consultation with non-governmental organizations (NGOs), academics, government bodies, and investors, jointly develops and updates the ESG standards.

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 is 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, 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.