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Cobb, Collison, Power and Stevenson, 2005

Executive summary

FTSE4Good comprises a series of indices that were launched in July 2001 with the aim of allowing investors to gain exposure to companies that meet globally recognised corporate responsibility standards. In order to be listed, companies are required to satisfy a series of ethical criteria; these are intended to develop, in terms of scope and degree of rigour, over time. The criteria cover three broad areas: environmental sustainability, relationships with shareholders and attitudes to human rights. Decisions on admittance to, and continued membership of, FTSE4Good are taken by an advisory committee, based on information supplied by the Ethical Investment Research Service (EIRIS). The launch of FTSE4Good was greeted by a number of derisory comments in the press: some commentators took exception to what they deemed a form of political correctness being applied to investment decisions. Conversely, the FTSE4Good initiative may also be viewed as muddying the waters of socially responsible investment, given the large proportion of companies that have qualified for inclusion – 80% of the top 100 UK companies (the ‘FTSE100’) were members of FTSE4Good as at July 2005.

This study sought to investigate the FTSE4Good initiative by, first, examining the financial performance of its indices relative to their mainstream equivalents, and secondly by seeking a range of views about FTSE4Good from individuals involved in its operation and from representatives of its constituent companies. Other perspectives, for example from the ethical investing community, from investors generally and from excluded companies would, of course, also be of value but go beyond the scope of this study.

The financial investigation was based on an examination of daily returns of the FTSE4Good indices and their mainstream equivalents over the period 1996 to 2003. For publicity purposes, FTSE4Good had calculated historical values for the indices before their launch and these were included in the study. The qualitative component of the study included a series of six interviews with a total of nine individuals during the period December 2003 to July 2004. These were followed by a postal questionnaire which was sent to a total of 440 constituent companies in the UK and Europe: a total of 117 useful responses were received, giving a reasonable response rate of 27%.

The analysis of the daily financial returns suggests that investors are unlikely to be worse off by restricting their investment universe, and may well be better off. This result is consistent with some earlier studies of ethical investing, notwithstanding the intuitive expectation that constraints on portfolio selection would be expected to impair performance. It is also unsurprising given the high proportion of mainstream companies represented in the indices.

Insights from the interviews and analysis of the questionnaires showed that the FTSE4Good initiative is having a limited impact on most of the constituent companies, but in some cases its influence is considerable. Overall, it is widely regarded as being helpful in improving relations with a range of stakeholders.

A majority of companies reported significant effects on some of their internal processes, for example, reporting and management procedures, as a result of complying with the FTSE4Good criteria.
Some interviewees were rather dismissive of the direct effects of their membership of the index; for example, they were unaware of any interest being shown by investors and regarded the initiatives that satisfied the FTSE4Good criteria as developments that were taking place anyway. Even in these cases, however, there was an acceptance that it was important to remain within the index to avoid any stigma or embarrassment that might be caused by being expelled. The extent to which such a motivation would allow progressive tightening of the criteria was in some doubt, however, with the suggestion from one interviewee that such a course could ultimately lead some companies to call FTSE4Good’s bluff.

Such a view, however, is probably not broadly representative, given the range of responses to that part of the questionnaire which dealt with potential changes to the FTSE4Good criteria. Opinions were evenly divided for and against such issues as increasing levels of disclosure, introducing criteria based on value-chain labour standards and on whether certain areas of business activity should continue to be excluded from the index.

The extent and type of engagement between FTSE4Good and its constituents vary considerably, with questionnaires being by far the most commonly used method. Although questionnaire fatigue is often remarked upon by companies, particularly in relation to ethical issues, some interviewees thought that the FTSE4Good initiative meant that questionnaire completion is more likely to be taken seriously by companies since failure to do so could put their FTSE4Good status at risk. Other methods of engagement, such as interviews and other forms of direct contact were thought to be very useful but, of course, from FTSE’s point of view they use more resources.

Seen from the perspective of FTSE4Good, our research suggests that there are clearly some grounds for satisfaction in terms of its impact on the conduct of some of the constituent companies. How seriously FTSE4Good is viewed by the socially responsible investment (SRI) community, given the large proportion of business activity that it represents, is a question that goes beyond the scope of this research. None of our admittedly small number of interviewees was aware of any increased investor interest as a result of their membership of the index, but the questionnaire results do show significant perceptions of improved relationships with many stakeholders, including some investor groups.

A much wider question relating to FTSE4Good is briefly touched on in this study but remains open: this relates to its ultimate impact on corporate behaviour. During the course of the Company Law Review process, calls have been made for increased corporate accountability through mandatory disclosure on a range of social and environmental issues, and for a broadening of directors’ duties of care beyond their duty to shareholders. Could FTSE4Good be seen as implementing the spirit of such calls? Alternatively, could it be viewed as a means of superficially placating them and maintaining the status quo, while, for good measure obscuring the influence of the traditional SRI sector? Should it be seen as neither of these but as a workable compromise which is achieving incremental improvements across a range of business sectors? This study provides some evidence for such an assessment but these are questions which cannot be answered fully without much further investigation.

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