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Stewardship and the transition to a sustainable economy

By: Mark Makepeace, CEO, FTSE Russell

We hear much excitement about sustainability and the green economy but very little defining what it is and how to measure it—both of which are important considerations. As a leading index provider, FTSE Russell is committed to our stewardship role in the global transition towards a sustainable and lower carbon economy. We feel part of this responsibility is ensuring investors have the data they need to enable effective company engagement and allocation of capital. To that end, we’ve recently published some research on the topic and have launched a program to support investors and companies working together towards a greener economy.

In the first of two recently published reports, we define green sectors and subsectors through a classification system such that we can measure and capture them in our indexes. We then measure the size of the green economy by identifying about 3,000 listed companies that offer green products and services. If we look at the proportion of their businesses represented by these products and services, and combine that as a percentage across all companies by their market capitalization, then the total is 6% today—up from 5% five years ago.

The report also examines the fossil fuel industry and its changing position relative to the green economy. Five years ago, fossil fuels accounted for 12% of the global equity markets; today this has decreased to 6%, matching our calculated size of the green economy.

 

As the size of the green economy and the oil and gas industry have now converged, this could be indicative of a tipping point in the transition towards a global green economy.

Our second report addresses stewardship, which in our view is also about “social purpose” and standing behind the belief that companies that don’t deliver benefits to society will ultimately not succeed as well as those that do. ESG issues are often very pertinent to the long-term success of an individual company, but are even more relevant across a whole portfolio. This has led some pension funds and sovereign wealth funds to consider investor stewardship, where they seek to influence the world that their beneficiaries will retire into by encouraging companies to focus on long-term growth and sustainability.

While this research is new, FTSE Russell’s support of the global green economy transition is not. As part of our on-going efforts, FTSE Russell has chaired the United Nations Sustainable Stock Exchanges Initiative working group to develop model guidance on ESG reporting for exchanges globally. We’ve also launched our own ESG reporting guidance for issuers—to help the shift from a world of “shiny CSR reports” to one of hard sustainability data. And since 2001, we’ve influenced positive change through FTSE4Good, the ESG index series.

We’ve brought all of these initiatives together under the banner of “STEP Change,” which stands for the Stewardship, Transition and Engagement Program for Change. The program embodies how we can support investors and companies to work together towards a sustainable economy. It’s also about data, transparency, dialogue and creating an operating environment that supports and fosters a long-term agenda.

In our STEP Change report, we provide an in-depth look at FTSE Russell’s approach to stewardship and illustrate how we conduct dialogue with companies. It includes what we have learned from FTSE4Good and how with leadership we can lift market standards, including building ESG into core benchmarks.

Get more information on the FTSE Green Revenues Index Series.

 

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