FTSE Russell and Research Affiliates have launched two new environmental, social and governance (ESG) smart beta index families: the FTSE4Good RAFI Indices and the FTSE RAFI ex Fossil Fuels Indices. Both index families are suitable to be licensed as underlyings for index-linked investment products such as ESG-themed exchange-traded funds.
The FTSE4Good ESG screen evaluates companies across 14 themes, using over 300 data points as indicators.
The FTSE RAFI ex Fossil Fuels Indices track the performance of constituents of selected FTSE RAFI Indices after the exclusion of companies that have a certain revenue exposure to fossil fuels; while the FTSE4Good RAFI Indices also utilize existing FTSE RAFI Indices and overlay the clearly defined ESG criteria used in the FTSE4Good Index Series.
The FTSE4Good ESG overlay ensures firms meet specific thresholds in relation to ESG practices through an evaluation across 14 themes – Anti-corruption, Biodiversity, Climate Change, Corporate Governance, Customer Responsibility, Health & Safety, Human Rights & Community, Labour Standards, Pollution & Resources, Risk Management, Supply Chain (environment & social), Tax Transparency and Water Use. The number of indicators assessed comprises over 300 data points.
In terms of constituent weighting, in contrast to traditional market capitalisation-based indices, which weight constituents according to a company’s public valuation, FTSE RAFI Indices focus instead on a company’s fundamental characteristics. This avoids systematically overweighting companies that may be overvalued due to the market’s constantly changing views, expectations, fads, bubbles, and crashes. Research Affiliates’ findings show improved long-term returns through such strategies.
Companies are each ranked by four fundamental measures of company value: book value, cash flow, sales, and dividends. Except in the case of book value, trailing five year averaged data is used to minimize volatility in the factors and reduce index turnover. Companies are weighted according to a composite score determined by taking the average of each fundamental measure.
Katrina F. Sherrerd, President & Chief Operating Officer, Research Affiliates, commented: “Over the years, many investors we’ve spoken with have expressed interest in a RAFI smart beta solution that reflects an environmental, social and/or governance perspective. Through Research Affiliates’ continuing partnership with FTSE Russell, I am pleased to announce that we have developed a solution that meets these requirements, while also delivering on Research Affiliates’ mission to benefit investors.
“The new FTSE RAFI indices preserve the benefits of our leading smart beta franchise—a rules-based, transparent and low cost approach that offers the potential for outperformance—while consistently incorporating ESG investing principles.”
David Harris, ESG Director, FTSE Russell, added: “These new FTSE RAFI indices offer investors an innovative approach to passive investing by combining a fundamental factor approach with a focused set of sustainability parameters. FTSE Russell has long been a pioneer in the development of ESG benchmarking tools and we are delighted to extend our well established partnership with Research Affiliates by launching these exciting new index products.”
The list of newly launched indices include:
FTSE4Good RAFI Developed
FTSE4Good RAFI Developed 1000
FTSE4Good RAFI Developed ex US
FTSE4Good RAFI Developed ex US 1000
FTSE4Good RAFI US
FTSE4Good RAFI US 1000
FTSE RAFI Developed ex Fossil Fuels
FTSE RAFI Developed ex US ex Fossil Fuels
FTSE RAFI US ex Fossil Fuels