Leading index provider to the exchange-traded fund industry FTSE Russell has launched ten smart beta sustainability-themed equity indices based on a new proprietary analytical tool. The tool, labelled the Low Carbon Economy (LCE) Model scores companies by the proportion of their revenues derived from ‘green’ pursuits – goods, products and services that directly help the world to alleviate the impact of climate change, resource depletion or environmental erosion.

Mark Makepeace, Chief Executive of FTSE Russell.

The results generated from the LCE model allow users to select global, regional or country-specific exposures that target firms actively engaged in positive environmental activities. The newly launched indices assign more weight to constituents with higher green factor scores and, according to FTSE Russell, have been designed to act as indices for the development of future ETFs.

FTSE Russell applied the new model to over 13,400 public companies globally. The total universe for analysis was derived from a range of large-, mid- and small-cap firms from 48 developed and emerging markets, representing roughly 98.5% of the world’s total market capitalization. Each firm’s revenue stream, where applicable, was mapped to 60 green industrial subsectors.

The range includes:

FTSE All-World Green Revenues Index
FTSE Developed Green Revenues Index
FTSE Emerging Green Revenues Index
FTSE Asia Pacific Green Revenues Index
FTSE Europe Green Revenues Index
FTSE All Share Green Revenues Index
FTSE China Green Revenues Index
Russell 1000 Green Revenues Index
Russell 2000 Green Revenues Index
Russell 3000 Green Revenues Index

The model differs from traditional environmental, social and governance (ESG) frameworks which tend to solely focus on excluding incompatible firms, notably heavy hydrocarbon producers or CO2 emitters. Historical analysis dating back to 2008 is available for each new index, allowing users to analyze the progression to a green economy for each referenced country or region, as well as globally. The model’s range of eight sectors and 60 subsectors are as follows below:

Source: FTSE Russell.

According to FTSE Russell, more than 2,400 public companies in the LCE data model generate green revenues from one or more of the 60 green industries.

Due to the classification system in the new tool, the model may also give rise to the creation of niche indices and hence future ETFs based on specific green subsectors or industries.

Mark Makepeace, Chief Executive of FTSE Russell, said in a statement: “FTSE Russell has long been a pioneer in the development of ESG benchmarking tools. As such, we identified a significant gap in the ability of portfolio managers to track exposure to the increasing shift towards a green economy. We calculate that the green opportunity is equitable in size to emerging markets and the launch of our green revenue data model, and related indexes, provides the missing piece for investors, with a framework that captures the full picture of their green revenue exposure for the first time.”