FTSE Russell unveils ESG risk index series


FTSE Russell has launched the FTSE UK ESG Risk-Adjusted Index Series as part of its expansion of its multi-asset ESG and climate index product range.

The UK ESG Risk-Adjusted Index Series applies a range of (product and conduct) exclusions, significantly reduces the carbon emissions and reserves exposure of the Index (vs the underlying benchmark) and tilts the weights of the universe towards companies with better ESG characteristics.

Index exclusions focus on controversial weapons, thermal coal production, energy generation based on thermal coal, Arctic oil & gas exploration, oil sands and shale energy extraction and production, tobacco production and retail, and controversial conduct.

Whilst fossil fuels are not fully excluded, index level fossil fuel reserves exposure is reduced by 50% (versus the benchmark) resulting in large underweights to e.g., Energy and Basic Materials Industries. Utilities and Industrials are also underweighted due to the 50% reduction in carbon emissions exposure versus benchmark levels.

UK companies achieve relatively high ESG scores (e.g. the aggregate ESG score of the FTSE 100 is almost 10% higher than the FTSE Developed ESG score). Due to the already high starting point, the ESG target of the UK ESG Risk-Adjusted indices is 5% above the aggregate benchmark ESG levels (based on FTSE’s ESG scores) – to ensure that a consistently high level is achieved.

This new UK index series, FTSE Russell claims, delivers broad ESG improvements whilst balancing index outcomes such as tracking error and other risk and return characteristics. While evolving over time to ensure that it remains aligned with market and client expectations, its launch is a starting point for incorporating key ESG considerations into the flagship UK Series.

FTSE Russell CEO Arne Staal said, “We have created the FTSE UK ESG Risk-Adjusted Index Series to further increase the options for clients incorporating ESG and Climate objectives into UK equity portfolios. This launch, while continuing to expand our multi-asset ESG and climate index range, is also our first ESG-adjusted version of the FTSE 100, and something our customers have been asking for.”

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