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ESG Ratings via Financial Times and London Stock Exchange

Tiffany Finley | Thursday April 21st, 2011 | 0 Comments

With 2,300 public companies rated, the FTSE’s ESG ratings are gaining respect in the responsible investment realm. Portfolio managers are turning more and more to these types of standards to help determine investment risks. As the transparency surrounding environmental, social, and corporate governance increases, investors are actively seeking companies that have solid ratings or steady improvements. The criteria for the ratings are public knowledge, as are the rankings of companies worldwide. Amongst the leader board for US companies are Ford Motor, Dr. Pepper Snapple Group, and Walt Disney. Country ratings rank Norway, the Netherlands, and Sweden with the highest scores. The United States did not make the Top Ten ratings.

FTSE, an independent company of The Financial Times and London Stock Exchange, provides a series of indices that aid investors and help measure performance annually. The ESG scoring system provides a general rating that measures six specific ESG criteria including: environmental management, climate change, human and labor rights, supply chain labor standards, corporate governance, and countering bribery. The higher the risks, the more the company must achieve to get a high rating. The companies are re-assessed twice a year by EIRIS. The criteria used was developed and overseen by an independent committee of experts from academia, business, unions, ngos, and the investment sector.  The FTSE offers a variety of other ratings including Environmental Leaders, IBEX, Carbon Strategy, and Environmental Markets.

Critics of the scoring system believe the criteria is not balanced. Several believe that the continued global focus on climate change as the major environmental issue as opposed to a more inclusive approach with water, land use planning, and biodiversity puts business and the environment at a greater risk. Ratings such as the ESG are accused of limiting the dialogue and assessment of other key environmental issues that should be equivalent to climate change on the global environment agenda. The rating also does not focus on local community investments, an ever-expanding field for CSR evaluation.

Despite the alleged shortcomings by critics, the ESG rankings are increasing transparency as well as encouraging investors to take an active role in their portfolio management.


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