// BY Jerry Moskowitz

Once a niche investment strategy, Responsible Investment (RI) has become a priority for individual and institutional investors globally. In the wake of corporate scandals, and the tightening of carbon emissions standards over the past decade, investors have begun to seriously evaluate the environmental, social and corporate governance risks within their portfolios. In turn, companies are responding to investor demands by re-examining the way they do business—from the reduction of emissions and energy conservation to fair trade and labor standards.

As responsible investment standards continue to evolve, it becomes quite difficult for investors to keep up to date on which companies in their portfolios have stringent corporate social responsibility (CSR) policies. As a result, both institutional and individual investors are turning to index-based investments to help them navigate the CSR landscape and take the guesswork out of responsible investment. As a result, companies interested in capturing these investments are striving to improve their CSR practices and policies in order to be included and remain in these indexes.

FTSE4Good Index Series

FTSE first became involved in responsible investment due to the growing demand from investors for tools to measure the numerous and varying global standards of corporate social responsibility. The FTSE4Good Index Series was created in 2001 to offer a series of transparent, rules-based and pre-screened benchmark and tradable indexes. Today, many companies use the globally reputable FTSE4Good standards in developing corporate social responsibility strategies and initiatives, and also as a measure for their success in meeting CSR goals.

One of the tenets of the FTSE4Good Index is to challenge companies to improve their corporate social responsibility practices for the good of the environment and human rights. Each year, the criteria evolve to reflect what constitutes good practice globally. Since its inception, FTSE4Good has tightened its environmental, supply chain and anti-bribery criteria in order to raise the bar for its constituent companies. In this way, FTSE4Good is able to maintain its reputation as the leading global standard for determining and measuring responsible investment.

CSR: Good for Business

Inclusion in responsible investment indexes has its rewards. As responsible investment moves from a niche to mainstream investment strategy, index invest-ment is steadily increasing. Managers are now using RI indexes to create investable products—mutual funds, exchange traded funds (ETFs) and other vehicles—in which the general public or institutions can invest. In the U.S. market alone, RI accounts for an estimated $2.3 trillion in assets under management, and research estimates by financial consultancy Celent predict that the RI market in the U.S. will reach $3 trillion by 2011. Companies that uphold stringent CSR standards and are part of responsible investment indexes are best poised to attract these assets.

Companies with high CSR standards, such as those included in FTSE4Good, are able to clearly demonstrate responsibility to investors, legislators, shareholders, employees, customers and the general public, and therefore manage risk and enhance their corporate reputation. By focusing on and reducing their environ-mental impacts, they are also saving money on electricity bills, resource use and waste removal. Companies with rigorous corporate responsibility standards are also best positioned to attract and retain high quality staff, thereby reducing employee turnover rates and recruitment costs.

Where to Begin

A recent study conducted by FTSE in conjunction with Insight Investment, one of the UK’s largest institutional investors and Business in the Community, an association of companies dedicated to CSR, sought to define and report on the role that corporate boards should play in directing CSR. The study found that boards should be charged with:

• Setting values and standards
• Developing CSR strategy
• Being constructive about regulation
• Using internal controls to assure and delegate responsibility
• Aligning performance management
• Creating a culture of integrity

Boards should ensure that CSR standards are explicitly stated, consistent with the values of the business and effectively communicated to employees. They should take into account the conditions, challenges and risks specific to their markets, and also define appropriate strategies and responses to these problems. Rather than wait for imposed regulation, boards must support self-regulatory standards and ensure that the company meets its own goals. They should put in place internal audit systems to ensure compliance with these standards. Finally, responsible behavior by executives and other employees should be rewarded over both the short and long term, and corporate values should be cultivated from the top down by fostering a culture in which responsible behavior is expected and irresponsibility is penalized.

Benefits of FTSE4Good Index Series

Investors

• A benchmark for responsible investment funds
• A basis for tracker funds
• A starting universe for actively managed funds
• A basis for a range of structured products
• For engagement strategies

Companies

• A framework for ‘responsible’ business management
• A ‘reputational’ badge in stakeholder communications
• To gain access to ethical and socially responsible investors’ funds

Non-Governmental Organizations (NGOs)

• A list to screen potential partners and donors
• A mechanism to contribute to the encouragement of responsible and sustainable business practice throughout the world
• For use within their own investments (e.g. trusts, foundations & pension plans)

FTSE’s Own CSR Practices

FTSE Group is active in managing its own corporate responsibility and defines its stakeholders as six separate groups—employees, shareholders, suppliers, clients, local communities and the environment—and is continually working towards managing and minimizing risks and impacts in these areas. Environmental conservation figures largely in FTSE Group’s practical commitment to socially responsible issues. Over the last year, FTSE has recycled some 87 percent of the company’s waste paper and the impact of savings in energy usage and waste generation show that each FTSE employee saves the equivalent of 2.7 metric tons of greenhouse gas each year. FTSE also works closely with UNICEF, contributing over U.S. $2 million to the organization since the two began working together in 1999.

Jerry Moskowitz is Managing Director of FTSE Group Americas.