ESG Risk Adjusted Index
FTSE Russell has launched its first ESG Risk Adjusted Index, which is based on the FTSE UK index series and aims to reflect index trends while improving ESG characteristics and maintaining similar risk return characteristics.
The risk adjusted index adopts the FTSE Russell Target Exposure method, aiming to reduce carbon emissions risk and improve ESG performance. The new index reduces fossil fuel exposure by 50%, carbon emissions exposure by 50%, and improves ESG performance by 5%.
Contents of Risk Adjusted Index Series
There are four ESG risk adjustment indices, which are:
|FTSE 100 ESG Risk Adjusted Index
|FTSE 100 Index
|FTSE 250 ESG Risk Adjusted Index
|FTSE 250 Index
|FTSE 350 ESG Risk Adjusted Index
|FTSE 350 Index
|FTSE All Share ESG Risk Adjusted Index
|FTSE All Share Index
These indices are constructed using the target exposure framework and can be focused in some directions based on the size of the exposure. The index excludes some controversial industries, such as coal mining, oil exploration, and industries that violate the United Nations Global Compact Principles.
Steps for Constructing the index
The FTSE Russell ESG Risk Adjusted Index is constructed based on five steps:
- Select benchmark indices: FTSE 100, FTSE 250, FTSE 350, and FTSE All Share;
- ESG screening: eliminate industries related to energy and those that violate the principles of the Global Compact;
- ESG score: By calculating the weight of component equity, the new index reduces fossil fuels and carbon emissions by 50%, and increases ESG score by 5%;
- Target exposure corrective tilts: use the target risk exposure method to match the risk and return of the index with the benchmark index, and correct for common factors such as value, scale, volatility and momentum;
- Publish and Review: Release new indices and conduct reviews in June and December each year;
The Role of Risk Adjusted Index
The ESG Risk Adjusted Index can be used to measure the performance of actively managed ESG funds and serve as a benchmark for creating ETF products and other derivatives. This index expands the ESG and climate index range of FTSE Russell and is included in the Sustainable Investment Index series.