The climate-related requirements on performance, disclosure, management and strategy, and policy and governance, to be phased in by 2009, were introduced at an event held to mark FTSE4Good’s fifth anniversary.
Investors already use the index to identify FTSE companies meeting environmental and social standards. Since its inception in 2001, the index has grown to include 898 companies. During that time some 160 companies have also been delisted.
Speaking at the event in London, Environment Secretary David Miliband said that in many ways the index had been ahead of government, which had been "too timorous". He added that climate change must become a core part of business strategy and operations, and would be a voter issue at the next general election.
"The long-term aim must be for carbon pricing to cover the whole economy," said Mr Miliband.
The climate criteria will apply to firms with high- or medium-impact activities - currently 255 of the companies listed.
Only high-emitting sectors such as oil and gas, mining, aluminium, steel, electricity, building materials, delivery services and commodity chemicals will need to meet performance-based criteria. Companies that could be affected include Arcelor Mittal, BASF, BHP Billiton, BP, British Airways, Drax Group, Ford, Lafarge, Scottish Power, Scottish and Southern Energy, and Shell.
To be listed, high emitters must already be among the most efficient in their sector, or reduce their carbon intensity by 5% over two years or have a strategic initiative in place to significantly reduce their greenhouse gas emissions.
Road vehicle and aerospace companies will need to meet extra criteria on the fuel efficiency of high-impact products.
The new requirements mark a shift from management criteria to actual performance.
"To date, criteria were about policy and management system rather than outcomes," said Rory Sullivan, head of investor responsibility at Insight Investment. "Now that environmental management systems such as ISO14001 are quite mature, obligations to comply with legislation and ensure continuous improvement are no longer substantive for well-run companies."
Oliver Greenfield, head of WWF’s sustainability business unit and a member of FTSE4Good’s climate change advisory committee, said the move to quantitative impacts was a big step forward.
"For markets to correct their failure on climate change, they need accurate information about companies innovating. The robust criteria send a strong signal as a first step. The key is how quickly they’re implemented across sectors and used by the financial industry."
The index will initially allow companies flexibility in implementing the new requirements because there is no accepted global standard for managing greenhouse gas emission reductions.
An advisory committee made up of investors, companies and NGOs developed the criteria, using research by the Ethical Investment Research Service, after climate change emerged from a stakeholder consultation as a key area. Draft criteria were consulted upon last year (ENDS Report 380, p 7 ).
FTSE4Good admits the criteria are weaker than the reductions needed from industry to stabilise greenhouse gas levels.
"If companies grow at 3-4% annually, absolute emissions will continue to increase," said advisory committee chairman Craig Mackenzie, of the Centre for Ethics in Public Policy and Corporate Governance.
"Clearly, in the long term the carbon reduction criterion is completely incompatible with the UK government’s goal of a 60% carbon dioxide reduction by 2050."
FTSE said the target "reflects what is currently possible for leading companies within the current regulatory and business environment" and that it is currently "too difficult" to measure absolute reductions in greenhouse gas emissions over time.
The criteria are set at a level that will allow the index to retain some stability, according to Will Oulton, the FTSE Group’s head of responsible investment. Without this, it would become too expensive for investors to use.
With carbon intensity thought to be increasing at a quarter of the listed energy-intensive companies, reducing emissions is expected to be a challenge for some, FTSE4Good says.
However, requirements may be revisited if a sector has valid difficulties meeting them. For instance, some water utilities have claimed that extra processes to comply with EU legislation will increase their energy use and carbon intensity (see pp 34-38).
High emitters that do meet performance requirements can choose whether to meet extra strategic criteria on long-term carbon intensity goals or greenhouse gas reduction targets.
Sectors with medium impact emitters, such as paper, water, waste, speciality chemicals and heavy construction will only have to meet policy and disclosure criteria. Diageo, Severn Trent, GlaxoSmithKline, and Veolia Environnement could be among companies expected to meet these criteria.
Companies will need to report efficiency or total operational greenhouse gas or CO2 emissions. For example, cement companies could disclose CO2 per tonne of cement. Medium-impact companies could provide information on energy consumption instead.
Oil and gas and coal mining companies will need to provide extra data on product-related emissions.
Verified data will eventually be required as the criteria are strengthened and extended.