A tenth of the constituents of the FTSE Russell ESG index range, the FTSE4Good suite, could be removed due to poor performance on climate-related issues.

Following what the firm described as an “overwhelmingly supportive” response to proposed stricter climate standards at a consultation last July, the metrics were introduced at FTSE Russell’s semi-annual index review on June 8, and 208 current index constituents now fall short of the mark.

The companies in question now have 12 months – the index review next June – to improve their climate scores or face deletion from the FTSE4Good index suite.

FTSE Russell said it has used Transition Pathway Initiative’s (TPI) climate performance methodology, along with its own geographical and sub-sector classifications, to analyse constituents’ climate performance.

Under the new standards, ESG ratings scores are determined using more than 300 indicators across 14 themes and applied to the entire FTSE4Good range, including the FTSE Blossom Japan index, FTSE4Good TIP Taiwan ESG index and FTSE4Good Bursa Malaysia index.

Regarding the impact of these changes on ETFs, FTSE4Good indices are used in products managed by Legal and General Investment Management (LGIM), Royal London and Japanese Government Pension Investment Fund (GPIF).

Also, of the 208 companies at risk of deletion, FTSE Russell noted 105 were from typically higher-emission sectors.

Arne Staal, CEO of FTSE Russell, commented: “These tougher climate requirements reflect a groundswell of investor demands for companies to develop credible climate transition strategies and emission reduction targets.

“The introduction of the TPI score will impact all companies but set the highest hurdles for those in the most carbon-intense industries. Over the next 12 months, we will work closely with constituents at risk of deletion to ensure they understand what is required to retain index membership.”

Chad Rakvin, head of index funds at LGIM, added: "We have been managing FTSE4Good benchmarks for over 15 years on behalf of our clients.

“The industry has moved very fast with respect to the integration of more advanced metrics and best thinking in terms of index construction.

“Given our support as a Research Funding Partner of the Transition Pathway Initiative (TPI) and our experience in working with FTSE Russell to bring the TPI scoring frameworks into one of our flagship Future World Funds, we are delighted to see this evolution of the FTSE4Good series.”