From time to time, companies ask me if it is worth improving their sustainability references, so that they are included in often followed ESG indices. In the UK, this question usually refers to the Ftse4good indicesIncluding only companies with a FTSE Russell ESG rating of 3.3 or higher on a 5-point scale. I didn’t know really good research that looked at the inclusion -Inclusion -effect for ESG indices from a business perspective, but now I found one.
The study investigated the profitability, appreciation and ESG ratings of thousands of companies worldwide between 1999 and 2019. Unfortunately, the data does not include post-Pandemic data, in which ESG investments experienced a significant pushback that can skew the results.
But at least, in the 20 years before the Pandemie, the researchers discovered that companies included in the FTSE4GOOD indices had considerably higher profitability and ratings in the index in the two years after their admission.
ROA and appreciation of shares in the five years around inclusion in the FTSE4GOOD indices
Source: Shrestha et al. (2025)
The authors claim that this is an indication of a favorable effect of FTSE4GOOD index recording on profitability and long-term ratings, but I think that is overly optimistic and probably not true.
On the contrary, the graph below shows that companies reaching the FTSE4GOOD have a return on assets (ROA) of one to two percentage points higher than their peers in the same country and industry in the two years prior to the inclusion of the index. After admission to the index, this ROA advantage remains roughly constant, although there is a technically a statistically significant increase in excess ROA compared to peers.
In the meantime, the valuation of shares included in the FTSE4GOOD indices is considerably moving from a discount versus colleagues in the same country and sector in the years before admission to an important premium in the following years.
For me, this graph tells no story that suggests that admission to the FTSE4GOOD indices leads to improved profitability and higher valuations. It tells a story of profitable companies where superior profitability is not recognized by investors. Inclusion in the FTSE4GOOD indices creates extra demand for the share of ESG investors and at the same time puts an spotlight on the company.
In a sense, inclusion in the FTSE4GOOD acts as a catalyst to unlock shareholder value and to increase high -quality stock valuations, but overlooked.
#FTSE4GOOD #good #company