Is FTSE4Good good for the company?

From time to time, companies ask me if it is worth improving their sustainability credentials so they are included in commonly tracked ESG indices. In the UK, this question typically refers to the FTSE4Good indices, which include only companies that have a FTSE Russell ESG rating of 3.3 or above on a 5-point scale. I didn’t really know of any good research that looked at the index inclusion effect for ESG indices from a business perspective, but now I have found one.

The study examined the profitability, valuation, and ESG ratings of thousands of companies globally between 1999 and 2019. Unfortunately, the data does not include post-pandemic data, during which ESG investments experienced a significant pushback, which may skew the results.

But at the very least, in the 20 years before the pandemic, the researchers found that companies that were included in the FTSE4Good indices had substantially higher profitability and valuations in the two years after their inclusion in the index.

ROA and valuation of stocks in the five years around inclusion in the FTSE4Good indices

Source: Shrestha et al. (2025)

The authors make a bold claim that this is an indication of a beneficial effect of FTSE4Good index inclusion on long-term profitability and valuations, but I think that is overly optimistic and probably not true.

Rather, the chart below shows that companies that make it into 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 preceding index inclusion. After inclusion in the index, this ROA advantage remains roughly constant, although technically, there is a statistically significant increase in excess ROA compared to peers.

Meanwhile, the valuation of stocks included in the FTSE4Good indices moves significantly from a discount vs. peers in the same country and sector in the years before inclusion to a significant premium in the years after.

To me, this chart does not tell a story that suggests inclusion in the FTSE4Good indices leads to improved profitability and higher valuations. It tells a story of profitable companies where superior profitability is not recognised by investors. Inclusion in the FTSE4Good indices creates additional demand for the stock from ESG investors and, at the same time, puts a spotlight on the company.

In a sense, index inclusion in the FTSE4Good acts as a catalyst to unlock shareholder value and increase stock valuations for high quality, but overlooked companies.