Industry Classification Benchmark: Explained
BY TIO Staff
|July 29, 2024The Industry Classification Benchmark (ICB) is a comprehensive, detailed and dynamic system for classifying companies and securities across the globe. Developed by FTSE Russell, a leading global index provider, the ICB is used by market participants including investors, analysts, and regulators to categorize and compare companies based on their primary source of revenue. This classification system is instrumental in creating a structured view of the world economy, enabling a thorough and precise analysis of market trends and sector performance.
The ICB structure is hierarchical and consists of 11 industries, subdivided into 20 supersectors, which are further divided into 45 sectors and 173 subsectors. Each company is allocated to the subsector that most closely represents the nature of its business, which is determined by the source of its largest revenue stream. The ICB system is revised periodically to reflect the evolving structure of the global economy and emerging industries.
Understanding the ICB Structure
The ICB structure is a four-tiered system, starting from industries at the top, followed by supersectors, sectors, and finally, subsectors. The classification of a company at each level is based on the nature of its business activities, with the most significant source of revenue being the determining factor. This hierarchical structure allows for a granular analysis of market trends and sector performance, providing valuable insights for investors and market participants.
At the highest level, the ICB classifies companies into 11 industries, which represent the broadest categories of economic activity. These industries include Oil & Gas, Basic Materials, Industrials, Consumer Goods, Health Care, Consumer Services, Telecommunications, Utilities, Financials, Technology, and Real Estate. Each industry is further divided into supersectors, which provide a more detailed view of the economic activities within each industry.
Supersectors, Sectors, and Subsectors
Each industry in the ICB structure is divided into supersectors, which provide a more detailed view of the economic activities within each industry. For example, the Consumer Goods industry is divided into supersectors such as Automobiles & Parts, Food & Beverage, and Personal & Household Goods. Each supersector is further divided into sectors, which provide an even more detailed classification of companies based on their business activities.
The lowest level of the ICB structure is the subsector level, which provides the most detailed classification of companies. Each sector is divided into several subsectors, which represent specific business activities within each sector. For example, the Automobiles & Parts supersector is divided into sectors such as Automobiles, Auto Parts, and Tires, each of which is further divided into subsectors.
Benefits of Using the ICB
The ICB provides several benefits to market participants. By providing a standardized classification system, it allows for a consistent comparison of companies and industries across different countries and regions. This is particularly useful for investors and analysts who need to compare companies and industries across different markets.
Furthermore, the ICB allows for a detailed analysis of market trends and sector performance. By classifying companies based on their primary source of revenue, it provides a clear view of the sectors and industries that are driving the global economy. This can help investors identify investment opportunities and risks, and can also help regulators monitor market developments.
Investment Analysis and Portfolio Management
The ICB is a valuable tool for investment analysis and portfolio management. By providing a detailed classification of companies and industries, it allows investors to analyze market trends and sector performance in a structured and consistent manner. This can help investors identify investment opportunities and risks, and can also help them manage their portfolios more effectively.
For example, by using the ICB, an investor can analyze the performance of different sectors and industries over time, and can compare the performance of companies within the same sector or industry. This can help the investor identify sectors or industries that are outperforming or underperforming the market, and can also help the investor identify companies that are outperforming or underperforming their peers.
Regulatory Monitoring and Market Surveillance
The ICB is also a valuable tool for regulatory monitoring and market surveillance. By providing a detailed classification of companies and industries, it allows regulators to monitor market developments in a structured and consistent manner. This can help regulators identify market trends and risks, and can also help them monitor the compliance of companies with regulatory requirements.
For example, by using the ICB, a regulator can monitor the performance of different sectors and industries, and can compare the performance of companies within the same sector or industry. This can help the regulator identify sectors or industries that are experiencing significant changes in market conditions, and can also help the regulator identify companies that are experiencing significant changes in their business activities.
Limitations of the ICB
While the ICB provides a comprehensive and detailed classification system, it also has some limitations. One of the main limitations of the ICB is that it classifies companies based on their primary source of revenue, which may not always accurately reflect the nature of their business activities. For example, a company may generate a significant portion of its revenue from a business activity that is not its primary business activity, and this may not be accurately reflected in its ICB classification.
Another limitation of the ICB is that it is revised periodically to reflect changes in the structure of the global economy and emerging industries. While these revisions are necessary to keep the ICB up-to-date, they can also create challenges for market participants who need to adjust their analysis and reporting to reflect the new ICB structure.
Challenges in Classifying Diversified Companies
One of the challenges in using the ICB is classifying companies that have diversified business activities. While the ICB classifies companies based on their primary source of revenue, this may not always accurately reflect the nature of their business activities. For example, a company may generate a significant portion of its revenue from a business activity that is not its primary business activity, and this may not be accurately reflected in its ICB classification.
This can create challenges for investors and analysts who need to compare companies based on their business activities. For example, if a company is classified in the Technology sector based on its primary source of revenue, but it also generates a significant portion of its revenue from Financial Services, this can create challenges in comparing the company with other Technology companies or with other Financial Services companies.
Challenges in Adapting to Changes in the ICB Structure
Another challenge in using the ICB is adapting to changes in the ICB structure. The ICB is revised periodically to reflect changes in the structure of the global economy and emerging industries. While these revisions are necessary to keep the ICB up-to-date, they can also create challenges for market participants who need to adjust their analysis and reporting to reflect the new ICB structure.
For example, if a new industry is added to the ICB, market participants will need to adjust their analysis and reporting to include this new industry. Similarly, if a company's ICB classification changes as a result of a revision to the ICB, market participants will need to adjust their analysis and reporting to reflect the company's new ICB classification.
Conclusion
The Industry Classification Benchmark (ICB) is a comprehensive, detailed and dynamic system for classifying companies and securities across the globe. Despite its limitations, the ICB provides a valuable tool for investors, analysts, and regulators, enabling a structured view of the world economy and facilitating a thorough and precise analysis of market trends and sector performance.
By understanding the structure and benefits of the ICB, as well as its limitations and challenges, market participants can use the ICB effectively in their investment analysis, portfolio management, regulatory monitoring, and market surveillance activities. As the global economy continues to evolve and new industries emerge, the ICB will continue to play a crucial role in classifying companies and securities, providing a structured view of the world economy, and facilitating a thorough and precise analysis of market trends and sector performance.
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