The Industry Classification Benchmark (ICB) is a widely recognized and comprehensive system for classifying publicly traded companies into specific industry categories. It was developed by Dow Jones and FTSE Russell (a division of the London Stock Exchange Group) and is used globally by various stock exchanges and market participants.
Key Features of the ICB:
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Hierarchical Structure: The ICB uses a four-tier classification system, providing increasing levels of granularity:
- Industries: The broadest categories of economic activity. There are 11 Industries.
- Supersectors: More detailed groupings within each Industry. There are 20 Supersectors.
- Sectors: Further divisions within Supersectors. There are 45 Sectors.
- Subsectors: The most granular level of classification, representing specific business activities. There are 173 Subsectors.
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Primary Revenue Source: Companies are assigned to a subsector based on their primary source of revenue. If a company has multiple distinct lines of business, the classification is determined by the main revenue stream, often based on audited accounts and directors’ reports.
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Global Standard: The ICB is adopted by numerous stock exchanges worldwide, including Euronext, NASDAQ, London Stock Exchange, and others. This standardization facilitates consistent comparison of companies and industries across different countries and regions.
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Purpose: The ICB helps investors, analysts, and regulators to:
- Research and identify companies within specific industries.
- Compare the performance of companies and sectors.
- Diversify investment portfolios effectively.
- Analyze market trends and economic cycles.
ICB vs. GICS (Global Industry Classification Standard):
The ICB is one of two dominant global classification systems, the other being the Global Industry Classification Standard (GICS), developed by MSCI and S&P Dow Jones Indices. While both aim to provide standardized industry classifications, there are some key differences:
- Developers: ICB was developed by Dow Jones and FTSE Russell, while GICS was developed by MSCI and S&P.
- Tier Terminology: While both have a four-tier structure and a similar number of top-level categories (11), they use slightly different terminology for their tiers. For example, GICS uses “Sectors” as its broadest category, while ICB uses “Industries.”
- Classification Approach: The ICB tends to use a more production-oriented approach, classifying companies based on what they produce. GICS, on the other hand, often employs a more market-oriented approach, considering the selling environment and how the market perceives the company. This distinction is most notable in how they classify consumer businesses (e.g., ICB divides into goods vs. services, while GICS uses cyclical vs. non-cyclical, or discretionary vs. staples).
- Specific Classifications: While largely similar at the broadest levels, there can be differences in how specific industries or companies are categorized at lower tiers. For example, coal companies might be classified differently under each system.
Ultimately, both ICB and GICS serve the same fundamental purpose: to provide a structured framework for understanding and analyzing the global equity market. The choice of which system to use often depends on the specific index provider or data source an investor or analyst is working with