What Is the Industry Classification Benchmark (ICB)?

The Industry Classification Benchmark (ICB) provides a standardized framework for categorizing companies based on their primary business activities. Managed by FTSE Russell, a subsidiary of the London Stock Exchange Group (LSEG), the ICB offers a comprehensive and globally recognized system. This classification helps investors, analysts, and companies gain a uniform understanding and compare businesses across diverse markets worldwide, facilitating better financial analysis and investment decisions.

Understanding the ICB Structure

The ICB system employs a hierarchical structure with four distinct levels, moving from broad categories to increasingly specific classifications.
At its highest level, companies are grouped into 11 main Industries, providing a wide overview of economic activity. Examples include Technology, Financials, Consumer Discretionary, and Energy.

Beneath the Industry level, there are 20 Supersectors, which offer a more granular division within each Industry. For instance, within the Financials Industry, one might find Supersectors such as Banks or Insurance, allowing for a closer look at specific financial services.

The next level consists of 45 Sectors, providing further detail by dividing the Supersectors. Within the Banks Supersector, there could be Sectors like Commercial Banks or Investment Banks. This progressively detailed classification allows for more focused analysis.

Finally, the most detailed level is the Subsector, which categorizes companies into 173 specific groupings. For instance, Commercial Banks might be further refined into Subsectors such as Regional Banks or Global Banks. Companies are assigned to a subsector based on their main source of revenue.

Why ICB Matters

The ICB system offers numerous benefits to various participants in the financial world.
For investors, it assists in portfolio diversification by allowing them to allocate investments across different industries and manage associated risks. It also helps in identifying specific investment opportunities within particular sectors and understanding sector-specific trends.

Analysts benefit significantly from the ICB as it provides a standardized framework for conducting industry research and performing peer comparisons. This consistent classification enables more accurate benchmarking of company performance against relevant industry peers, supporting comprehensive financial analysis and reporting.

Companies also find value in the ICB, as it helps them understand their position within the broader competitive landscape. Businesses can identify market trends relevant to their specific industry and align their financial reporting with recognized industry standards, which can improve transparency and comparability for external stakeholders.

Index providers widely use the ICB as a foundation for creating industry-specific indices and exchange-traded funds (ETFs). The global consistency of the ICB is a considerable advantage, allowing for the creation of products that enable investors to target or benchmark specific parts of the global economy.

ICB Compared to Other Classification Systems

The ICB is one of several industry classification systems used in the financial markets. The Global Industry Classification Standard (GICS) is another widely used proprietary system, developed jointly by MSCI and S&P Dow Jones Indices. While GICS also employs a hierarchical structure, it classifies companies based on how products are used by customers (market-oriented approach), whereas ICB focuses on what the company produces (production-oriented approach). Both GICS and ICB are popular and aim to provide accurate and standardized industry definitions for the global investment community.

The North American Industry Classification System (NAICS) differs from ICB and GICS in its primary purpose and application. NAICS is a government-developed standard mainly used for statistical purposes in North America, focusing on production processes for economic data collection. It is generally more detailed for statistical analysis and economic reporting than for investment analysis, which is the primary focus of ICB and GICS. While all these systems classify industries, their design and intended users vary, making each suitable for different analytical needs.

How ICB is Used

The ICB system finds practical application across various facets of the financial industry.
In investment product creation, ICB is fundamental for constructing industry-specific indices, such as those used by FTSE Russell. These indices allow investors to track the performance of specific market segments. ICB classifications are also used to develop sector-specific ETFs and mutual funds.

Financial analysts and reporting professionals extensively utilize ICB to segment markets and perform detailed peer group analysis. This standardized classification aids in presenting financial data consistently for comparative analysis across different companies and regions. Analysts can use ICB to assess industry trends and evaluate competitive positioning.

Businesses and market researchers leverage the ICB for market sizing and competitive intelligence. By categorizing companies within the ICB framework, they can identify key competitors, analyze market share, and pinpoint emerging industry trends. This structured approach supports strategic planning.

While primarily an investment classification tool, the ICB may also play a supporting role in some regulatory and compliance contexts. Financial institutions might use ICB classifications to organize data for internal risk management or for certain statistical analyses required by regulators.