Tools to check a company’s ESG credentials
Important - The value of investments can fall as well as rise, so you could get back less than you invest, especially over the short term. The information shown is not personal advice. You should seek advice if you’re not sure an investment is right for you.
Investors, markets and companies are increasingly interested in more than just profits.
There are plenty of resources out there to help you assess a company’s financial performance. But information on environmental, social and even governance performance is less readily available.
Fortunately, there are some freely available resources that can help.
This article isn’t personal advice. If you’re not sure if a particular action is right for you, ask for advice. All investments rise and fall in value, you could get back less than you invest.
Looking at annual reports is nothing new, they’ve always been the best place to go for financial results. However, the quality of ESG (Environmental, Social and Governance) reporting in these documents has improved a lot in recent years.
Since April 2019, large UK companies have had to report on their UK energy use and carbon emissions, and lots of companies go much further. That’s on top of having to report on board diversity and the gender pay gap.
However, the raw data usually needs a bit of work to make it useful. Take greenhouse gas emissions, for example.
Greenhouse gas emissions have to be reported both in absolute tonnes of CO2 produced and in tonnes per employee. This covers direct emissions, emissions generated by the electricity the company purchases and emissions from various supply chain activities (although this final category is difficult for companies to estimate accurately).
The problem with a simple ‘total tonnes of CO2 produced’ number is it inevitably penalises larger businesses. An independent pizzeria will produce a lot less carbon dioxide than a national chain – but it could actually be far less energy efficient.
Emissions per employee also has its problems – companies that invest in technology and efficiency employ fewer people for the same level of economic output. Penalising them for this improved performance is counter intuitive.
As investors we’re ultimately interested in overall profits, so instead we would suggest looking at emissions per unit of profit. Sometimes called carbon intensity. If a company can produce the same level of profit but with fewer emissions, that’s definitely a positive. It’s also not a difficult sum to do.
Carbon intensity = total greenhouse gas emissions/net income
This lets you see how much carbon your investments are producing for every pound of profit they generate. Calculate it for every company in your portfolio and you can see which of your investments are the most carbon intensive.
Company risk ratings
While there’s no substitute for looking at individual companies in detail, it’s a time consuming process. Professional investors use specialist ESG rating providers to speed things up. Companies are scored on a number of ESG metrics, letting investors rank companies according to their ESG credentials.
Unfortunately signing up to an ESG ratings service is expensive, and probably out of the reach of most investors.
However, you can access ESG specialist Sustainalytics’ headline ratings free online. It categorises companies’ overall ESG risks as Negligible, Low, Medium, High or Severe. Crucially, it also provides rankings within industry groups. Oil & gas producers are never going to rank well on ESG criteria, but you can see whether you’re investing in one of the better companies in the industry or not.
One of the key questions you should always ask yourself when investing in a company is whether you understand not only the opportunities, but also the risks.
Increasingly, those risks include environmental and social issues – with consumers and regulators taking a tougher stance on companies that don’t meet the expected standards.
We think the Sustainability Accounting Standards Board’s (SASB) Materiality Map is a useful tool for investors looking to get a better understanding of the risks built into their investments.
The map gives investors a visual guide to sustainability issues that could affect financial performance. While risk assessments aren’t broken down on a company by company basis, there are 76 separate sectors listed.
All investments come with risks – some industries are riskier than others and they might not perform like they have in the past. That doesn’t mean they should be avoided entirely. After looking at a sector’s materiality map, you can go back to the annual report and see what the company’s doing to help reduce and manage those risks.