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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.

Annual reports

Looking at annual reports is nothing new, they’ve always been the best place to go for financial results. In recent years, more companies are including ESG (Environmental, Social and Governance) reporting in these documents too.

Since April 2019, large UK companies have had to report on their UK energy use and carbon emissions. 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 can 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 revenue. Sometimes called carbon intensity. If a company can produce the same level of revenue but with fewer emissions, that’s definitely a positive.

Carbon intensity = total greenhouse gas emissions/total revenues

This lets you see how much emissions are being produced by the companies for every pound of revenue they generate. If you calculate it for the companies in your portfolio, you can compare their different carbon efficiency levels.

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.

Materiality Maps

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, social and governance 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 Finder is a useful tool for investors looking to get a better understanding of the risks built into their investments.

The tool enables investors to search for an industry or publicly listed company and see the risks that are deemed relevant to them. Of the 26 potential issues, SASB highlight which are most likely to affect that particular industry or organisation, and why.

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 the materiality map, you can go back to the annual report and see what the company is doing to help reduce and manage those risks.