Investing responsibly in shares

Responsible stock picking

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 understanding a company’s environmental, social and governance performance can be more challenging.

Fortunately, there are some freely available resources that can help.

Annual reports

Looking at annual reports is nothing new: they’ve always been the best place to go for financial results. But they can be a great source of ESG (Environmental, Social and Governance) reporting, too.

Large UK companies are required to disclose information on energy use and carbon emissions, alongside a range of other governance and workforce-related metrics.

However, the raw data sometimes needs a bit of work to make it useful. Take greenhouse gas emissions, for example. Looking solely at the total emissions produced by a company can be misleading because larger businesses naturally tend to have a bigger footprint. One useful measure is emissions per unit of revenue, sometimes called carbon intensity. This shows the emissions associated with every pound of revenue, making comparisons between companies more meaningful.

Similar challenges apply to other ESG data. For example, reporting that a company has increased the proportion of women on its board is useful, but the real insight often comes from looking at progress over time and comparing it with peers in the same industry.

The key is to look beyond headline figures and consider what they tell you about the efficiency, resilience and long-term sustainability of the business.

Sustainability reports

While annual reports often contain some sustainability-related information, many companies now produce separate sustainability or ESG reports that go into much greater detail.

They often include information on topics such as greenhouse gas emissions, energy use, workforce diversity, employee wellbeing, supply chain standards and corporate governance.

The quality of reporting varies between companies, and it’s important to remember that these reports are produced by the companies themselves. However, they can still provide valuable insight into the issues management considers most important and the progress being made against stated targets.

When reviewing a sustainability report, it can be helpful to look beyond the headline commitments and focus on measurable results. Has the company disclosed clear targets? Is it reporting progress against them year after year? Are there areas where performance has improved or deteriorated?

Comparing sustainability reports over time can also help investors assess whether a company is following through on its commitments, rather than simply making new promises.

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 identify the most material sustainability issues.

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.

See our article on ‘how to analyse shares in different sectors’ for more information on the sustainability issues that matter most across a selection of industries.