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Useful tools to help check a company’s Environmental, Social and Governance credentials

Nicholas Hyett, Equity Analyst, looks at some easily available, and free, tools to help investors check a company’s ESG credentials.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Investors, markets and companies are increasingly interested in more than just profits. The growing popularity of the ‘triple bottom line’ means investors are interested in environmental, social and financial performance.

However, while there are plenty of resources out there to help you assess a company’s financial performance, 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 an investment is right for you make sure you ask for advice. All investments fall as well as rise in value. You could get back less than you invest.

Annual reports

Now looking at annual reports is nothing new, they’ve always been the best source of information on financial results. However, the quality of ESG (Environmental, Social and Governance) reporting has improved dramatically in recent years.

Since April 2019 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 existing board diversity and gender pay gap reporting requirements.

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 both 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 that it inevitably penalises larger businesses. An independent pizzeria will produce significantly less carbon dioxide than a national chain – but it might actually be far less energy efficient. Emissions per employee also seems problematic – 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. 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/profit 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 isn’t any 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 various ESG metrics, essentially allowing investors to 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 everyday 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 gives 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 be asking yourself when investing in a company is whether you understand not only the opportunities a company has, but also the risks it faces.

Increasingly those risks include environmental and social issues – with consumers and regulators taking a tougher stance on companies that fail to meet expected standards.

We think the Sustainability Accounting Standard’s Board (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 you 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 investment comes with risks, and some industries are inherently riskier than others. That doesn’t mean they should be avoided entirely. But, having identified an area of risk from the map, you can then go back to the annual report and look at what the company does to limit and manage those risks.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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