Craigs Investment Partners, October 2021
Investors are increasingly considering non-financial sustainability measures, in combination with traditional financial measures, when assessing a company. Not only can this help align investments to different sets of values and encourage companies to make positive change, it can also identify risks to the longevity and sustainability of a company’s business model. Here at Craigs, we have developed company sustainability scores which provide a snapshot of how companies rate across three key areas of business sustainability – environmental, social and governance (ESG).
Sustainability is about more than just a company’s impact on the environment. It also incorporates a company’s societal impact, along with how it is governed. Just as a company that has a detrimental impact on its environment is more likely to have an unsustainable business model, so too is one that has a negative impact on society, or that has poor governance practices.
Assessing a company’s sustainability can help align investments to an investor’s set of values. It can also help drive positive change by signalling to companies what areas stakeholders see as important, and where certain issues may need to be addressed. Furthermore, a company with an unsustainable business model presents additional risks over the long-term of which investors should be aware. Considering a range of non-financial measures can therefore aid an investor in managing risk and help avoid investing in companies that may find themselves involved in controversy or facing a declining revenue outlook.
Most listed companies now have at least some form of sustainability disclosure, be it an annual sustainability report, an integrated annual report, or some other form of disclosure. According to the Governance and Accountability Institute, 90% of S&P 500 companies published sustainability reports in 2019, up from 20% in 2011.
90% of S&P 500 companies now publish sustainability reports
One of the most common ways of incorporating sustainability into an investment process is via the integration of environmental, social and governance factors. This is termed ‘ESG’ investing. More than simply screening and excluding companies engaged in certain business areas (e.g. gambling, fossil fuels or tobacco), ESG investing takes it a step further and includes a range of non-financial measures to help identify sustainable and non-sustainable businesses, and those taking active steps to improve the sustainability of their businesses. This is the approach we have taken when developing our sustainability scoring framework.
The analysis of environmental, social and governance (ESG) factors for a company is incredibly difficult.
While certain things can be measured (like a company’s greenhouse gas footprint or the number of independent directors), many things cannot. Furthermore, the issues affecting each individual company can be quite unique. We must also constantly weigh multiple factors against each other, and against other companies, to arrive at a score we believe reflects where the company is at and provides useful information for investors. Our analysis also considers any recent controversies the company has been involved with.
We have taken a realistic and pragmatic approach to scoring each company, with a focus on what we think is important from the viewpoint of a private investor. Our approach is consistent with others in the industry, while being tailored to our requirements and displayed in an easy-to-understand manner. Our scores are separate to our investment recommendations.
We have not benchmarked or ranked each company against its sector peers (as many ESG providers and funds do). Instead we have allocated each company an environmental score, a social score, a governance score, and an overall sustainability score based on the individual company’s merits against all other companies (an equal weighting of the E, S and G scores). Each company has a one-page sustainability overview which highlights the key issues that investors should be aware of. All scores are out of five.
As with anything, we expect our approach to evolve over time. The scores of many companies will also change for a range of reasons; be it a greater focus from the company, improved disclosures, business changes and so on. We hope that our focus on this area and continued engagement with companies leads to improved disclosures and actions from companies.
Would you like to find out more or see how your favourite companies have scored? Talk to an investment adviser to discuss becoming a client. Our sustainability scores are only available to Craigs Investment Partners clients.