Increasingly, people and the planet are coming before profits. Companies are being evaluated on their environmental, social and corporate governance. ESG for short. Modern portfolio managers need to see more than just a strong bottom line to include a stock in their portfolio. What that, how can we rate a company on ESG?
Before going into the most ESG friendly companies, let’s dig into the concept a bit further. A lot of effort has been made to quantify just how socially responsible companies are. Ratings agencies like S&P and MSCI take in thousands of data points from factors like board diversity to carbon emissions and put it in a figure.
Can oil or alcohol companies be ESG compliant? Yes. It’s not so much what the business does, but how they are improving on their practices. For example, alcohol companies that ensure their ingredients are sustainably sourced can be ESG friendly, even if their product can be damaging. Or a big oil company could have a very diverse board.
Which companies come out on top? Depends on which ratings agency you use. Fitch, S&P, Bloomberg and many more agencies each have different measures for sound ESG policy. Morningstar makes its rankings publicaly available through its “Sustainalytics” platform. Perhaps the most recognisable names include Reuters, the media firm, Scentre Group, which owns Westfields shopping centres, and Mirvac. They all rank in the top 50. Interestingly, no major S&P500 companies make it.
On deeper investigation, transparency doesn’t always pay off for listed companies. Harvard Business Review found for every 10% increase in corporate disclosure leads to a 1.3-2% increase in ESG score variation. The more a company reveals about their governance, the worse off they can be as different ratings agencies weigh the data differently.