Good Companies Guide
Since 2007 The Co-operative Asset Management has produced an annual in-depth study of the UK'S largest 350 quoted companies (FTSE350) around environmental, social & governance (ESG) issues. In 2009 we focussed on what efforts companies were making to ensure they had access to the most diverse pool of talent, with a particular emphasis on gender.
Studies or indices of this nature often satisfy themselves with a conventional appraisal of the companies' corporate social responsibility programmes, which may tell one little about how the company is affected by material ESG issues and its strategy for coping or capitalising on them. In 2010 we decided to turn this around and look at ‘sustainability' in a more strict sense. Our study posed the question of which companies would enjoy financial tailwinds and which face headwinds from critical long-term social and environmental challenges including resource depletion, pollution, demographic change and pressure on the distribution of wealth.
The double page coverage in the main section of The Observer on the August Bank Holiday weekend showcased the way The Co-operative Asset Management adds value to its own investment process by building in these often underappreciated themes. Worryingly, our analysis shows that 56%, or more than half, of the FTSE 350, will suffer negative financial effects from depleting resources, climate change and pollution, while only 10% stand to gain by providing solutions.
Top 10 for Ecology (out of 5) |
Top 10 for Society (out of 5) |
|---|---|
| Eaga 5 | Smith & Nephew 5 |
| Hansen Transmissions 5 | Synergy Health 5 |
| Invensys 5 | Carnival 4 |
| Atkins (WS) 4.5 | Eaga 4 |
| Johnson Matthey 4.5 | National Express Group 4 |
| FirstGroup 4 | Pearson 4 |
| Spirax Sarco Engineering 4 | Standard Chartered 4 |
| National Express Group 4 | Old Mutual 3.5 |
| Severn Trent 4 | Promethean World 3.5 |
| Unilever 4 | SSL International 3.5 |
Ecology driving profit
Eaga scored highly as its product lines in heating and renewables, as well as carbon reduction services, are in the sweet spot of solving climate change and energy challenges. Invensys, an engineering company, is seeing strong demand from clients looking to increase efficiency in logistics and cut energy use while National Express, offering flexible low-cost public transport, will benefit from a sympathetic subsidy and planning environment for public transport in the fight against climate change. Turning to Severn Trent, the water company, we believe it will be allowed to increase revenues on the back of investment into improving the resilience of our fresh water infrastructure while its water testing business will see demand increase as more marginal water supplies need cleaning up. Unilever, though not providing pureplay ‘solutions’ like the wind turbine gear boxes of Hansen Transmissions, will nevertheless benefit from food price inflation as a consequence of pressure on land and resources, while insulating itself relative to competitors to supply disruption through more sustainable supply chain management.
Moving with Society
Smith and Nephew’s hip replacement therapies will be in demand from an ageing population. Controversially, we also see Carnival, which normally performs poorly in ESG ratings, benefiting from this theme, with opportunities to grow in emerging markets as well as an increase in demand for cruises from an ageing population. These prospects may be tempered by the fact that Carnival’s business is highly oil dependent which may eat into margins, and shipping’s high greenhouse gas emissions will likewise soon come under scrutiny. The increased need for essential financial products such as bank accounts, microfinance and insurance in emerging markets will be a strong boon to Standard Chartered and Old Mutual while Pearson and Promethean World, both in different parts of the education market, will benefit from increased spend on literacy and learning in emerging markets as their middle classes expand.
Conclusion
Sustainable business practice is becoming an increasingly influential factor on company bottom line performance. Indeed, we believe such considerations are already a primary strategic driver in a number of industries, while there are few companies that cannot benefit from cost reduction and productivity improvements through a more methodical assessment of their relationships with environmental and social stakeholders.
Our study is a warning of testing times ahead for both business and society. It also presents a major challenge for institutional investors such as The Co-operative Asset Management who will need to ensure that their investments will provide long term returns for their clients.
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