Higher ESG Impact Can Lead to Higher Profit Potential

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Higher Impact Can Lead to Higher Profit Potential

Companies with higher HIP Impact (ESG) Ratings have realized higher 5-year TSR (Total Shareholder Return)

Since 2006, 12 years ago, the HIP fundamental philosophy has always sought to capture how solutions for human, social and environmental challenges can link to lower future risk and higher profit potential – what we call “human impact + profit.”

Our HIP team calculates impact ratings based on up to 30 factors of impact and ESG (environmental, social, governance factors), which all have positive correlations to  financial drivers of future risk and return potential, like total shareholder return (TSR, which includes capital gains and reinvested dividends), as well as return on equity (ROE) and return on invested capital (ROIC). Here we’ll explore how HIP has correlated with five-year financial returns, or TSR.

Generally, corporate equities around the world that are extractive or destructive of people and planet garner lower HIP Ratings, and also seem to suffer lower than average (or even negative) financial returns for shareholders.

Yet global equities that rate highly for being sustainable, regenerative or transformative of people and planet have realized stronger than average 5-year shareholder returns, calculated as of 12/31/2017.

 

5-Year Total Shareholder Return (Annualized TSR)
For 6,347 HIP-Rated Global Equities, as of 12/31/2017

Source: HIP Investor Ratings; Thomson Reuters (financials)

Stock market gains around the world have been quite strong over the last five years. Across our HIP-rated universe, the 5-year median total shareholder return from year-end 2012 to year-end 2017 of 6,347 companies is +10.4% annualized yearly average.

The gains increase with higher HIP Ratings and decrease significantly with lower HIP ratings. In the middle HIP Ratings brackets, from 30.1 to 50, we see a slight outperformance of the median at +11% annualized. These companies are not quite reaching the level of a “net positive” (over 50 on the HIP scale of 100) impact on society but are doing an average job as corporate stewards.

In the 20.1 to 30 rating bracket we note a slight decline of TSR below the median at +10.3% annualized. With nearly 2,000 companies, this low-rated bracket is the biggest. Will more corporate actors strive for true net positive impact on society going forward? With higher TSR possible, it could be in everyone’s best interests, including shareholders.

The true laggards of the field with lower than a 20.1 HIP rating are also true laggards for returns. The 10.1-20 HIP rating bracket only returned an average of +4.0% annualized. Even worse the 104 companies which didn’t manage to hit more than 10 points on the HIP rating scale lost money and returned a negative TSR of -2.7% annually over 5 years, as of 12/31/2017.

On the upper end of the HIP scale we see companies which have net-positive impact and outperform on financials. The 1000 companies with HIP Ratings between 50.1 and 80 outperformed the median financials by more than +2 percentage points (or 200 basis points) annualized.

The “high positive impact” corporates, which respect the environment while providing an important products and services that improve society managed to outperform the median financially by +5.9 percentage points.

At HIP our methodology rates highly firms investing in people as an asset, optimizing natural resources, transparently managing the firm, and building trust with society are likely to build positive returns on investment. Engaged employees who treat customers right can yield recurring revenues and rich referrals. Efficient use of oil, land and water typically enhances operating margins and frequently avoids future price shocks. Higher revenues and lower costs can result from higher-efficiency and sustainability performance.

With HIP Ratings, poor impact performance on our community typically correlates with weak performance for shareholders, while strong performance for environment and society can correlate with good to great financial returns for shareholders.

Below we highlight examples of companies in each HIP Rating bracket.

 

WHO IS MORE HIP – AND WHO IS LESS HIP?

Behind the HIP Ratings, Pillars and Metrics are quantitative measures of impact covering 6,347 global companies as of 12/31/2017, with their goals to both perform financially and address long term systemic changes in society, climate and consumer trends. To illustrate the HIP Ratings, we selected a company from each impact-ratings bracket to understand actual HIP Metrics, and what initiatives impact leaders deliver.

COUNT OF GLOBAL EQUITIES RATED BY HIP, IN EACH SEGMENT

Source: HIP Investor Ratings

 

0-10 HIP Rating example

Suncoke Energy (ticker: SXC)

HIP Rating = 8 (of 100)

5-year TSR = -4% annualized
(as of 12/31/2017)

Suncoke Energy eroded shareholder value a total of -4% annualized over the last 5 years, as of 12/31/2017. As a coke producer for steel mills in the US, it is a fossil fuel producing company, so could choose to be efficient and regenerative for the environment as well. However, Suncoke manages to score 0% on HIPs Earth Pillar. To score this poorly it is not only necessary to not report on emissions, waste and water consumption but also to not have any policies in place to improve resource efficiency and emissions.

HIP also found very poor performance in terms of how Suncoke treats their employees. This rating is corroborated in their Glassdoor reviews. Only 20% of the reviewers would recommend working for Suncoke to a friend.

Overall, we see Suncoke lacking in how they treat the people they impact as well as ignoring their environmental obligations.

 

10-20 HIP Rating example

Universal Corp. (Tobacco Leaf) (ticker: UVV)

HIP Rating = 12 (of 100)

5-year TSR = +5% annualized
(as of 12/31/2017)

This huge conglomerate produces tobacco. Universal returned +5% annualized total shareholder returns, lagging the overall average, over the past 5 years, as of 12/31/2017. While a corruption suit Universal faced was settled back in 2010, Universal still lacks comprehensive disclosures for shareholders to see its impacts. Universal has pilot projects on sustainable action but appear to lack a systemic approach which integrates their sustainability efforts with their core business. Even though Universal strives to be a better company it is still in the business of selling raw product for an addictive substance which contributes to the death and lower health of thousands of lives over the last half century, which results in one of the lowest HIP Ratings for Products and Services.

 

20-30 HIP Rating example

International Speedway (ticker: ISCA)

HIP Rating = 26 (of 100)

5-year TSR = +9% annualized
(as of 12/31/2017)

International Speedway owns NASCAR and IndyCar race tracks. As a business which thrives on high-carbon-emissions car races, International Speedway is aware of sustainability issues and has some programs and projects to address recycling and transportation to and from its events.

These programs are helpful progress towards sustainability, although systematic improvements would be even more purposeful in corporate management, policy and reporting on impacts and sustainability.

 

30-40 HIP Rating example

Commercial Metals Company (ticker: CMC)

HIP Rating = 31 (of 100)

5-year TSR = +11% annualized
(as of 12/31/2017)

As a steel manufacturer Commercial Metals Company is in a very energy intensive industry, which could give it an opportunity to reinvent an approach to emission reductions. Worker safety and environmental concerns are central issues for them. CMC’s sustainability webpage lists some of the results achieved in improving its environmental performance. To further improve, Commercial Metals must increase disclosure of all relevant metrics for people and planet. Selective disclosure may misrepresent the impact Commercial Metals has on the environment and makes it tough for investors to verify and compare to competitors.

 

40-50 HIP Rating example

The JM Smucker Co (ticker: SJM)

HIP Rating = 47 (of 100)

5-year TSR = +10% annualized
(as of 12/31/2017)

JM Smuckers is close to reaching an “above-50” HIP Ratings towards the “net positive” threshold, with good sustainability reporting and pays its employees well.
To increase its HIP Rating further, Smucker could report more on materials usage and resource efficiency, beyond greenhouse gases (GHGs), including concrete numbers and policies for employee engagement and customer satisfaction.

With 30% female board members, Smucker shows leadership to be gender-balanced. However, there is not yet gender diversity disclosure of the share of women in management positions.

 

50-60 HIP Rating example

Whitbread (ticker: WTB in London)

HIP Rating = 56 (of 100)

5-year TSR = +13% annualized
(as of 12/31/2017)

Whitbread is the UK’s largest hotel, restaurant and coffee shop operator, and has managed to achieve HIP Rating above the “net positive” threshold, belonging to the 1000 best companies globally in our HIP database.

Whitbread has set and achieved greenhouse gas emission reduction goals, shows commitment to improving the share of women managers, and have management processes in place to ensure sustainability is integrated across its business decisions.

Whitebread could enhance its HIP Impact Rating even further, by producing quantitative metrics on energy efficiency, waste reduction and water usage. This would help investors compare Whitbread, and their ecological footprint, to competitors

 

60-70 HIP Rating example

Medtronic (ticker: MDT)

HIP Rating = 68 (of 100)

5-year TSR = +17% annualized
(as of 12/31/2017)

Medtronic is one of the global leaders in medical technologies, achieved +17% annualized total shareholder returns over the last 5 years, as of 12/31/2017, and also leads in impact.

Beyond supplying hospitals with technologies that are fundamental to treating patients back to health, Medtronic ensures that they do so as environmentally efficiently as possible. Medtronic’s sustainability reporting not only discloses quantitative values for greenhouse gas emissions, recycled waste and other indicators, but also has set targets to improve resource efficiency and even tracking and disclosing changes.

While Medtronic’s reporting is excellent, to further improve they will have to show that their efforts provide better outcomes than competitors and demonstrates even more efficiency over time.

 

70+ HIP Rating example

Symantec (ticker: SYMC)

HIP Rating = 74 (of 100)

5-year TSR = +15% annualized
(as of 12/31/2017)

Symantec is a computer security company which achieved +15% annualized total shareholder returns over the last 5 years, as of 12/31/2017. As an absolute leader in impact Symantec has its own corporate responsibility blog and extremely good disclosure on its sustainability reporting. Symantec has also created targets to improve its energy efficiency and greenhouse gas emissions. To improve its lower than 50% gender diversity, it is tracking progress in share of employees and managers who are women. As a true leader, Symantec could be one of the companies to push further up on the HIP scale towards 80%, 90% or higher.

 

Want to see more HIP Ratings? Go to the HIP Impact Ratings Portal

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Onindo Khan
Follow Onindo Khan:

Onindo manages the production and deployment of HIP’s corporate ratings. He ensures that the HIP ratings continuously represent our most up to date analysis of corporate results relating to human impact and profit. Onindo earned his M.Sc. in Logic from the University of Amsterdam and holds a B.Sc. in Mathematics from the Ruhr Universität Bochum. Before joining HIP, Onindo worked as an analyst in the governance team at As You Sow, focusing on compensation issues, like overpaid CEOs. Out of the office, Onindo enjoys being outdoors while sailing, biking or hiking.

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