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Decomposing Environmental Impacts By Sector

Market and Economics

By Greg Botto  |  June 17, 2019

In 1987 the United Nations Brundtland Commission defined sustainability as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” Sustainability applies to many factors, but one area where it demands full attention is the environment. With a growing population and continual increase in resource scarcity, focus on the environment and sustainability is becoming, and will continue to be, an important metric in everyday decisions. For financial professionals, this manifests itself in the allocation of resources towards entities who are conscience and sustainable in their use of the environment. However, before being able to make investment decisions regarding the environment, an understanding of environmental impact and how to properly measure it must first be established.

In this article, the components of environmental impact are decomposed into the following as defined by TruCost: Greenhouse Gas (GHG) Emissions, Water Use, Waste Generation, Land and Water Pollutants, Air Pollutants, and Natural Resource Use. All the components measured will be both direct and indirect costs, and TruCost applies a monetary value to each component allowing a comparison of the various components to one another. This analysis also utilizes the FactSet Revere Business Industry Classification System (RBICS) for industry group assignment, and all analysis of TruCost and FactSet data are done within the FactSet platform.

Universe for Analysis

The analysis focuses on publicly traded companies in the United States where there is available data for each of the TruCost components. This gives a universe size of 1042 companies. This analysis is up to date as of December 31, 2018.

For each of the environmental components, a dual-factor ranking was created to rank each of 1042 companies on two metrics: total impact in the component and total impact in the component divided by sales. Both factors are equally weighted in the ranking and allow the analysis to consider both the total impact along with the impact per sales, or the efficiency of the impact in terms of sales. Once having the ranking, the results are then filtered to only display the 1% decile within each component, with the 1% decile being the companies within each component that have the highest ranking. A company is highly ranked if it is high total impact and/or high total impact per sales.

The 1% decile of each component will be analyzed in 2 primary ways: Industry Group Analysis and Total Impact versus Impact per Sales. All analysis is done using the companies within the 1% decile for each of the 6 TruCost components.

Industry Group Analysis

FactSet’s RBICS Industry Group is used to show which industry is most prevalent for each component. The Other category is the combined weight of all the other industry groups not-shown in the charts.

Below are the top industry groups for each of the components:

GHG Emissions

GHG Emissions                                                                                                 

Water Use

Water Use

                                                               

Waste Generation

Water Generation

Land and Water Pollution

Land and Water Pollution

 

Air Pollution       

Air Pollution

Natural Resource Use

Naturaol Resource Use

Looking at the Industry groups GHG Emission, Waste, Air Pollutants, and Natural Resource Use all have Electric Utilities as the top industry group, whereas Water Use and Land and Water Pollutant have Food Production as the top non-other Industry Group.

In addition to the top industry groups within each component, common industry groups also stand out among the components. For example, Electric Utilities and Primary Metals Products appear in all six subcomponents, Other Specialty/Performance Chemical Manufacturing and Agricultural Support Activity Providers are in five components, and Food Production is in four components.

Lastly, two components look to be related in terms of top industry group make-up. Water Usage and Land and Water Pollution both have the same top five industry groups, along with Food Production being the top non-other Industry Group.

Total Waste vs. Waste per Sale

Graphing each company’s total impact versus the impact per sales allows a comparison of companies of different sizes and displays the tradeoff between total impact produced and the efficiency of the impact in terms of sales. Units of total impact are millions of USD and represent the monetary value applied to each component by TruCost.  Below are the results:

GHG Emissions

GHG Emissions 2

Water Use

Water Use 2

Waste Generation

Water Generation 2

Land and Water Pollution

Land and Water Pollution 2

Air Pollution

Air Pollution 2

Natural Resource Use

Natural Resource Use 2

Looking at the chart, the best place in terms of total environmental impact are in the bottom left corner, where there is both low total impact and low impact per sales. For all components, most of the companies are clustered around this bottom left range of the graph. An interesting outlier here is XOM in the GHG Emission component, where in terms of total GHG Emission it leads the pack; however, it is also one of the most efficient in terms of GHG Emission per Sales.

The worst place in terms of sustainability and waste are in the top right corner of the graphs. A few outliers approach this region, particularly BG in Water Use, which is leading the category in both total water usage and having the highest Water Usage per Sales.

Looking at the axes values between each component also gives an indication into the upper limits of each metric. Looking at the Y axis of each component, Water Use has the largest upper limit in terms of total impact between 20,000 and 25,000 whereas looking at the X axis of each component, Natural Resource Use has the largest upper limit in terms of total impact per sales with a top range between 1.8 and 2.0.

In addition, calculating the total impact of each component allows a comparison of which component is generating the largest impact on the environment. Taking the sum of each company’s total component impact, Water Use component has the largest total impact at $99.6 billion . This is followed by GHG Emission at $82.4 billion, Land and Water Pollution at $25.7 billion, Air Pollution at $21 billion, Natural Resource Use at $19.7 billion, and Waste at $6.7 billion.

Calculating the impact per sales gives an indication into the efficiency of a component’s impact generation in terms of total sales. By taking the total impact for each component above and dividing by the total sales for each component, Water Use also has the largest impact/sales at 0.106, meaning that for every $1 million sale, $106,000 of Water Use impact is generated. This is followed by GHG Emission at 0.077, Natural Resources at 0.041, Air Pollution at 0.029 Land and Water Pollution at 0.027, and Waste at 0.011.

Summary

Below is a summary of the analysis of the various environmental components:

Summary of Analysis

The table further illustrates Water Use is the component with the highest impact as well as impact efficiency per sales. As a percentage of total impact, Water Use makes up around 39% of the overall environmental impact when compared to the other components, with the next closest component of GHG Emissions at around 32%. The impact generated per sales is also around 40% larger than that of the second worst efficiency component, of 0.106 for Water Use versus 0.077 for GHG Emissions.

The table also displays the most common sectors as defined by RBICS industry groups, previously mentioned in the industry group analysis section. We can see above Electric Utilities and Primary Metals Production being top industry groups in all 6 components.

Decomposing environmental impact into components allows a more thorough understanding of the pieces that contribute to environmental waste. Grouping companies within industry groups for each component reveals prevalent industries that contribute to environmental waste. Calculating the total impact and total impact per sales indicates which component contributes the most to overall environmental impact, as well as the efficiency of each component at utilizing environmental waste in terms of generating sales.

All of this provides a clearer picture of the features that contribute to environmental impact and allows for more impactful decision making and investing when it comes properly allocating resources towards entities who are conscience and sustainable in their use of the environment.

ESG in insurance investing

Greg Botto

Sales Specialist, Americas Analytics

Greg joined FactSet in 2015 and is based in San Fransico.

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