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Earth Day and ESG: The Stakeholder View of Top Firms

ESG

By Eliot Caroom  |  April 19, 2022

Earth Day and Earth Week in 2022 are starkly different from the annual holiday in past decades: this is no time to simply plant a tree, pick up some roadside trash, and call it a day.

Investors today must focus on climate and environmental risk as the U.S. Securities and Exchange Commission (SEC) pushes for mandated carbon footprint disclosures. At the same time, risks to corporations mapped out by the Task Force on Climate-related Financial Disclosures (TCFD), including reputational, legal, and policy risk, are increasingly in focus.

Beyond climate, though, investors can’t assess corporate performance on biodiversity and ecological issues solely through a self-reported corporate social responsibility (CSR) report. Corporate behavior, both positive and negative, is tracked by Truvalue Labs, a FactSet company, by analyzing stakeholder conversations from newspapers, trade journals, and non-governmental organizations (NGOs).

A 2019 study by Witold Henisz and James McGlinch of the Wharton School found a relationship between Truvalue Labs’ environmental, social, and governance (ESG) scores on biodiversity and material credit events and credit risk. In their study, Henisz and McGlinch write that, “biodiversity and environmental ratings of companies in the commodity value chain were highly positively correlated with a number of ESG risks.”

What do the data show today? Here we examine the companies and industries with the biggest impact on the environment, beyond simply climate concerns.

Tracking Corporate Behaviors with Ecological Impacts Data

How can investors track company behavior that affects nature outside of carbon emissions? The Sustainability Accounting Standards Board (SASB) provides a framework and ESG category to do just that.

Ecological Impacts

The category addresses management of the company’s impacts on ecosystems and biodiversity through activities including, but not limited to, land use for exploration, natural resource extraction, and cultivation, as well as project development, construction, and siting. The impacts include, but are not limited to, biodiversity loss, habitat destruction, and deforestation at all stages – planning, land acquisition, permitting, development, operations, and site remediation. The category does not cover impacts of climate change on ecosystems and biodiversity.

Source: Sustainability Accounting Standards Board (SASB)

News about a company’s negative ecological impacts could easily generate reputational blowback or cause legal issues, situations that investors will want to avoid.

Truvalue Labs identified the industries with the greatest share of ESG data volume in the Ecological Impacts category in the past 12 months through March 31, 2022. The industries are defined by SASB’s Sustainable Industry Classification System® (SICS®), which groups companies based on shared sustainability risks. Using a scale of 0 to 100, Truvalue generates a score for each industry where 50 represents a neutral assessment; the closer the score is to 100, the more positive the sentiment, and the closer the score is to zero, the more negative the sentiment.

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The Forestry Management industry tops the list of industries with the greatest percentage of ESG data based on stakeholder conversations from Ecological Impacts (21.89%). But notably, the average score for the industry is 59—one of the highest average scores in the Top 10. That can come from positive scores due to sustainable forestry and projects to preserve biodiversity.

The worst score for Ecological Impacts among the highest-volume industries is Oil & Gas Midstream, followed by other extractive industries: Oil & Gas - Exploration and Production and Metals & Mining.

Corporate Leaders in Ecological Impacts Performance

Where can investors find ESG outperformance that may indicate a responsible firm with less downside risk of reputational damage or legal liability?

Below is a list of top performers across five different industries, generated using Truvalue Labs data for Ecological Impacts. To be included on this list, firms must have at least 26 articles in the trailing 12-month period (TTM) in data volume, with at least 15 articles tagged to Ecological Impacts, and at least 5% of TTM data volume drawn from that category.

  1. Tetra Tech, an Engineering & Construction Services firm, will promote biodiversity in West Africa as part of a contract it won from the U.S. Agency for International Development (USAID). Environmental experts who work for the firm will focus on regulatory reforms that can help combat wildlife trafficking.
  2. Hero Motocorp Ltd, in the SASB Automobiles industry, is an Indian firm that primarily manufactures motorcycles and other two-wheel vehicles. It signed a 10-year deal with a local government in Haryana, India, to restore and conserve a 380-acre biodiversity park.
  3. Travel platform Expedia, classified by SASB as an Internet Media & Services firm, built a headquarters in Seattle on a 40-acre former biotech site that was contaminated with buried trash. In constructing the new campus, Expedia hired soil scientists and replaced meters of dirt, creating a microbiome and seven different soil profiles to support a new set of greenery, including native grasses. The hope is that perennial plants will become self-sustaining, and beehives will find a home on the grounds alongside Expedia workers.
  4. Located in Inner Mongolia, Yili Industrial Group Co Ltd is a Chinese Meat, Poultry, and Dairy giant. The company has collaborated with the World Wildlife Fund (WWF) for years and contributes a share of its profits to elephant protection. In addition, the milk producer reports that it encourages suppliers to use green packaging and recyclable materials.
  5. Barratt Developments PLC is an international Home Builder that has had numerous projects hailed for their positive effects on the natural world. These include a partnership between a subsidiary and the UK Royal Society for the Protection of Birds to design and use special swift homes designed to match bricks in the development. Swift populations have declined sharply with losses of older brick buildings where they nest. The development also includes nesting sites for house sparrows, tawny owls, and kestrels. “Hedgehog highways” are also planned for the site, with holes in fences and walls that are large enough to permit hedgehog traffic.

Conclusion

While climate is an important environmental consideration for investors, it is not the limit of what matters to stakeholders, including neighbors, employees, and customers of corporations. Ecological impacts still matter and are justifiably an area for risk analysis, as shown below.

climate-related-risks-opportunities-financial-impact-tcfd

Policy and legal risks related to ecological impacts and biodiversity will not disappear in a world where extinction rates are increasing and increasingly crucial species to humans (such as pollinators) are suffering. The same is true for reputation risks—as demonstrated above, stakeholders do take note of positive company performance in this area. Positive and negative reputation risk is an important area to monitor for ecological impacts.

In short, this Earth Week and after, investors must consider climate, and beyond that, ecological impacts of companies, to truly capture all the risks and upside present in their holdings.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

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Eliot Caroom

Senior Product Manager

Mr. Eliot Caroom is a Senior Product Manager at FactSet. In this role, he researches new applications for ESG data and develops products in collaboration with engineering colleagues. Prior, he authored research for Truvalue Labs, a FactSet Company, worked for Bloomberg News as an oil markets reporter, and reported on utilities, solar, wind, and nuclear energy for The Star-Ledger. Mr. Caroom earned a master’s degree in business journalism from the Craig Newmark Graduate School of Journalism at CUNY.

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The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.