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.
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.
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.
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.
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.
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.