The ever-evolving sustainable finance space appears to have entered a paradoxical phase. While some headlines discuss regulations aimed at legitimatizing environmental, social, and governance (ESG) strategies, others highlight firms and politicians that denounce ESG investing altogether.
However, behind the headlines, investment professionals are pushing forward with increasingly sophisticated ESG strategies. Given the overabundance of ESG information in the media, what topics are the most important?
Over the coming months, we’ll perform a deep dive into this question and the specific themes attracting stakeholder attention.
Why is this important? ESG topics continue to evolve as businesses and stakeholder values change. However, news and industry reports can provide insight into the themes stakeholders feel are the most important.
For today’s analysis, we’ve used data on 26 ESG factors defined by the Sustainability Accounting Standards Board (SASB) for U.S. and European large-cap companies over the trailing 12 months (i.e., March 2022 through February 2023). Our universe of U.S. large-cap companies was defined by the SPDR S&P 500 ETF Trust (SPY), while our European large-cap universe was defined by the Vanguard FTSE Europe ETF (VGK).
To see which factors received the most attention, we used a data point exclusive to FactSet Truvalue data known as “Dynamic Materiality.” FactSet’s Dynamic Materiality is a measure of how external sources (e.g., news, industry reports, NGOs, watchdog groups and more) are gauging the importance or unimportance of a particular topic as measured by the percent of articles related to that topic.
We also used the absolute article volume of ESG topics related to each large-cap company using the FactSet Truvalue SASB Scores DataFeed, which extracts and analyzes relevant information from 100,000+ sources. It is updated daily and is not reliant on annual or biannual reporting.
As of February 2023, 10.2% of all articles in a trailing 12-month (TTM) period for U.S. large-cap companies were tagged to the topic of Competitive Behavior, followed by approximately 8.3% for GHG Emissions and 7.6% for Product Design & Lifecycle Management.
The top five categories by percent of article volume (Dynamic Materiality) remained consistent with those discussed in November 2022, except for Product Design & Lifecycle Management, which rose above Data Quality as the third highest category by percent volume.
Competitive Behavior kept its top spot as allegations of anti-trust behavior continue to plague widely covered tech companies. As of February 2023, the Technology sector received 74% of the TTM article volume related to S&P 500 companies and Competitive Behavior.
Rounding out the top five are Data Security at just over 7.5% and Labor Practices at 6.7%.
Source: FactSet
One way to understand topics receiving the most attention is to look at the total article volume and Dynamic Materiality related to that category at the sector level. Regarding Product Design & Lifecycle Management, the Consumer Cyclicals sector receives the greatest article volume and has the highest Dynamic Materiality due to widespread attention to the development of electric vehicles and charging networks. The Finance sector also received significant coverage, but the conversation ranges from the launch of sustainable or ESG products, issuance of green bonds, and discussions around the political climate of ESG and sustainable investing.
Source: FactSet
On a percentage-point basis, Access & Affordability witnessed the largest percentage-point decline of all 26 factors during this period at -1.4 percentage points (from 5.7% to 4.4%). The predominant driver is the continued decline of COVID-19-related article volume tied to companies in the Health Care sector. On the other hand, Selling Practices & Product Labeling recorded the largest percentage point increase of all 26 factors at +1.3 percentage points (from 2.9% to 4.3%).
Source: FactSet
As with November 2022, more than 40% of all articles over the same period were related to GHG Emissions and Product Design & Lifecycle Management. The stark difference between the top Europe and U.S. categories demonstrates the heavy emphasis on climate change and managing the environmental and social lifecycle impacts of products and services in Europe.
Source: FactSet
Labor Practices saw the sharpest increase in Dynamic Materiality with 2.3% (from 3.1 to 5.4).
Access & Affordability continued to decline, while Product Design & Lifecycle Management continued to extend its dominance.
Source: FactSet
The focus categories in this quarter’s report are GHG Emissions and Product Design & Lifecycle Management, which together have consistently garnered over 40% of the article volume related to Europe large caps.
GHG Emissions collect information on direct greenhouse gas emissions from a company’s operations. It also captures how a company manages regulatory risks, environmental compliance, and reputational risks from direct emissions.
It is no surprise that approximately 48% of articles related to GHG Emissions are tagged to companies in the Energy sector, followed by firms in the Industrials and Utilities sectors.
Source: FactSet
Product Design & Lifecycle Management encompasses how ESG concerns are factored into a company’s products and services. This captures neither the direct environmental or social impacts of a company’s operations nor health and safety risks to customers. Instead, it picks up the lifecycle impacts of products—for example, packaging, use-phase resource intensity, and other environmental or social externalities.
Consumer Cyclicals receives approximately 49% of the article volume in this category for Europe large caps, followed by Industrials and Finance. Within the Consumer Cyclicals sector, the top companies by TTM article volume are Volkswagen (VWAPY), Rolls-Royce Holdings (RYCEY), Bayerische Motoren Werke (BMWYY), and Stellantis (STLA). The key theme across each of these companies is the development of electric vehicles and research and development (R&D) related to sustainable fuels.
Source: FactSet
Of the top 10 companies by article volume in the Product Design & Lifecycle Management category, two financial institutions made the list: Banco Santander SA and HSBC Holdings Plc.
HSBC has made news headlines, including:
HSBC will stop dishing out finance for new oil and gas fields
HSBC Asset Management launches circular economy investment fund
HSBC “green” ads banned for omitting information about bank's emissions
Santander headlines are a mixed bag, ranging from projects aimed at reducing CO2 emissions from Formula 1 racing to financing for sustainable energy solutions.
Source: FactSet
Emma Lukens also contributed to this article.
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.
Definitions
Access & Affordability: A company’s ability to ensure broad access to its products and services, specifically in the context of underserved markets and/or population groups.
Business Model Resilience: An industry’s capacity to manage risks and opportunities associated with incorporating social, environmental, and political transitions into long-term business model planning.
Competitive Behavior: Social issues associated with monopolies, which may include, but are not limited to, excessive prices, poor quality of service, and inefficiencies.
Data Security: Management of risks related to collection, retention, and use of sensitive, confidential, and/or proprietary customer or user data.
Energy Management: A company’s management of energy in manufacturing and/or for providing products and services derived from utility providers (grid energy) not owned or controlled by the company.
GHG Emissions: Direct (Scope 1) greenhouse gas emissions a company generates through production and delivery operations.
Labor Practices: Compliance with labor laws and internationally accepted norms and standards. For example, basic human rights for child labor, forced or bonded labor, exploitative labor, fair wages, and overtime pay.
Management of the Legal & Regulatory Environment: Engagement with regulators in cases where conflicting corporate and public interests may have the potential for long-term adverse direct or indirect environmental and social impacts.
Product Design & Lifecycle Management: A company’s ability to address customer and societal demand for more sustainable products and services as well as to meet evolving environmental and social regulation.
Selling Practices & Product Labeling: Includes, but is not limited to, advertising standards and regulations, ethical and responsible marketing practices, misleading or deceptive labeling, as well as discriminatory or predatory selling and lending practices.
Supply Chain Management: ESG risks within a company’s supply chain, including issues associated with environmental and social externalities suppliers create through their operational activities.