Potential investor risk is one way to consider the elements comprising many ESG scores. Through that lens, one could further consider risks as material or immaterial. But to make that determination, you first need to identify the various risks.
FactSet’s Truvalue Dynamic Materiality scores indicate topics brought up the most across external documents such as news articles, industry reports, NGOs, watchdog groups, and social media. Tracking frequently discussed topics can point to the risks investors are concerned about and how they rise and fall in importance over time. A rising risk should draw investor attention to find out what is causing a certain topic to be discussed more frequently. In this article, we specifically look at material topics for the Transport sector—railroads, trucking, and air freight—including how they have changed and what is trending now.
We reviewed Dynamic Materialty scores from daily scraping of more than 100,000 documents to identify topics (risks) investors might be focused on. These exclusive-to-FactSet scores are updated daily and are not reliant on annual or biannual corporate reporting. The topic mentions are aligned with 26 SASB materiality categories.
For five leading North American railroads, the top 10 materiality factors are illustrated through time in the chart below. We show any material topic that was ever >5% of articles at any given point in time. Some issues may not ever come up for a company or an industry. The Y-axis in the charts indicates the percentage of material topics being discussed at a particular point in time. Presenting material topics—though ESG in original intent—as issues or risks can lead investors to see which issues or risks are rising and fading across an industry and, perhaps more importantly, to consider when an issue might again change in importance.
Source: FactSet
The rail data shows that labor practices (dashed blue line) were a rising issue throughout 2022 after declining over the prior four years. This was likely due to the labor negotiations in mediation during the year. Interestingly, too, the rise in the labor practices issues crowded out historical moderate-level issues of greenhouse gas, employee health, competitive behavior, and the physical impact of climate change. Their relative importance could rise again as labor practices concerns fade.
Critical incident risk management (dotted blue line) peaked in mid-2019 amid passenger train accidents and has recently picked up again, likely due to the derailment and chemical spill in Ohio.
It is interesting to note as well that labor practices and critical incident risk management together account for over half of the collected rail topics.
A third topic of interest for the rails, and indeed the entire economy, is supply chain management (gray line). It is beginning to more definitively decline as a hot topic given pandemic-era supply chain issues are easing.
The chart below also shows a different view of railroad data. For most companies and industries, we have found the top 10 - 15 topics of the 26 total usually account for more than 90% of materiality scores with many being either insignificant or not discovered.
Source: FactSet
As shown in the chart below, greenhouse gas emissions is the top material factor for the trucking industry. Interestingly, labor practices peaked in late 2019—perhaps due more to driver availability concerns than poor labor relations—but have not increased of late with some union contracts up for renewal.
Also of note is the supply chain issue has begun to fade amid growing looseness in truck capacity and a bit of rolling in trucking rates.
Source: FactSet
To see news that might be driving changes in importance across material topics, we use our Spotlight function. It surfaces the main stories that determine the topics trending high relative to others. Below is an example that highlights trucking company JBHT’s stories during the past year.
Source: FactSet
In air freight we again see a slightly different trend in leading issues over time. Supply chain management and greenhouse gases are the leading issues, but both have begun to decline in recent months—with the decline in greenhouse gases as an issue particularly surprising. Rising material topics of interest include labor practices, employee health, and employee engagement. Looking back, labor and employee engagement issues perked up briefly in 2019, and then energy management and business model resilience in late 2021.
Source: FactSet
We can also view how specific topics are evolving across subsectors. The two charts below, for example, show how greenhouse gas emissions and supply chain management have risen and fallen in importance across the sector over time. In the greenhouse gas emissions chart, we see this topic has been rising more in relative importance within the trucking and marine subsectors than in the air freight and rail subsectors.
Source: FactSet
When turning to supply chain management—which again may hold keys to economic and global trade issues as well as capacity issues (a.k.a pricing)—we see this is a far more important issue for air freight (particularly since late 2019) than for other transportation subsectors. In addition, there is less interest in that issue on the margin for trucking and rail.
Source: FactSet
For further research, FactSet’s Truvalue capability also provides the actual articles from which it is pulling data to generate sentiment on its 26 material risk topics. Below is an excerpt from the transportation stocks highlighting FedEx articles in 2022 and 2023. The actual output file includes both the article’s URL and a set of summary bullet points.
Greenhouse Gas Emissions Articles Counted in 2022
Supply Chain Articles Counted in 2022
Investors and analysts spend most of their time talking about upside potential return, whereas a focus on avoiding risks could benefit portfolio performance. In other words, avoid underperformers!
FactSet’s Truvalue analysis of materiality topics over time—while based in an ESG context—can also be viewed as a study of evolving risk factors and an indication of the issues most important for a company or industry. Our Spotlight reports, too, can expedite discovery of what is being said and by whom.
Summer Xiao of FactSet contributed significantly to the research behind this Insight.
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.