By Ellie Winninghoff
Energy use, water consumption, carbon emissions, and waste. Eco-metrics like these are not exactly the sort of thing you find in a company's financial statements. But in an era defined by peak water and oil, disclosures like these are key to understanding a company's underlying efficiency and resilience-not just its stewardship or citizenship. And as these and other similar metrics become increasingly available, it could create a sea change in the basics of fundamental analysis.
Among the pioneers driving this trend is Michael Muyot, president of CRD Analytics, a New York City-based provider of sustainability investment analytics and indexes. Muyot has aggregated 200 financial, environmental, social and governance (ESG) metrics to create an algorithm to assess and rank the sustainable performance value of public companies.
This ranking, powered by the company's proprietary methodology, is the basis of the NASDAQ OMX CRD Sustainability 100 Index, which celebrated its second anniversary on June 15. The top companies in the index include Merck, IBM, Novartis, Baxter, Credit Suisse, and Banco Santander.
With a two-year annualized return of 13.9% versus 12.4% for its benchmark S&P Global 100 ETF iShares (and 17.8% for the S&P 500,) the CRD index is focused on how ESG factors drive profitability.
"CRD is a bridge between the old way of looking at ESG factors based on a policy and practices focus, and the new way of using results metrics like actual carbon emissions, water consumed or worker accidents," says R. Paul Herman, president of HIP Investor Inc., an San Francisco-based RIA that began offering the index as a managed account in April. "CRD is integrating both, but they weight the results metrics higher. And because it's results-based, it tends to have a positive influence on profitability and shareholder value."
According to Muyot, there are 45,000 listed companies in the world. CRD currently tracks 5,000 total and ranks 1,200 of them. Its universe is limited for two reasons. First, he's tracking only firms that use Generally Accepted Accounting Principles, or GAAP, the American accounting system. Second, companies must meet CRD's minimum requirement for ESG disclosure.
The second requirement is trickier. Thanks to the efforts of the Global Reporting Initiative, or GRI, a multi-stakeholder governed NGO based in Amsterdam that has created the de facto international standard for ESG reporting, companies have started publishing sustainability reports. These reports contain disclosures regarding carbon footprints, energy usage, water consumption, hazardous and non-hazardous waste, employee safety, work-force diversity-the list goes on and on.
Disclosures Can Vary
But the GRI standards are a framework and a process, and it would be daunting for a company to report all the potential disclosures in its guidelines. Most don't. Nor do they necessarily calculate metrics the same way. Company disclosures regarding carbon emissions, for example, are notoriously different.
And what's material to one company's business might not be as material to another's. For example, at pharmaceutical corporations such as Merck or Novartis, the biggest risk may be chemical ingredients and their associated environmental life cycle. For mining companies, abusive behavior with respect to human rights can end up disrupting supplies.