Active investment commentary & analysis

ESG issues faced by the investment community

A comprehensive integration of Environmental, Social and Governance (ESG) factors into company investment analysis is only possible if a universally recognized level and standard of disclosure is adopted by listed corporations. Unfortunately, this is currently very far from the case. Even for the largest companies there are gaps in the data which makes such scrutiny almost impossible. Our recent analysis of a FTSE100 real estate company highlights the issues faced by the investment community.

 A precursory look at the company’s literature looks highly encouraging with some ambitious targets set for environmental improvements, such as a 40% reduction in the energy intensity of the company’s estate accompanied by an increase in renewable energy generating capacity across the group. The culmination of these efforts being a 40% reduction in CO2e emissions by 2025. At face value this appears like a company at the forefront of the move to align itself with the principles of the Paris Agreement. Further analysis, and some discussions with management, leads to a very different conclusion. The environmental targets apply to what the company call their “responsible space” and “qualifying buildings”. Unfortunately, there is no definition given for such terms but further investigation makes it clear that they refer to only 37% of total floorspace. This makes quantifying and assessing the environmental targets a meaningless exercise. Likewise, the promise on renewable energy which only applies to generating capacity not energy produced. When asked, the company states that they do not disclose the level of renewable energy they produce or purchase, again making their targets appear redundant. And this is a FTSE 100 company, these issues tend to be encountered with greater frequency and magnitude the further down the market capitalization range you travel.

 Despite the huge interest generated around ESG investing and the proliferation of funds which operate within this space the lack of take up of comprehensive ESG reporting from listed entities is notable.

 This is why SVM’s investment approach places great emphasis on engagement and seeking to improve the disclosure of our funds’ holdings. This allows us, just as we do with company financials, to assess the ESG potential embedded within the investment case engaging with companies to express our concerns and promote change. In the case of the FTSE 100 company we have been promised disclosure will be made on the issues we have identified throughout the course of 2020 and, as the ESG hungry community prices such actions, the share price, and in turn our fundholders, should benefit.