(Gerard Wynn is a Reuters market analyst. The views expressed
are his own)
By Gerard Wynn
LONDON, Sept 22 Sustainability data can help
spot winners in a future, greener economy, but only with active
political lobbying to abolish fossil fuels subsidies, for
example, as sagging equity markets revive talk of alternative
Environmental social and governance (ESG) data measure
performance in areas like health and safety, labour rights,
corruption and transparency on carbon emissions reporting.
ESG leaders can out-perform in equity markets, as related
indices point to quick-witted, high-achieving companies.
The rapid response of Puma, Adidas and Nike to Greenpeace
demands to halt discharge of toxins into Chinese rivers
illustrated ESG awareness in leading companies.
Such companies want to be seen as green, but whether they
are is more complicated.
That uncertainty is reflected in broad ESG indices which may
claim to be sustainable but use broad criteria which could
please many but fail to capture anything precise.
The UK green group Forum for the Future and the investment
arm of insurers Aviva PLC published a report this month which
tried to capture what types of companies would flourish in a
sustainable economy of 2040.
Such companies may underperform now, given government
policies and resource limits may still disadvantage them.
The low-carbon sector, one narrow aspect of ESG, has
underperformed oil and gas and wider benchmarks, see chart
Active lobbying must accompany sustainable investing: G20
governments pledged to abolish fossil fuel subsidies two years
ago, but that promise is unfulfilled despite prodding by the
International Energy Agency (IEA).
The Aviva/Forum for the Future report pictured how five key
sectors - food, health, energy, mobility and finance - should
look in 30 years time, for example in resource efficiency and
Broad green indices apply sustainability criteria across a
wide range of stocks, to catch a wide, investable mix. The
approach can yield inconsistent results.
The Carbon Disclosure Project (CDP) has over the past nine
years successfully pressed the world's biggest companies to
reveal environmental strategies by sending a questionnaire and
publishing the answers.
In its global 500 report last week, it suggested "a strong
correlation" between returns on investment in a company's shares
and an index which measures corporate fulfilment of emissions
The top leaders in the index were Philips Electronics, BMW,
Honda Motor Company, Tesco, Bank of America, Westpac Banking
Corporation, Bayer, Cisco Systems, SAP and Sony Corporation.
Philips and Cisco are positioning in energy efficiency but
it's hard to explain all these low-carbon leaders.
Among automakers, BMW makes just two and Honda none of the
72 low carbon-emission models qualifying for zero road tax in
Britain, according to the Vehicle Certification Agency.
The Dow Jones Sustainability Index (DJSI) identified three
identical companies including Philips and BMW in its 19
"supersector leaders", based on a broad questionnaire ranging
from gender equality to remuneration transparency.
The DJSI has performed well compared with world stocks.
How to make indices, or ESG data, deliver something more
precise is the challenge.
A sector-specific approach, for example focused on wind,
solar or energy efficiency, runs the obvious problem of a less
liquid group. HSBC has selected companies which make revenues
from climate change-related themes, for a broader base.
But sector approaches also risk losing broader
sustainability themes such as corporate governance and social
responsibility, and dropping ESG leaders. Governance in
particular, the checks and balances of how a company is run, is
key to performance.
Active investors argue that in sustainability, in
particular, a discriminating, hands-on approach is needed, using
ESG data and FTSE Group-type scoring to spot companies more
likely to thrive in a sustainable world with tougher social
governance and environmental laws.
(Editing by Jason Neely)