One of the best (and most infuriating) things about being an investment manager is having an inbox that is very large. I receive hundreds of emails per week from scores of different investment management companies, economists and strategists for instance. I am invited to dozens of web conferences. I have lots of phone calls discussing a great deal of investment ideas and opportunities. I very rarely see absolute consensus on the attractiveness or not of a market or an investment style. There are always ways to find a different argument, or the ability to see the idea from a different angle and this ultimately means there is no room for complacency. It also means that there is plenty of opportunity to get things right and wrong. Although you can’t argue with numbers, there is a great deal of subjectivity around those numbers, and that’s why for instance I like debates when you put fund managers together to discuss one stock. This could be due to “Fund Manager A” having an x% weight and “Fund Manager B” having a y% weight. It could be the difference between one manager owning the stock and the other not. It could be one owning a small weight and the other owning a large weight and understanding why.
One such email that landed in my inbox a while back, but one that I only got around to recently was from HSBC Asset Management. Every Friday I get an email from them called “Five Insights in Five Minutes” and one chart in particular caught my attention. As a multimanager, I take great pride in being able to cut, copy and paste research such as this onto a couple of social media platforms, so the chart below was duly pasted onto LinkedIn – (here) and it garnered a lot of interest and attention, so I thought I’d write a bit more about it.
The associated text I wrote around the chart below was:
“....just because you produce a sustainability report doesn't automatically make you a sustainable business....”
Over the past couple of years a great deal has been written about ESG and we too have written a great deal about it, and yet it still feels like more (much more) needs to be done / said / actioned relating to this subject.
The chart above is really interesting in a number of ways. It shows the number of stocks in the S&P 500, the index that represents the 500 largest listed US companies, that publish an annual report relating to sustainability. Ten years ago, c20% of the companies (roughly 100) produced reports and today this number is closer to 90% (450) which is amazing. What isn’t as amazing is the degree of the slope of the curve in the most recent years when ESG awareness is becoming more and more mainstream. There was a big series of jumps in the first couple of years after the data starts in 2011 but from there it has really flattened which I just can’t fathom out.
Looking at the components of the S&P 500, the smallest company has a market capitalisation of about $15bn and that is quite a large business. To put it in some form of context, a company with such a market cap would place it among the largest 50 companies in the UK. When you have a market capitalisation of that size, you are more likely than not to have an Investor Relations team and a large shareholder base. Shareholders, whether they be individual or professional, are interested in sustainability, so why 1/10th of the companies in this index do not produce such a document baffles me.
Of the 10% of companies that do not produce a sustainability report, the table above doesn’t say who those companies are, what sectors they operate in, or why they don’t produce a report.
This got me thinking about how sustainability reports are, so I looked at two companies:
BP probably doesn’t need much of an introduction, but Orsted probably does, but for the sake of completeness, I typed into Google “what does Orsted do” and “what does BP do” – below are two screen grabs:
Although BP does discuss its renewable energy interests (at the end of the spiel), it’s fairly safe to say that Orsted is probably the more sustainable, even though both operate in the energy space.
You can also type into the Google search bar “Orsted Sustainability Report” and “BP Sustainability Report” to obtain two documents that can be (and have been) downloaded. The Orsted report is 24 pages long whereas the BP report is almost four times larger at 97. True, BP has more to do, but it certainly looks like they are taking this challenge seriously – you wouldn’t write a 97-page report and mention it in your report and accounts for the fun of it would you? Please also remember that BP are a larger, older business with more legacy assets and issues and aim to be “net zero” by the government mandated 2050 target whereas Orsted expect to be there by 2025.
You might expect the sustainability report from Orsted to be shorter than the BP one because they are younger, smaller (albeit a £40bn market cap company compared to a £60bn one) but you also might be shocked that a business that is operating exclusively in the renewable space actually has a sustainability report in the first place; it could be argued that 24 pages is too long! It goes to show there is a long way to go, even for those businesses that are a long way down the road to net zero carbon because sustainability isn’t only about carbon neutrality.