Can Sustainability Be Quantified?

This is the second in a series of blog posts relating to the launch of the S&P Long-Term Value Creation (LTVC) Global Index.

The Index

S&P Dow Jones Indices collaborated extensively with the Canada Pension Plan Investment Board (CPPIB) over the past nine months to create an index that seeks to measure the performance of global firms that are considered on track to create long-term value.  Long-term investing requires looking at metrics that go beyond the standard GAAP financial accounting measures.  The S&P Long-Term Value Creation (LTVC) Global Index incorporates S&P Quality Scores but goes further, including long-term sustainability scores.  Sustainability (or ESG) scores garner many questions, as there is no uniform, widely accepted methodology on how to measure sustainability.  This blog will dig deeper into how our partner, RobecoSAM, a sustainability asset management and research company, approaches formulating its Economic Dimension Scores, which are used in the S&P LTVC Global Index.

RobecoSAM and Economic Dimension Scores

For the qualitative assessment in the S&P LTVC Global Index, we relied on the Economic Dimension scores (ED) provided by RobecoSAM.  Each year, RobecoSAM conducts an annual survey, the Corporate Sustainability Assessment, covering over 2,500 publicly traded companies with a 100-question survey on financially relevant economic, environmental, and social factors.  Based on the sustainability data collected through the survey, each company is assigned a total score, as well as a component economic, environmental, and social score.  The ED score is RobecoSAM’s governance score, which focuses largely on corporate governance criteria such as board independence, board effectiveness, management incentives, and vesting.  However, the differentiating factor for RobecoSAM’s ED score is that it also covers a series of criteria that evaluate the quality of a company’s management systems as well as its ability to manage issues over the long term.  ED scores are at the intersection between extra-financial information and financial data, and they evaluate a company’s ability to plan the business proactively in relation to long-term opportunities and risks.

The ED scores are calculated using a combination of both general and industry-specific questions.  The following are the general criteria used across all industries.

  1. Corporate Governance
  2. Risk and Crisis Management
  3. Codes of Conduct/Compliance/Corruption and Bribery
  4. Antitrust Policy
  5. Customer Relationship Management
  6. Brand Management
  7. Innovation Management
  8. Supply Chain Management
  9. Tax Strategy

There is also a series of sector-specific criteria, with the applicable industries in parentheses.

  • Anti-Crime Policy/Measures (Financials)
  • Financial Stability and Systemic Risk (Financials)
  • Efficiency (Utilities)
  • Market Opportunities (Utilities)
  • Reliability (Utilities)
  • Water Operations (Utilities)
  • Exploration and Production (Energy)
  • Gas Portfolio (Energy)
  • IT Security and System Availability (Information Technology)
  • Privacy Protection (Information Technology)
  • Marketing Practices (Pharmaceuticals)
  • Product Quality and Recall Management (Pharmaceuticals)
  • Fleet Management (Airlines)
  • Compliance with Applicable Export Control Regimes (Aerospace/Defense)
  • Health and Nutrition (Food Products)
  • Independence of Content (Media)
  • Payment Transparency (Materials)
  • Principles for Sustainable Insurance (Insurance)

RobecoSAM has been conducting its questionnaire since 1999 and has established itself as a leader in the sustainability assessment arena.  While some may view sustainability as too qualitative to assess in a simplified, readily understandable manner, RobecoSAM has applied a quantitative, structured, and consistent approach to assess companies vis-à-vis long-term ESG metrics.

The next blog will analyze the S&P Quality Score and the role it plays in the structure of the S&P LTVC Global Index.

The posts on this blog are opinions, not advice. Please read our disclaimers.

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