Companies impact society both positively and negatively. The problem is that these impacts are not always reflected in their financial statements.
Growing scrutiny of companies’ effects on the wider environment and society mean governments and regulators are starting to clamp down. At the same time, people’s expectations of companies are changing. As a result, companies are increasingly having to pay for these costs.
We have already seen this over the last decade through the likes of rising minimum wages and the introduction of carbon taxes.
This raises the question of how can we measure these impacts and what they might look like on company balance sheets.
Schroders’ award-winning SustainEx tool is designed to answer this question.
Here Hannah Simons, Schroders’ Head of Sustainability Strategy, goes into more detail on the tool and what it can tell us.
"Essentially, what SustainEx is doing is putting a financial value on all of the impacts that companies have on society. This way our portfolio managers can integrate these risks and considerations into their investment decision-making process.
"We found that most existing approaches focused on either the negative or positive impacts a company creates, but never both together. We wanted to build a tool that tells us the full story, giving us a balanced view of what harm and good a company is bringing to society."
"We looked at all of the stakeholders a company interacts with – governments, the environment, customers, employees, and communities – and the activities that impact them. In a perfect world SustainEx would track every possible impact out there. However, to ensure the tool offered meaningful outputs, we narrowed that list down to around 40 that met the following criteria: quantifiable, attributable, disclosed and transparent."
"It’s a combination of academic analysis and company data. When we launched SustainEx, we reviewed more than 400 pieces of academic research. This number is getting closer to 800 now.
"We also analyse 70 data points for every company to help us translate the social costs into “dollar” terms.
"SustainEx covers more than 10,000 global companies and we can also look at impacts across sectors.
"It’s a very systematic and robust framework."
"The output of SustainEx tells us a company’s “social value” as a percentage of sales, so if a company had a score of +5%, it means that for every $100 of sales the company is making, it is generating an overall positive impact on society equivalent to $5."
"Impacts like connectivity and innovation generate really positive scores, while some of the biggest costs to society are tobacco, carbon emissions and financial instability.
"SustainEx helps us identify the biggest areas of sustainability risk, but doesn’t necessarily tell us how companies are managing those risks. That’s what another of our proprietary tools, CONTEXT, helps us do."
"As well as on a company or sector basis, we can consider an individual portfolio compared to its benchmark.
"Because economic costs or benefits are measured on a company-by-company basis for each impact separately, we can combine them in different ways.
"For instance, by assigning each impact to a relevant UN Sustainable Development Goal category (people, planet, prosperity orpeace), by mapping them to the stakeholders impacted or by separating them into the three “ESG” (environmental, social or governance) categories.
"The total costs remain the same, its simply the lens through which you look at it that changes."
"SustainEx allows fund managers and our clients – from pension funds to insurance and wealth management or end investors – to understand the impact that their investments are having on different sustainability risks.
"The ability to look at the outputs through different lenses allows people with different priorities to see the data in the way its most valuable to them.
"We are extending its use to encompass governments. We can examine the positive or negative impacts countries contribute to global challenges or goods.
"We’re also developing a tool to sit alongside SustainEx that helps our clients understand how their portfolio contributes to specific UN SDGs."
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