Strategy & economics
SustainEx: Quantifying the hidden costs of companies’ social impacts
Social pressure and government intervention are forcing companies to take responsibility for the impacts their actions create.
This is a departure from the last few decades when large companies have been able to grow and thrive even as social and environmental challenges have intensified.
Among other measures, minimum wage legislation, sugar taxes, gambling restrictions or carbon prices are all spreading, creating financial expenses in place of previously unaccounted social problems. As a result, costs that were previously externalised to society will become internalised on companies’ financial statements.
New approaches to investment analysis are needed to identify, measure and manage the impacts of these changing pressures.
What is SustainEx?
SustainEx, a ground-breaking new tool, measures the costs companies would face if all of their negative externalities were priced, or the boost if benefits were recognised financially. SustainEx is designed to help our analysts, fund managers and clients identify those risks to help ensure they are reflected in investment decisions and valuations.
If all of the impacts our research identifies were crystallised as financial costs the $4.1 trillion of profits generated by listed companies would fall by 55%, our analysis shows. One third of companies would become loss-making. The research also highlights the total positive or negative impact of each sector, relative to the sales of companies in each sector.
Andrew Howard, Head of Sustainable Research, said: "Companies don’t operate in a vacuum – they are affected by society and have impacts on society.
"We have developed a new framework and tool – SustainEx – to quantify those impacts in economic terms.
"It asks the question – if companies were given a bill for the costs they impose or the benefits they create, how large would that credit or debit be?
"That isn’t a theoretical question. Companies face carbon pricing, sugar taxes, minimum wages and a raft of other political changes that will turn more of those social impacts into financial costs.
"The analysis we’ve done is built up by looking at close to 50 individual measures – like wages, carbon emissions, tobacco sales, workplace stress and so on.
"We have examined close to 500 academic studies to put an economic cost to those activities and we use data from dozens of sources to measure the effects for close to 9,000 companies.
"The net result is a measure of the risk every company faces.
"We can use that analysis with our analysts, fund managers and clients to measure the risks companies face and make sure we are as prepared for the uncertain future ahead as possible."
- Coronavirus outbreak: tracking the economic and financial market impact
- Janet Mui: weekly economic update 21 February
- COP26: Pressure growing for step change in climate policy
- Economic infographic: A view of the global economy in February 2020
- Why global cities could be more valuable than high-performing tech stocks
- Business owners warned of capital gains tax increase in March 2020 Budget
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.
All data contained within this document is sourced from Cazenove Capital unless otherwise stated.