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Portfolio > Portfolio Construction > ESG

Do Companies That Talk ESG Really Walk the Walk?

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An August announcement by the Business Roundtable made big news: Some of the largest global companies agreed that companies should not only deliver long-term value to shareholders, but be committed as well to stakeholders: customers, employees and suppliers.

This would be a seismic shift, meaning the shareholder is no longer king of the hill, but has to share it. And though a majority of BR members signed the statement of purpose, some of them, as measured by Truvalue Labs, don’t currently live up to the statement itself that commits to delivering value to customers, investing in employees, dealing fairly with suppliers and supporting local communities.

We asked Truvalue Labs to use its platform to find the top and bottom sustainable performing signatories of the BR declaration. Jim Hawley, head of the firm, said the platform measures both insight (12-month trailing average of a pulse score that is a daily aggregate of headlines and other information for a select period) and momentum (showing firms can rise or fall due to actions).

The platform only analyzes third-party sourced information, such as news articles, and is subscribed to by a myriad of pension firms, asset managers and banks, to determine how firms fit in the sustainability spectrum.

Hawley noted that the BR member scattergram closely mirrors the overall S&P 500, as most companies cluster in the middle. He graded the overall performance by these firms as “middling.” That said, many of those who signed the document performed below that, and typically were weakest in governance and company behavior, with several caught in the opioid controversy, according to TruValue Lab’s findings. Here are the bottom 10:

  • Southern Copper Corp. (Metals & Mining): A key factor were protests against their billion-dollar Southern Copper mining project in Peru.
  • Union Pacific Corp. (Rail Transportation): Several issues include recent evacuations ordered in Illinois after a fiery train derailment, a derailment in Nevada that spilled vegetable oil and closed a major highway, a woman who lost her legs due to an accident, and a fire after an ethanol train derailed in Texas.
  • Deloitte (Professional & Commercial Services): Setbacks here are mostly legal, such as the U.S. government alleging 22 audit violations.
  • Boeing Co. (Aerospace & Defense): The 737 Max airliner lawsuits and allegations have not only forced airlines to ground the plane but have caused a number of lawsuits against Boeing by family members of passengers on planes that have crashed.
  • Qualcomm Inc. (Semiconductors): The company has been embroiled in various antitrust lawsuits both in the United States and in Europe. Its EU fine was $272 million.
  • Allergan PLC (Biotechnology & Pharmaceuticals): Troubles due to the opioid problem, including multiple lawsuits that were settled. Further, breast implants were recalled after reported links to rare cancer cases.
  • KPMG: (Professional & Commercial Services): The audit firm has had a bad time with an ex-partner getting jail time due to a fraud scheme, India alleging multiple audit violations in a fraud case, MPs demanding “Big Four” accountancy firms get broken up and an appeal in a corruption scandal in South Africa.
  • PricewaterhouseCoopers (Professional & Commercial Services): PwC paid out $8 million to settle charges from the Securities and Exchange Commission over auditor independence and improper conduct. Meanwhile, it’s caught in India’s debate on splitting up the Big 4 accounting firms. On the plus side, profits jumped $935,000.
  • Johnson & Johnson (Biotechnology & Pharmaceuticals): Opioid problems also for J&J, to the point it settled for $20 million in Ohio. It also had a recall of contact lenses due to fears they might scratch eyes.
  • McKesson Corp. (Health Care Distributors): Opioid problems, including being part of a $10 billion settlement. In addition, states are looking to settle opioid lawsuits in the wake of a recent settlement deal in West Virginia.

The best performers were BorgWarner, which has worked toward better fuel efficiency, and Owens Corning, which has worked on renewable energy projects.

Hawley added that self-reporting by these companies will continue to grow, spurred by the European Union’s new regulation mandating firms to disclose environmental, social and governance information, as well as actions taken by states like Illinois, which is demanding pension funds based in the state evaluate their holdings on an ESG basis.

“It would be convenient to take company proclamations of ‘doing better’ at face value, however, ultimately actions speak louder than words,” Hawley stated, adding that deep-dive research helps “strip away potentially greenwashed veneers.”

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