What are we looking for?
Over the past few years, interest in environmental, social and governance issues has grown dramatically. By some estimates, ESG issues are being incorporated into more than 50 per cent of professionally managed assets in Canada alone.
One oft-cited reason not to pursue ESG investing is the lingering belief that incorporating any non-financial metrics will lead to underperformance. Today we look at North American utility companies with basic, positive ESG indicators to see whether using these metrics does, in fact, drag down performance.
The screen
Using FactSet’s Universal Screening, we isolated the constituents of the MSCI North America Index.
We then applied filters to reduce the screen to an appropriate universe, starting with large-cap companies (a market capitalization greater than $10-billion), and only those in the utilities sector as identified by FactSet’s Revere Business Industry Classification System.
These first two filters for size and classification returned 35 companies with an average return of around 20.8 per cent year-to-date.
We then filtered using two very simple ESG factors: carbon intensity, provided by Sustainalytics, a leading ESG research and data provider; and the percentage of female board members, data collected by FactSet.
Carbon intensity is a measure of carbon released per unit of production – the higher the intensity, the more carbon is released for each unit. Focusing on lower intensity scores can help identify utilities that would likely reduce the carbon footprint of an average portfolio, so we screened out companies with a score greater than 1,000. (The threshold of 1,000 reflects a higher intensity than the average company in the MSCI North America Index, but is significantly lower than the average utility in the same universe.)
Following the goal of the 30% Club, which works with corporations to achieve 30 per cent representation by women on boards and in C-Suites, we then filtered out any company that doesn’t have at least 30 per cent women on its board of directors. According to research by McKinsey & Co., companies in the top quartile for gender diversity in leadership are more likely to experience above-average profitability than those in the bottom quartile.
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What we found
After screening for size, classification, carbon intensity and representation of women on boards of directors, four companies pass all criteria.
Hydro One Ltd., American Water Works Co. Inc., Edison International and Sempra Energy had a combined average total return of 31.8 per cent for 2019, far exceeding that of both the MSCI North America Index (up 24.8 per cent) and the utilities sector within it (19.5 per cent).
All four also maintained a significantly lower carbon intensity than the rest of the sector and have a markedly higher-than-average number of women on their boards.
As is often quoted, “correlation does not imply causation” and that holds true here. This example is very simple in its application of ESG but demonstrates, at the very least, that investors who make environmental, social and governance factors part of their toolkit are not doomed to underperformance.
Readers are advised to do further research before investing in any of the securities shown here.
Lee Souter is vice-president and analytics specialist at FactSet.
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