Today we continue the series of posts examining corporate sustainability, often called environmental, social and governance factors, of Canadian companies. In the past, we have looked at Consumer companies, Mining, and Oil and Gas stocks, and just last week, Transportation companies. It is now the turn of three more industrial sub-groups - aerospace and defense, waste management and engineering & construction firms. As in previous posts, we'll also have a look at their financial and stock performance.
The Methodology - 3 Key Factors
The data comes from reports like the annual Management Information or Proxy Circular filed on Sedar, or through a Sustainability report filed on the company website or on the Global Reporting Initiative database, on three key aspects that researchers have found (see especially the Mining post for the details and further links) are especially useful in finding companies that will outperform for the investor.
1) Board of Directors committee with a sustainability mandate
2) Executive compensation tied to ESG performance
3) Formal stakeholder engagement processes
We combine that data with other evidence that a company has been taking sustainability seriously:
4) Published, annual, up to date corporate sustainability reports, preferably audited and submitted to GRI
5) Membership in voluntary sustainability-related reporting and promotion organizations like Carbon Disclosure Project, Canada's Top 100 Employers, Canada's Best Managed Companies, Sustainalystics / Macleans Top 50 Socially Responsible Corporations 2013, Randstad Award for Canada’s Most Attractive Employer 2013
6) Constituent of the iShares Jantzi Social Index ETF (TSX: XEN) that holds only companies with better social and environmental ratings
7) High rating in the Board Shareholder Confidence Index published by the Clarkson Centre for Business Ethics and Board Effectiveness
8) Women on the Board of Directors
The results are similar to those for transportation companies - the larger the company, the more explicit and extensive the adherence to sustainability. In delving through the data we got the impression that many of the smaller companies may actually do more than is evident or documented or formalized. For example, smaller companies with a board of limited size may not find it necessary or cost effective to have a separate board committee devoted only to sustainability.
Surprisingly, no company seems to look green, aka good, across the table on every ESG rating dimension. Bombardier comes closest with a lot of green, but it doesn't have a board committee (see the three committees here) dedicated to Sustainability, not even one for Environment, Safety and Health, which comes closest as a partial effort for several others. Stantec is another that gives a better impression when we read through its latest Sustainability report than the absence of a dedicated board committee or explicit tied executive compensation would suggest. SNC's severe ethics failings of the last few years stand in contrast to the very green image our table presents. The various company reports suggest it is trying to rectify the problem but the question is, of course, whether that effort is genuine and will succeed. The experience of time will provide the answer.
Even more surprising, given that the companies are specialized in waste management, is that neither Newalta nor Progressive Waste Solutions, ties a significant part of company executives' pay to ESG performance. At least, it is not stated explicitly in the Proxy Circulars, where such data should be found.
Financial and stock performance seem opposite to Sustainability
The biggest surprise is in the next table, which sorts the companies by their annualized total stock return (capital gains plus reinvested dividends) over the last five years. Bombardier and SNC-Lavalin, which look so good in Sustainability, have had the worst stock performance, even worse than the benchmark TSX Composite's 12.0% annualized return, as represented by the iShares ETF that tracks the index under symbol XIC! All the other companies we show in these sectors (there are other smaller companies we do not show) have had consistent, solid profitability and profits.
A few of the stocks still seem value-priced according to Price/Earnings and P/Book ratios compared to XIC - Magellan and perhaps Bombardier. The other stocks appear to be priced in the expectation of further strong earnings growth. This suggests that an investor needs to look further into company prospects before buying in.
Bottom Line: Similarly to the results for Transportation, Oil & Gas and Consumer stocks, the research-established relationship between sustainability action and corporate success may take longer to manifest itself than the past five years. Nevertheless, this sustainability assessment may assist those investors who wish to select their investments on philosophical grounds in addition to the financial numbers.
Disclosure: This blogger owns shares of SNC-Lavalin.
Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.