• David MacNeil

Global Good is a Good Investment

David MacNeil


Introduction


Corporate expectations, financial markets, business operations and the very society we live in are being continuously shaped by one common element: community voice. The importance of understanding and taking into consideration the perceptions, opinions and emotions felt by those within our key communities cannot be overstated. At Orenda, we not only aim to understand these factors, but to quantify them in a way that can be effectively implemented into financial processes, with a focus on creating value in ESG (Environmental, Social & Governance) oriented investments.


In a society now globally linked via online communities and social media, companies are consistently being dragged into the spotlight, and the social expectations of shareholders, stakeholders, and consumers are continuously rising. In today’s environment, a company must have an ESG action plan in place to align with the values of these key communities.


Orenda has extensively covered the adverse effects of corporate scandals and poor ESG performance, and the impact it has on financial markets. However, we’ve always preached that companies that do good in the world, do better in the market. The findings presented in this paper aim to present how a company’s commitment to positive and consistent ESG action can provide a reliable boost to its overall financial performance, and how online communities are far more likely to publicly support organizations that are making a conscious effort to adhere to a positive ESG standing and achieve the 17 goals set out by the United Nations in its established Sustainable Development Goals. Failure or neglect to do so will often bring upon undesirable results such as poor ESG performance, negative brand reputation, company boycotts, public protests, and social movements.


The data presented throughout represent some of the top performers in ESG action from January – November of 2021 across three different sectors, as identified by Orenda’s scoring methodology. The sectors selected are:


• Consumer Digital Services Sector

• Pharmaceuticals Sector

• Semiconductors Sector


The sector analysis presented throughout this paper was collected using the SIX iD Data Terminal.


Core Elements of ESG


Before analyzing some notable performers of ESG action for January – November of 2021, it is important that we first understand the core elements of ESG, and how Orenda categorizes different types of corporate actions into its ESG performance data.


Environmental

The first core element of the ESG spectrum is the Environmental aspect. Society expects organizations to have a plan in place to contribute to a clean, green, and sustainable environment. Issues such as climate change, fossil fuel reliance, depletion of natural resources, pollution, plastics usage, water management, greenhouse gas emissions, and waste management are all examples of issues that corporations can act upon to ensure a more sustainable future for all.


Social

The second core element of the ESG spectrum is the Social aspect. Corporations must adhere to the highest possible social standards to maintain a positive relationship with society. Issues such as diversity and gender inclusion, employee and customer welfare, human and animal rights, and local community impact are all examples of issues that corporations can act upon to ensure a healthy social environment.


Governance

The third and final core element of the ESG spectrum is the Governance aspect. Corporations must ensure that its Governance actions are responsible and justified to maintain a reputable corporate image and ensure comfort and fairness to its shareholders and workforce. Issues such as corporate behaviour, company values, employee relations, executive compensation levels, and employee compensation levels are all examples of things corporations can act upon to ensure an acceptable and fair level of organizational governance.


Overall ESG

Orenda also provides insight into a fourth category which we call the Overall ESG performance of a company, which takes into consideration and equally weights a company’s ESG action in its entirety. This provides an all-encompassing view of an entity’s current standing in its communities and can be used to identify companies that are wholly committed to positive Environmental, Social, and Governance change in the world, as well as those which are not.


Sector Analysis


As previously mentioned, analysis was conducted upon companies across three unique sectors for this exercise. We then selected the top 10 companies with the highest ESG performance scores within each sector as of the end of November 2021 and proceeded to calculate the 11-month average Overall ESG score for each sector based on the companies within.


As displayed in the table below, the semiconductors sector was the leader of the group in ESG performance, while the Pharmaceuticals sector, which was faced with plenty of adversity since the beginning of the pandemic, fell slightly short.



STMicroelectronics (STM)


The first company analyzed was STMicroelectronics, a French-Italian manufacturer of semiconductors and electronics.


Of the top 10 companies that are listed in the sector, STMicroelectronics had the highest average Overall ESG score within the sector with a score of 3.961: a moderately higher score than the sector average for the 11-month period.


STMicroelectronics is a sector-leader when it comes to environmental, sustainability and climate concerns. In 2021, STM was credited with the some of the following ESG-focused achievements:

  • March - STM collaborates with OQMented on MEMS (Microelectromechanical Systems) technology in an effort to eliminate environmental contaminants while also reducing power usage.

  • May - STM releases an updated sustainability report and steps up its commitments and programs to meet its goal to become carbon neutral by 2027.

  • June - Ferrari names STM executive as new company CEO as it aims to embrace the transition to electric vehicles.

  • July - STM announces the manufacturing of its first 200mm Silicon-Carbon bulk wafers for prototyping next-generation power devices with more efficient energy usage and lower cost of ownership.

  • September - STM releases the design for the worlds first LoRa system-on-chip (SoC) developed to automate rubber-tapping in trees, while prolonging tree lifespan and increasing both efficiency and sustainability.

As displayed in the chart below, STMicroelectronics boasted an extremely positive ESG standing in 2021, despite experiencing two sharp declines in March and August. However, these declines are not indicative the company experiencing moments of weak ESG performance, as even the lowest points of the year were still well above sector average during the period analyzed. More realistically, these periods were moments where STM’s ESG performance regressed closer to the sector average, before once again shooting up into extremely favourable scores in the following months.


Additionally, we witness a compatible trend between stock price growth and the company’s Overall ESG score throughout the duration of 2021, rising from an annual-low of $16.07 in mid-March, to $39.34 by the end of November – an increase of 145%.



Shopify Inc.


Next, in the Consumer Digital sector, we’ve analyzed Shopify Inc., a Canadian multinational ECommerce company known for its online stores and retail point-of-sale systems.


Of the 10 companies listed within the consumer digital sector, Shopify was a standout performer, consistently maintaining scores well above the sector average in ESG standing from January – November of 2021. It should come as no surprise that a company specializing in online convenience performed well during a pandemic where many were required to work out of their own homes, and found comfort in online shopping as a way to maintain physical distance from others during times of uncertainty. In fact, Shopify is so committed to making health and safety a priority that they announced that all employees would have the option of working from home permanently, even after the pandemic ends.


Shopify has also done an extraordinary job at pushing climate change issues to the forefront, proving numerous times throughout the year its very real commitment to implementing change in the world to ensure a more sustainable future for all. This, combined with the explosion in demand for online services for the purpose of health and safety, separated Shopify from the pack.


In 2021, Shopify was received recognition from stakeholders for some of the following actions:


  • January – Announces a full-time work from home policy for all employees during and after the pandemic to ensure health, safety, and comfort.

  • February – Commits to spending $5m annually to combat climate change.

  • May – Teams up with a carbon accounting software company to create a free “carbon footprint calculator” to help corporations manage their carbon output.

  • June – Releases a 50 page “playbook” on how it intends to kick start the carbon removal market.

  • October – The director of Shopify’s sustainability fund, Stacy Kaulk, releases an article outlining the company’s dedication to tackling climate issues and makes suggestions for how other large corporations can and should do the same.

In the chart below, we can visualize the trends in ESG scoring over time for Shopify in comparison to its sector benchmark. As you can see, Shopify maintained an above sector-average score for the entirety of the year as a direct result of its ESG conscious actions and valuable product offering.

When analyzing the market trend in comparison to its ESG performance, we witness another extremely positive trend, as Shopify’s stock price increase was consistent with its positive ESG scoring; resulting in a 42.6% increase from January – November of 2021.



Roche Holdings Inc.


It should come as no surprise the pharmaceuticals industry has faced some serious challenges over the past few years considering the COVID-19 pandemic. For most within this sector, the focus on vaccine production, distribution, and public health and safety have been at the forefront.


While not known as one of the large four vaccine manufacturers (Moderna, Pfizer, AstraZeneca, and J&J), Roche contributed to public health in other ways throughout 2021, such as developing into a world-leader in COVID-19 testing, all while maintaining a consistently positive ESG standing.


In 2021, Roche Holdings Inc. was credited with the following actions which boosted its overall ESG market performance:


  • February - Roche becomes one of the first organizations to receive authorization for emergency use of rapid COVID-19 tests to allow healthcare workers to make faster and safer decisions within minutes.

  • March - Roche receives approval for a new diagnostic to more rapidly identify lung cancer in patients, and prolong patient life.

  • April - Roche vows to boost its corporate diversity by setting out to double the hiring of Black and Latinx executives and spend $1B with diverse suppliers.

  • May - Roche is named by Forbes as one of the top 500 companies dedicated to diversity in 2021.

  • August - Roche receives $5B in investment dollars from SoftBank Group as it believes in Roche’s strategy and plans surrounding its COVID-19 testing.

  • October - Roche ramps up its COVID-19 test distribution in light of the new Delta variant in an attempt to help prevent spread and lighten the workload on front line health care workers.

As you can see in figure 5 below, as a result of its commitment to positive ESG action throughout the year, Roche Holdings maintained a considerably above sector-average ESG standing for the duration of the year. So much so, that even its lowest point of 2021 still materially outperformed the sector.


Complimentary to its sector dominant ESG performance, we also see a directly correlated trend in company stock price in figure 6 during the same time frame. Over 11 months, Roche’s stock rose from ₣298.16 in January to ₣357.50 (Swiss Francs) by the end of November.



Conclusion

The call for consistent and meaningful ESG action has been on the rise over the past decade and will only continue to become even more significant in the years to come. Corporations are now expected to dedicate significant time and effort to ensure that they are contributing to a healthier, greener, and more inclusive future for all. Those which fail to align with society’s expectations are doomed to perform less desirably as they watch ESG conscious organizations surpass them on the market.


Orenda has proven time and again that by turning to ethical and socially responsible investment opportunities, investors can make an impact on the issues that matter to them most, do good in the world, and maintain a profitable portfolio all at the same time.


To learn more about Orenda’s ESG dataset or the benefits and features of the SIXiD data terminal, contact esg@orenda.digital today.



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