Welcome to the fifty-fifth edition of my weekly blog. In volume II, I look at what some of the most sustainable companies in the world are doing to be better corporate citizens.
 
Introduction
Each week I will analyse three companies from an industry sector to see what policies and procedures they have implemented to make their companies more sustainable. I will also compare these companies' financial ratios (valuation, growth, yield, leverage etc.) against their industry averages to see if a company can be sustainable and still outperform their industry sub-sector expectations.

1. Johnson & Johnson
Johnson & Johnson (J&J) publishes an annual ‘Health & Humanity Report’, the progress and reporting section of their latest annual report notes the following achievements:
 

• 20% of board positions at J&J are held by women compared with global research from multiple sources that show a range between 12% and 15%.
• J&J has reduced its CO2 emissions by 10.4% between 2010 -  2016 and has a 2020 reduction target of 20%.
• All 120 manufacturing and R&D facilities have undergone water risk assessment.
• They have enrolled 44% of their suppliers onto their ‘Sustainable Procurement Program’ and source approximately 20% of their goods and services from small & medium sized companies.
• Over 13,000 employees completed an internal “Energy for performance” training
• Concluded 100 MW wind power purchase agreement to help reach renewable energy targets.

 
2. Allergan Plc
Highlights from Allergan’s 2017 Sustainability Report include:
 

• 25% of board positions at Allergan are held by women and 30% of Allergan’s executives are women.
• Reduced GhG emissions by 22% since 2015.
• Recycled more than 75% of all waste.
• Decreased water consumption intensity by 7% since 2015.
• Workplace injuries and illnesses have reduced by over 30% since 2015.
• Allergan has commenced a sustainable supply chain audit with key suppliers where water use and emissions data will be provided by the suppliers.

3. UCB SA
UCB SA’s sustainability report 2017 highlights include:
 

• 31% of board positions at UCB SA are held by women, they also have a 4-year mandate and over 50% of the board of directors are independent directors.
• Three carbon compensation projects:
  • Providing energy efficient cooking stoves in DR Congo to prevent illegal harvesting of wood.
  • Over 10,000 hectares of reforestation will take place in Virunga Park DR Congo over the next 10-years.
  • 12,000 of degraded forest in Tigray Ethiopia will be restored by 2030.
• 92% of electricity consumption is from renewable sources.
• 19.5 hours of training per employee was provided to staff. 88% of employees consider UCB to be a socially responsible company.
• UCB has supply chain security council comprising of purchasing departments who operate in 20 countries and are responsible for over 21,000 suppliers. The council meets to review the quality standard of their key suppliers.
• €7m raised for charitable organizations.

 
Key Performance Statistics – Company Vs Industry Average
Using Morningstar data, we can compare the performance of the three companies against industry averages:

J&J’s lower than industry net margin and returns on assets and equity can be linked to the enactment of the Tax Cuts and Jobs Act (TCJA) in the US. This led to a sharp rise in provisions for taxes on income for J&J, the 2017 provision was $16.4b compared with a 2016 figure of $3.3b and is an initial estimate of what the impact of TCJA will have on the company’s net earnings. In addition to fiscal policy change in the US, J&J are faced with potential tax reform measures in Switzerland and the implementation of the OECD’s Base Erosion Profit Shifting (BEPS) project. The tax provision along with a net loss on disposal of assets ($2.5b) in 2015 help explain the negative 3-year net income growth figure. J&J’s operational performance was strong and outperformed their industry peers as did revenue growth. Gross profit (67% - 69%) and earnings before tax provisions (20 – 27%) relative sales have reasonably consistent since 2012.
 
Allergan’s performance compared with its industry peers is extremely positive. Allergan has increased their gross margin from 78% in 2015 to 87% in 2017. Amortization of intangible assets, along with research & development costs and asset disposals/ impairments ($646m for Aczone) means that they have been running operating losses for the past three years. However, relative to their industry peers their operating margin (loss) is better. Revenue has grown at an impressive rate of 50% over the last three years. From a financial leverage point of view, their current debt/equity of 0.4 is at prudent levels. Allergan appears to be in restructure mode (sold generic business to Teva) as they generated large incomes from discontinued operations in 2016 ($15b) and 2015 ($3.9b).
 
UCB had a strong financial performance in 2017. The company recorded €4.5b revenue and €1.4b of recurring EBITDA. €1.1b was invested in R&D or almost 80% of EBITDA. They outperformed their industry peers against all the key statistical measures in the diagram above and achieved their net/EBITDA target of 1.1 and recurring EBITDA/revenue goal of 30% in the past two years. From a segmental reporting point of view, their top product (Cimzia) accounted for 34% of total revenue with the vast majority of their remaining revenue spread across a further eight products. Geographically the US market accounted for almost half of their revenue with nine key European and Asian markets supplying most of the remaining income. In spite of more than half of their revenue being generated in non-euro currencies, UCB recording a small net fx loss (€44m) in 2017. Net debt/EBITDA have dropped significantly in the last five years as evidenced by a debt/equity ratio of 0.3.
 
Summary
When you compare the operational performance of these three pharmaceutical companies with their industry peers all three outperform their industries. This is a positive development as improvements to sustainable performance can be directly linked to operational performance such as the selections of suppliers, sourcing of energy, water usage, employee training, recycling etc.
 
Overseeing the financial performance of a large pharmaceutical’s company involves the proactive management of a multitude of risks. Show leadership in the area of sustainability can help mitigate against but not limited to risks to: staff (health & safety), the environment (fines), reputation (bad publicity), operations (inefficiencies). It will not solve for other market risks such as changes in fiscal policy and foreign exchange fluctuations however it is a step in the right direction and will help strengthen the operational performance and stability of the business.
 
Next week’s blog will feature three software companies, Dassault Systemes SE, Autodesk Inc, and Adobe Systems, and the measures they have taken to be more sustainable. 
Learn more
If you liked this article you might enjoy reading the following information:
 
Week 54 Insurance: Storebrand ASA, Sun Life Financial Inc.,and Allianz SE
 
Week 53 Electricity & Gas: Enagas SA, Centrica Plc, and Iberdrola SA
 
Week 52 SASB: An A - Z of the Sustainability Accounting Standards Board
 
ACCA: The Sustainable Development Goals: redefining context, risk and opportunity
 
Disclaimer
The content of this article is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find in this article and wish to rely upon, whether for the purpose of making an investment decision or otherwise.

Life Insurance Document - Source - rawpixel and Free Images - Pixabay

Welcome to the fifty-fourth edition of my weekly blog. In volume II, I look at what some of the most sustainable companies in the world are doing to be better corporate citizens.

Introduction
Each week I will analyze three companies from an industry sector to see what policies and procedures they have implemented to make their companies more sustainable. I will also compare these companies’ financial ratios (valuation, growth, yield, leverage etc.) against their industry averages to see if a company can be sustainable and still outperform their industry sub-sector expectations.

1. Storebrand
Storebrand publishes various sustainability reports on its website ranging from their carbon footprint to their investing strategies. Key sustainability performance results include:

• 33% of board positions at Storebrand are held by women compared with global research from multiple sources that show a range between 12% and 15%. Also, 38% of management are women with an internal target for this to rise to 50.
• Storebrand does not invest in 191 companies because of sustainability and ethical issues.
• 100% of assets are screened against their sustainability criteria.
• 65% of real estate waste is recycled and 26% of real estate is certified green. 82% of waste at Storebrand’s head office was recycled.
• 74% job satisfaction rate among employees with a 3.5% sick leave rate.
• Prioritization is given to suppliers who comply with at least one of the following standards: ISO14001, EMAS, Eco-Lighthouse, the Swan ecolabel and Green Dot.

2. Sun Life Financial Inc.
Highlights from Sun Life’s 2017 Sustainability Report include:

• 36% of board positions at Sun Life are held by women and 33% of senior management are women.
• 7% reduction in GhG emissions and 5% decrease in energy use intensity since 2015. 69% of waste at Canadian operations is diverted from landfill.
• Sun Life’s subsidiary Bentall Kennedy has been voted in the top 3 most sustainable real estate investors in the world by the Global Real Estate Sustainability Benchmark (GRESB).
• 100% of Sun Life’s investments are assessed for ESG factors.
• 650 documents have been updated with plain language.
• $1Bn invested in clean and renewable energy projects. Over $1.8Bn invested in safe infrastructure projects.
• $41m spent on training and development with a 96% staff satisfaction for training received.

3. Allianz SE
Allianz’s sustainability report 2017 highlights include:

• 36% of board positions at Allianz are held by women and 37% of managers are female.
• 17% reduction in CO2 emissions since 2010.
• 58 million customers in emerging markets.
• €2.5 Bn in green bond investments €1Bn of new investments in renewable energy. €225m divested away from coal companies in 2016.
• 72% score in Inclusive Meritocracy Index. Over 2,200 leaders were trained in Integrity in 2016.
• 922 suppliers have signed their vendor code of conduct.
• €20m raised for charitable organizations.

​Key Performance Statistics – Company Vs Industry Average
Using Morningstar data, we can compare the performance of the three companies against industry averages:

When you look at measures like Debt/Equity all three are in line with industry expectations. This isn’t really a surprise when you consider how regulated the Insurance industry with global regulations such as Solvency II that ensure Insurance have adequate levels of capital on their balance and are not over-leveraged.

Looking at Storebrand’s key financial figures for 2017 tells us that their solvency margin (172%), return on equity (11%), total assets (NKK569 Bn), equity (NKK 31 Bn), profit (NKK 2.9 Bn), earning per share (EPS) (5.28), and dividend per share (DPS) (2.10) are all stronger than their 2016, and 2015 comparators. Two of their three valuation metrics are more favourable than their industry peers according to latest Morningstar data. Revenue growth and net margin are slightly behind their industry, however, Storebrand publishes a list of companies it does not invest in. The Quarter 1 2018 list includes 191 companies, including 22 companies in the highly profitable tobacco industry. According to latest data published by Aswath Damodaran at NYU Stern, the average return on equity for the Tobacco industry is 89%, this compares with a total market average of 11%.

Total Shareholder Return (TSR) is a simple measure that captures your total investment return (capital and dividend) from a share investment in a publicly listed company. TSR = (Current Price – Purchase Price +Dividends)/Purchase Price. E.g. If you bought one share in a company for $100, the share is now worth $110 and since you purchased the share you have received a $5 dividend your TSR is (110-100+5)/5 or 15%. Sun Life’s 2017 financial highlights include a 5-year TSR of 138% exceeding comparative TSRs for the S&P 500 (108%), TSX composite (94%), and TSX Financial Sector (51%). Sun Life’s current return on equity is a healthy 10.2 and their medium-term objective is to increase this to 12% - 14%. Morningstar only provides industry comparatives for valuations and Sun Life is broadly in line with industry performance for these metrics.

Allianz SE’s 2017 return on equity (ROE) was 11.8%, its current ROE is 11.3% and above that of its industry average of 9.0%. Other financial highlights from the company’s 2017 annual results include revenue (5%) and operating profit (0.4%) growth. Both EPS (15.24) and diluted EPS (15.23) were more or less in line with 2016. Overall Allianz’s key statistics are favourable when compared with latest industry comparators published by Morningstar.

Summary
Insurance companies who are demonstrating leadership in the area of sustainability are choosing investment strategies that identify suitable companies to invest in and also ones that exclude unsuitable companies such as those in the Tobacco, Oil and Gas, and weapons industry.

From a supply chain point of view, they actively manage their procurement practices through supplier risk assessments and select suppliers who share their sustainability goals. Within their own operations, they have reduced the use of paper by embracing advances in digital technology. Documents have been updated with plain language which helps make customers more aware of what they are signing up for when they buy one of their products.

Next week’s blog will feature three pharmaceuticals companies, Johnson & Johnson Inc., Allergan Plc., and UCB SA, and the measures they have taken to be more sustainable.

Learn more
If you liked this article you might enjoy reading the following information:
Week 53 Sustainability: Electricity & Gas, Enagas SA, Centrica Plc, and Iberdrola SA
Week 52 SASB: An A - Z of the Sustainability Accounting Standards Board
Week 51 United Nations Sustainable Development Goals: Brief overview of the goals
ACCA: The Sustainable Development Goals: redefining context, risk and opportunity
World Benchmarking Alliance: Corporate Sustainability Performance

​Disclaimer
The content of this article is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find in this article and wish to rely upon, whether for the purpose of making an investment decision or otherwise.

Ohm’s Law Calculator - Source - Bluebudgie and Free Images - Pixabay

Welcome to the fifty-third edition of my weekly blog. In volume II, I look at what some of the most sustainable companies in the world are doing to be better corporate citizens.

Introduction
Each week I will analyse three companies from an industry sector to see what policies and procedures they have implemented to make their companies more sustainable. I will also compare these companies’ financial ratios (valuation, growth, yield, leverage etc.) against their industry averages to see if a company can be sustainable and still outperform industry expectations.

1. Enagas SA
Looking at Enagas’ ‘Our commitment to society’ report and its key sustainability figures the following sustainability data is revealed:

• Avoided more than 135,000 tonnes of CO2.
• 620 GWh of energy savings in the use of natural gas.
• 40% reduction in the use of paper over a four year period.
• 23% of board positions at Enagas are held by women compared with global research from multiple sources that show a range between 12% and 15%.
• Provided 65 hours of training per employee.
• No workplace fatalities were reported between 2011 and 2017.
• 1,356 approved suppliers.
• 55 suppliers have been audited against financial, ethical, social and environmental criteria.

2. Centrica Plc
Highlights from Centrica’s 2016 responsibility performance report include:

• 27 million tonnes of CO2 were avoided by customers since 2008.
• Over 60% of waste was diverted from final disposal.
• £35m was spent training UK based engineers.
• 1 workplace fatality reported between 2011 and 2016.
• 18% of board positions at Centrica are held by women.
• Average sustainability risk rating of assessed suppliers has improved from 49 (low risk) in 2012 to 57 (low risk) in 2016.

3. Iberdrola SA
Iberdrola’s sustainability report 2017 tells us the following about their corporate structure and performance:

• 67% of capacity is emissions-free avoiding 63 million tonnes of CO2 over the three years.
• 36% of board positions at Iberdrola are held by women.
• Provided 42 hours of training per employee.
• No workplace fatalities were reported in 2016 and 2017.
• 80% of employees received some form of training.
• 87% of work was awarded to qualified suppliers.
• Over 80% of suppliers are ISO accredited (ISO 9001/ ISO 14001).

​Key Performance Statistics – Company Vs Industry Average
Using Morningstar data, we can compare key performance statistics of the three companies against industry averages:

As you can see in the ‘Advantage by Statistic’ section of the table all three companies are outperforming industry averages with an aggregate score of 22 – 8.

Enagas’ Price/Sales TTM (trailing twelve month), Net Income growth and Debt/Equity levels are below industry averages for gas companies. Although average net income growth for the last three years is well below industry levels, Engas’ net income grew by 17.6% in 2017. Its operating and net margins are well above industry comparators. In 2017 Enagas reduced its net debt by €725m through improvements in working capital collections and less than expected capital expenditure. Enagas expects to be debt free by 2023, its current cost of net debt is 2.7%.

Centrica is behind industry averages for price-to-book, operating and net margin and debt/ equity. This can be explained in the most part by the weaker performance of their energy supply businesses in the UK and US on the back of regulatory and political uncertainty, including plans in the UK to put a cap customer energy bills by the end of 2018. Centrica’s proposed full-year dividend of 12.0p per share is on par with 2016 in spite of weaker financial performance. The 2018 – 2020 outlook is for dividend levels to remain at current levels. The company also plans to continue with its cost reduction initiatives.

Iberdrola’s operating margin of 8.7% is below the industry average of 17.2%, however, its net margin of 9% easily exceeds the industry figure of 5.6%. With the exception of operating margin, the other nine key statistics are ahead of the industry. What could help explain its favourable rating relative to its industry and in particular against all three valuation measures (price/ earnings, price-to-book, price/sales TTM) is the fact that capital expenditure exceeded cash from operations in 2017. An additional €32Bn will be invested in grid, renewables, and generation projects by the end of 2022.

Summary
The three companies have higher than average female representation on their board of directors. Interestingly Iberdrola who has the highest % of female board members performed best compared with industry averages followed by Enagas who had the 2nd highest.

The three companies measure their health and safety performance against the highest standards and treat it as a high priority objective at all times. They invest in their people and assess their supplier’s sustainability performance.

All of this is achieved without their financial performance suffering when compared with industry averages for their respective industries.
Next week’s blog will feature insurance industry companies, and the measures they have taken to be more sustainable.

Learn more
If you liked this article you might enjoy reading the following information:

​Week 52 SASB: An A - Z of the Sustainability Accounting Standards Board
Week 51 United Nations Sustainable Development Goals: Brief overview of the goals
ACCA: The Sustainable Development Goals: redefining context, risk and opportunity
World Benchmarking Alliance: Corporate Sustainability Performance

​Disclaimer
The content of this article is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find in this article and wish to rely upon, whether for the purpose of making an investment decision or otherwise.