Ininitial screening involves filtering out any company that is involved in:
- Polluting commodities (such as oil, coal, copper or gold)
- Weapons or defence
- Gambling
- Alcohol
- Any media harmful to psychological well-being
If a company passes this filter we then examine:
- External ESG factors
- How the company has demonstrated its awareness of ESG factors
- Where management has demonstrated its awareness of ESG factors
- How management has demonstrated is knowledge of ESG risks
- Strategy alignment with ESG opportunities
- Evidence of reporting highlighting future ESG risks and if strategy allows for anticipated risks
- Linking of ESG factors to financial performance
- Extent that management involves customers, employees, governement and other stakeholders in ESG issues
- How responsive the company is to investor engagement
- Board support of ESG issues
- Drivers of revenue for price and volume and do they align with sustainabile ESG factors, future prospects for these factors
- Risks in future ESG factors
- ESG trends and their impact on core markets
- Anticipated legislative or regulatory changes
- Sustainability of company's key markets in terms of resource use and disposal, consumer preferences and social trends
- Scacity of raw materials
- Energy intensity of operations
- Motivation of employees
- Risks that input costs will rise and is the company aware of this
- Costs projects of input costs
- Gross income as a portion of revenue
- Product development strategy and % of new sales from new products
- Pending patent applications
- Incentive structures
- Extent of stakeholder research
- Efforts to mitigate ESG risks in regards to costs
- Capacity to sustain or improve operating efficiency
- Growth rate of shares outstanding
- Percentage of total assets that are intangible assets
- Environmental provisions and levels vs historical costs
- Notes to balance sheet recognising environmental risks to physical assets
- Notes to balance sheet in recognition to ESG risks to reputation
- Strength of brand
- Strength of customer satisfaction and loyalty
- Pricing power
- Level of autonomy of employyes
- if there are flat or hierarchical structures
- Recruitment proceedure for obtaining talented graduates
- Structure and diversity of non-executive board
- How dynamic and committed executive management is
- If pension assets are being managed by ESG aware practitioners
- If liabilities are short or long-term
- The efficiency of working capital
- Reliability of relationships with suppliers and customers
- Extent of off-balance sheet commitments
- If there is excessive leverage eroding stakeholder trust and raising cost of equity
- If debt covenants specify any aspects of ESG risk management
- If operating expenses are being reduced by investment in resource-efficient technology
- If capital expenditure is covering asset depreciation
- Capital expenditure and if it is reducing the need for capex in the future pointing to improvements in free cash flows
- Any due dilligence on acquisition targets needs to cover long-term ESG risks
- Debt facilities in relation to costs that could be lowered if management improves it ESG risks
- Any ammendment that needs to be made to our valuation in light of ESG risks impacting future cash flows