Here are 5 ESG metrics to look at to give you an edge in investing!

Here are 5 ESG metrics to look at!

1. Employee Turnover

Common criticisms of ESG metrics is that some have nothing to do with business and are just about expressing advocacy for trendy causes. This criticism is not valid with this one. Because if your investment is bogged down in the cycle of hiring and firing rather than doing business, it won’t be doing business and it may also be a sign of a toxic culture. Sure, sometimes it may be the employees’ fault and some industries are inherently high turnover (i.e. retail), but other times it could that of the employers.

And the key way to tell if there are staffing problems is employee turnover, at least in the sense of a quantifiable ESG metric. What if employee turnover is low – i.e. below 5%? Are there ways you could tell turnover may increase? You could look at the share of the workforce that is casual, because they’ll be out the door faster than permanent staff. You could also go onto Glassdoor and read employee reviews – if a company has a lot of bad reviews, surely it’d be a warning not to work there. And if you wouldn’t put time and effort into it as an employee, why put in time and money into that same company as an investor?

2. Emissions to EV (Enterprise Value)

This is self-explanatory: It is total greenhouse gas emissions divided by enterprise value. It measures how much greenhouse gas (GHG) emissions a company is responsible for relative to its enterprise value, allowing stakeholders to assess carbon intensity per unit of value. It helps investors identify carbon-intensive companies in relation to their market value, and thus those at risk of climate change and/or regulation in response to the threat of climate change. This metric is used in many ESG frameworks, including the TCFD (Task Force on Climate-related Financial Disclosures) and the ISSB (International Sustainability Standards Board).

3. Lost time incident rate

This is important for industrial businesses (i.e. mining or transport) but could be applicable for any business. And it is not just used by ESG-oriented investors but also by managers as an occupational safety metric. It is: (Number of Lost Time Incidents * 200,000)/Total Hours Worked. Why is 200,000 used? Because it is equivalent to 100 employees working full time for one year. A high LTIR may indicate poor safety practices which at the very least could cause operational disruptions, but also potential regulatory penalties and reputational damage. Think about it, even if you hated ESG and loved investing in mining companies, a company with incidents regularly would surely have potential to be a problematic investment.

4. Independent board share

Have you ever noticed how some board directors are ‘independent’? In a nutshell, these directors are free from relationships with the company, its management or major shareholders that could compromise their objectivity. Theoretically, a higher proportion of directors who are independent should be good for a company as they would bring objectivity and unique perspectives to the board. This is why this is a commonly considered ESG metric.

5. Total energy consumed

Many companies will report so-called ‘Scope 1 and 2 emissions’ in their ESG reports but some may even report total energy consumption. Regardless of how energy is derived (non-renewable or not) it will need to be paid for, and companies with a high amount of energy consumed will be paying more.

The difficulty is that there is no ‘one size fits all’ because all companies are different. Nonetheless, it wouldn’t be totally inaccurate to measure one companies’ emissions with that of a peer. If for instance, Westpac had twice the energy consumption of NAB – that’d say either bad things about Westpac’s efficiency or good things about NAB’s.

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