March 28, 2019
A suite of educational resources for engaging clients on sustainable investing
ESG Perspectives: The Sustainable 75
Last month Barron’s published a cover story entitled “The Most Sustainable Companies,”(1) which featured an equity-focused survey of the 100 Most Sustainable Companies in America based upon, among other things, the strength of their scores for “forward thinking and good behavior.” Using a similar methodology and sustainability scoring framework, Sage evaluated these 100 companies from a credit perspective to identify their relative placement among this well-regarded ESG grouping. The result is the Sustainable 75.
score for the top 100 companies was 66.6, with a score
range of 63 to 74. While the average score for the top
100 companies was lower than last year’s 68.7 survey
score, it is worth pointing out that this group achieved
an equity return of -3.2% versus -4.2% recorded for the
S&P 500 index over the same period.
It is also worth noting that the 20 most sustainable
companies in the survey (see below) generated an
average score of 71.05, well above that recorded for the
rest of the group. Moreover, this group represented a
diverse cross-section of the market, with six technology
firms, seven manufacturers, three services firms, two
communications companies, and a couple of retailers.
Company (Ticker)
2019 Rank
Score
Best Buy
Co. (
BBY)
1
75
Cisco Systems (CSCO)
2
75
Agilent Technologies (A)
3
74
HP Inc. (HPQ)
4
73
Texas Instruments (TXN)
5
73
Voya Financial (VOYA)
6
72
The Clorox Company
(CLX)
7
72
W.W. Grainger (GWW)
8
71
Motorola Solutions (MSI )
9
71
ManpowerGroup (MAN)
10
71
Salesforce.com (CRM)
11
71
PVH Corp.
(PVH)
12
70
I ntuit (I NTU)
13
70
Cummins (CMI )
14
69
Kellogg Company
(K)
15
69
Tiffany
& Co. (
TI F)
16
69
Oshkosh
Corp. (
OSK)
17
69
United Parcel Service (UPS)
18
69
Colgate
-
Palmolive
Company (
CL)
19
69
Lam Research (LRCX)
20
69
Last month Barron’s published a cover story entitled
“The Most Sustainable Companies,”
(1)
which featured
an equity-focused survey of the 100 Most Sustainable
Companies in America based upon, among other things,
the strength of their scores for “forward thinking and
good behavior.” Using a similar methodology and
sustainability scoring framework, Sage evaluated these
100 companies from a credit perspective to identify
their relative placement among this well-regarded ESG
grouping. The result is the Sustainable 75.
The Barron’s survey was based on the work compiled
by Calvert Research and Management, a well-known
and respected sustainable investing advocate. The
Barron’s list was compiled after reviewing data across
the 1,000 largest U.S. publicly held companies. The
survey scored the companies using a wide range of key
metrics that were focused on environmental, social,
and governance (ESG) related factors. The researchers
then segregated the data into five key stakeholder
categories — shareholders, employees, customers,
planet, and community — to assess how each company
scored (on a scale of 100) regarding metrics that would
be considered material to each of these stakeholders.
Finally, this information was weighted according its
materiality for a given industry to help arrive at a total
overall sustainability score.
According to Calvert’s management, “companies can
be differentiated based on how well they manage
their environmental and social impact and the
strength of their governance.” They also believe that
their research shows which management teams are
creating better companies for the long term and for
long-term investors in general. Reportedly, the lowest
score among the 1,000 companies was 27 and the
median score was 55. More importantly, the average
March 2019
™
The Most Sustainable U.S. Companies:
The Credit Story
1
ESG Perspectives
The Sustainable 75
Barron’s Survey Methodology
The Barron’s survey offered an insightful, but largely
equity focused, review of the 100 most sustainable
public U.S. companies. Importantly, like their equity
counterparts, fixed income investors are also looking
to identify those organizations that are improving
their long-term credit fundamentals through better
ESG management polices and execution. We believe
this in turn leads to better credit rating assessments,
lower borrowing costs, and greater financial stability
for investors. To fill this important research gap, Sage
evaluated the same companies represented within
the Barron’s 100 survey to see how they stacked up
from a credit perspective and to identify their relative
placement within this well-regarded ESG grouping.
We observed that 75 of the companies listed in the
Barron’s 100 survey were rated by two or more of the
leading U.S. credit rating agencies (i.e., Moody’s, S&P,
or Fitch). We reviewed the environmental, social, and
governance scores achieved by each company rated
by two or more of the credit rating agencies using
Sage’s internal sustainability scoring framework to
arrive at an overall ESG score and percentile ranking
for each organization. Like the Calvert process, our
scoring system is based upon the assessment of
financially material ESG data and key industry metrics
to assess the relative strength of an organization’s
intentional and inherent sustainability. Collectively,
the companies that were represented in this group
had more than $1,038 billion of outstanding public
debt at the end of 2018. This was not a trivial amount
since it represented about 13% of the $8 trillion in
outstanding U.S. investment grade debt at year-end.
Like the Barron’s 100 survey, the average scores for
the Sustainable 75 universe were attractive. The
average credit rating was in the high Baa/BBB+ range,
the total ESG score reached was 65.45 out of 100, the
percentile rankings were near the 70% mark, and the
average controversy score was a low 1.99 on a scale of
5. However, as shown in the table, there were some
distinct differences in the marks achieved between the
top and bottom 10 companies within the Sustainable
75 universe. The differences in the quality of the credit
ratings and strength of the ESG scores were significant
across categories and much wider than the ranges
identified in the Calvert equity research cited in the
Barron’s 100 article.
Sustainable
75
To p
10 Cos.
Bottom
10 Cos.
Moody's Rating
Baa1
A3
Baa2
S&P Rating
BBB+
A
-
BBB
ESG Score
65.45
77.73
52.78
ESG % Rank
69.97
93.68
33.33
E Score
68.12
83.23
48.58
S Score
63.23
77.08
54.32
G Score
65.81
77.15
56.98
Controversy
Score
1.99
1.90
1.90
The Baron’s 100 survey was not market cap weighted,
with each company individually assessed based upon
the merits of its ESG scores. In the Sustainable 75 survey
we took the same approach but also evaluated the
universe based on each company’s relative amount of
debt outstanding to gauge the concentration levels of
corporate public debt available to investors from these
sustainability leaders. Our distribution analysis revealed
that 89% of the companies in the Sustainable 75 universe
were largely concentrated in five sectors: consumer
cyclicals (23%), consumer non-cyclicals (20%), financials
(16%), industrials (15%), and technology (15%). However,
as shown below, when adjusted for debt outstanding
the sector distributions shifted significantly. The overall
weighting of these five sectors dropped to 63% of the
total universe with a notable five-fold increase to 34%
for the communications sector along with considerable
declines in the consumer cyclical and non-cyclical sectors’
percentage shares.
2
Balancing ESG Optimization with
Debt-Weighted Market Realities
2%
7%
23%
20%
1%
16%
15%
15%
1%
Non
-
Debt Weighted
1%
34%
11%
13%
1%
18%
8%
13%
1%
Debt Weighted
Basic Materials
Consumer, Non
-
cyclical
Industrial
Communications
Energy
Technology
Consumer, Cyclical
Financial
Utilities
Industry Sectors
The Sustainable 75
received scores north of the 80 mark. We also note that
the group’s governance scores were exceptionally strong,
with 82% of the companies receiving score assessments
of 60 and higher.
There is an abundance of academic research and
industry evidence that supports and demonstrates
the link between a variety of material ESG factors and
the long-term financial performance of companies.
However, most of the empirical evidence on
sustainability factor assessment suggests that the
strength and maintenance of the “G” component of
ESG is the dominant force behind better corporate
returns and outcomes for all stakeholders.
Good governance can be identified by evaluating
corporate management structures, codes of conduct,
internal reporting requirements, external community
communications, governmental policy influence efforts,
executive compensation methods, and management
ownership interests. These efforts also extend to
assessing supply chain management policies and
oversight, as well as management’s risk and crisis
management preparedness capabilities.
4%
21%
52%
19%
4%
Overall ESG Score
19%
28%
32%
14%
7%
Environmental Score
5%
17%
39%
31%
8%
Social Score
1%
27%
54%
17%
1%
Governance Score
>80
70
-
80
60
-
70
50
-
60
<50
These adjustments are important to consider because
the amount of issuance and availability of ESG-qualified
investment grade corporate debt can place significant
constraints on an investor’s portfolio construction and
diversification efforts. Unlike the equity markets, the
amount and availability of a company’s debt is an important
risk factor to consider when building a well-diversified and
sustainably optimized fixed income portfolio.
Our review of the present credit ratings for the
Sustainable 75 found that while the universe attained
an average Baa1/BBB+ status, there were some notable
shifts in the rating quality distributions of the universe
when evaluated on a debt-weighted basis. For example,
44% of the universe was rated within the AAA to A
categories on a non-debt weighted basis; but when each
company’s respective amount of debt was considered,
this distribution shifted. When viewed on a debt-
weighted basis the average rating was and A3 and the
percentage in the AAA to A rating categories jumped to
a 51% share of the universe. This suggests that for the
Sustainable 75 there is some alignment between the
quality of a company’s credit ratings and the strength of
its ESG score profile.
The companies within the Sustainable 75 had much in
common when it came to their respective environmental,
social, governance, and controversy scores. They generally
had strong scores for environmental factors, with 47%
scoring above 70 on a scale of 100, and 19% of the group
reaching scores that exceeded 80. On social factors, 61%
of the group was comfortably above average, but only 5%
3
ESG Score Distributions:
How They Measured Up
8%
1%
42%
44%
5%
Debt Weighted
1%
3%
40%
51%
5%
Non
-
Debt Weighted
Aaa
Aa
A
Baa
Below Investment Grade
Rating Quality
ESG Scores for The Sustainable 75
Disclosures
Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. The
information included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions.
This report is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or
investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments
contain risk and may lose value. Past performance is not a guarantee of future results. Sustainable investing limits the types and number of investment opportunities available,
this may result in the Fund investing in securities or industry sectors that underperform the market as a whole or underperform other strategies screened for sustainable investing
standards. No part of this Material may be produced in any form, or referred to in any other publication, without our express written permission. For additional information on Sage
and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.
5900 Southwest Parkway, Building 1 • Austin, TX 78735 • Phone | 512.327.5530 Fax | 512.327.5702 | www.sageadvisory.com
Lastly, good governace can be observed in a company’s
efforts to measure the impact and outcomes of their
respective programs for social needs and stakeholder
relationship management efforts as part of their brand
and reputational management. The benefit of these
initiatives is indeed measurable through metrics such as
a company’s controversy score.
The controversy score reflects the frequency and
severity of ESG news reports, such as dubious social
behavior and consumer product-harm scandals, that
could place a
firm under the media spotlight and, by
extension, induce adverse investor and credit rating
agency attention. These forms of controversial reports
often raise doubts about a company’s future operating
prospects, can constitute a risk for the corporation’s
reputation, and may have a measurable impact on the
company’s financial value. A review of the controversy
scores shows that 78% of the Sustainable 75 had scores
at 2 or below (on a scale of 0 to 5). In our view, these
low scores were a compliment to the strength of the
group’s governance metrics and superior scores.
At Sage, we have long recognized that ESG factor scores are
important measures for assessing company valuations,
risk management, and even regulatory compliance.
These scores do not necessarily reflect judgments
about whether an entity has positive or negative ESG
practices, but rather disclose and illustrate how material
environmental, social and/or governance issues specific
to a company may influence its current and future credit
rating. This is supported by both Moody’s and S&P Global
Ratings, which have provided clear guidance on the
importance and pivotal nature of ESG factor assessment
within their respective credit assessment processes.
The companies within the Sustainable 75 are largely
sustainability leaders within their respective industries,
and our ESG score assessments, like those of Calvert
Research and Management, are testament to that. We
also recognize that while strong ESG score assessments
are important to the long-term financial strength of an
organization, they do not necessarily guarantee superior
credit ratings and fixed income market assessments.
However, what they do provide to us, and hopefully to
investors in general, is confidence in the commitment of
these companies to sustainability leadership practices
that will help mitigate future investment risk for long-
term fixed income investors.
Final Thoughts
“ESG considerations are part of the holistic
assessment of credit risk that we undertake for
a rated entity. They are an important element in
our assessment of an entity’s creditworthiness
where they represent a material credit risk.”
- Moody’s Investors Service
(2)
“Since all rated entities operate in the natural
and social worlds, we regard these risks as
ubiquitous across the ratings spectrum...managing
environmental and social risk is included in the
business and financial risk profile assessment
for corporate ratings, as applicable and when
environmental and social risks are ratings significant.”
- S&P Global Ratings
(3)
7%
11%
60%
21%
1%
Controversy Score
Category 0
Category 3
Category 1
Category 4
Category 2
Category 5
Sources:
(1)
The 100 Most Sustainable Companies, Barron’s, Feb. 11, 2019; pg. 19
(2)
Environmental, Social, and Governance Risks — Global: Moody’s Approach to Assessing ESG Risks in Ratings and Research, Sept. 8, 2015
(3)
ESG Risks in Corporate Credit Ratings — An Overview, S&P Global Ratings, Nov. 16, 2015
4
Sustainable
75
Industry
Sector
Moody's
Rating
S&P
Rating
Total
ESG
Score
ESG
%
Ranking
E
Score
S
Score
G
Score
Controversy
Level
HP
Inc
(HPQ)
Technology
Baa2
BBB
86.43
100.00% 97.64 83.70 72.29
2
NVIDIA
Corporation
(NVDA)
Technology
A3
BBB+ 80.26
94.37% 84.47 82.78 69.99
2
Cisco
Systems
Inc
(CSCO)
Communications
A1
AA
‐
80.15
96.38% 84.12 84.20 68.15
2
Hewlett
Packard
Enterprise
Co
(HPE)
Technology
Baa2
BBB
78.60
94.93% 77.81 83.76 72.65
2
Keysight
Technologies
Inc
(KEYS)
Industrial
Baa3 BBB
‐
77.11
92.03% 77.88 72.24 82.73
1
Texas
Instruments
Inc
(TXN)
Technology
A1
A+
76.18
85.92% 80.47 79.89 64.12
1
Prudential
Financial
Inc
(PRU)
Financial
A1
AA
‐
75.77
90.97% 90.00 69.05 70.19
2
Campbell
Soup
Co
(CPB)
Consumer,
Non
‐
cyclical Baa2 BBB
‐
75.41
99.43% 77.53 74.91 73.24
2
Microsoft
Corp
(MSFT)
Technology
Aaa
AAA
74.15
94.09% 82.50 70.81 70.15
3
International
Flavors
&
Fragrances
Inc
(IFF)
Basic
Materials
Baa3
BBB
73.28
88.72% 79.91 69.49 67.95
2
Motorola
Solutions,
Inc.
(MSI)
Communications
Baa3 BBB
‐
73.24
85.51% 81.94 70.25 63.49
3
Salesforce.com
Inc
(CRM)
Technology
A3
A
‐
72.31
92.61% 77.00 70.87 69.28
2
Voya
Financial
Inc
(VOYA)
Financial
Baa2
BBB
72.07
93.52% 72.60 70.80 72.73
1
Colgate
‐
Palmolive
(CL)
Consumer,
Non
‐
cyclical
Aa3
AA
‐
72.00
77.00% 82.00 63.00 71.00
3
Air
Products
&
Chemicals
Inc
(APD)
Basic
Materials
A2
A
71.64
83.46% 64.62 77.67 74.45
1
W.W.
Grainger
Inc
(GWW)
Consumer,
Cyclical
A3
A+
71.21
93.18% 78.03 68.00 66.81
1
State
Street
Corporation
(STT)
Financial
A1
A
70.84
91.67% 80.37 64.37 68.77
2
CBRE
Group,
Inc.
(CBRE)
Financial
Baa2 BBB+ 70.19
87.42% 69.46 68.93 72.43
1
ManpowerGroup
Inc.
(MAN)
Consumer,
Non
‐
cyclical Baa1
BBB
70.09
82.56% 73.88 62.64 74.45
2
Verizon
Communications
Inc.
(VZ)
Communications
Baa1 BBB+ 69.42
76.84% 82.47 57.02 76.05
3
Lam
Research
Corporation
(LRCX)
Technology
A3
BBB+ 69.30
67.61% 77.32 62.86 65.45
0
Xerox
Corp
(XRX)
Technology
Ba1
BB+
68.97
91.13% 84.33 59.00 68.49
2
Cummins
Inc
(CMI)
Industrial
A2
A+
68.34
77.69% 71.15 64.09 69.79
2
The
Home
Depot
Inc
(HD)
Consumer,
Cyclical
A2
A
68.28
91.79% 83.59 54.65 68.68
3
VF
Corp
(VFC)
Consumer,
Cyclical
A3
A
68.26
76.74% 62.21 71.14 72.11
2
Starbucks
Corporation
(SBUX)
Consumer,
Cyclical
Baa1 BBB+ 68.19
91.51% 71.28 70.77 59.65
3
The
Clorox
Company
(CLX)
Consumer,
Non
‐
cyclical Baa1
A
‐
67.95
62.79% 76.30 61.63 66.35
2
American
Water
Works
Co
Inc
(AWK)
Utilities
A3
A
67.89
67.02% 60.57 74.92 72.65
2
Avery
Dennison
Corp
(AVY)
Consumer,
Non
‐
cyclical Baa2
BBB
67.83
58.62% 64.60 74.83 63.20
1
Gap
Inc
(GPS)
Consumer,
Cyclical
Baa2
BB+
67.79
89.55% 65.46 68.83 69.39
3
Sonoco
Products
Co
(SON)
Industrial
Baa2 BBB+ 67.24
55.17% 68.19 67.71 65.05
0
Pepsico,
Inc.
(PEP)
Consumer,
Non
‐
cyclical
A1
A+
67.05
83.33% 71.46 58.96 73.81
3
Applied
Materials
Inc
(AMAT)
Technology
A3
A
‐
66.27
54.93% 69.57 67.30 59.55
1
BorgWarner
Inc
(BWA)
Consumer,
Cyclical
Baa1 BBB+ 65.85
61.54% 72.71 64.05 59.12
2
The
Hershey
Company
(HSY)
Consumer,
Non
‐
cyclical
A1
A
65.77
81.03% 72.66 56.69 70.67
3
Agilent
Technologies
Inc
(A)
Industrial
Baa2 BBB+ 65.42
89.31% 80.35 59.37 62.05
2
Baker
Hughes,
a
GE
company
(BHGE)
Energy
A3
A
‐
65.40
56.52% 67.28 63.79 64.65
2
AT&T
Inc
(T)
Communications
Baa2
BBB
65.32
64.21% 80.49 53.43 68.49
3
Best
Buy
Co
Inc
(BBY)
Consumer,
Cyclical
Baa1
BBB
65.31
85.07% 72.43 60.00 63.82
2
McCormick
&
Co
Inc
(MKY)
Consumer,
Non
‐
cyclical Baa2
BBB
65.17
78.16% 72.83 56.60 68.15
2
DXC
Technology
Co
(DXC)
Technology
Baa2
BBB
65.16
85.22% 66.33 62.46 68.59
2
Kellogg
Co
(K)
Consumer,
Non
‐
cyclical Baa2
BBB
65.14
77.59% 76.29 51.15 71.91
2
Oshkosh
Corporation
(OSK)
Industrial
Ba1
BBB
65.02
71.54% 57.51 71.53 67.95
3
Hasbro
Inc
(HAS)
Consumer,
Cyclical
Baa1
BBB
64.85
75.56% 64.94 66.59 61.95
2
Church
&
Dwight
Co
Inc
(CHD)
Consumer,
Non
‐
cyclical Baa1 BBB+ 64.67
46.51% 65.14 65.70 62.35
2
Macy's,
Inc.
(M)
Consumer,
Cyclical
Baa3 BBB
‐
64.33
82.09% 66.79 61.64 65.19
2
BlackRock,
Inc.
(BLK)
Financial
Aa3
AA
‐
63.94
80.09% 62.91 63.44 65.16
2
Coca
‐
Cola
Co
(KO)
Consumer,
Non
‐
cyclical
A1
A+
63.46
68.97% 63.07 62.99 64.75
3
Lowe's
Companies
Inc
(LOW)
Consumer,
Cyclical
Baa1 BBB+ 63.44
79.10% 62.06 60.55 70.02
2
The
PNC
Financial
Services
Group,
Inc.
(PNC)
Financial
A3
A
‐
63.27
66.37% 68.33 63.73 58.87
2
Kohl's
Corporation
(KSS)
Consumer,
Cyclical
Baa2 BBB
‐
63.00
77.61% 65.43 56.01 70.79
2
United
Parcel
Service
Inc
(UPS)
Industrial
A1
A+
62.99
78.86% 67.13 57.78 65.55
3
Deere
&
Co
(DE)
Industrial
A2
A
62.92
67.69% 72.72 53.32 60.65
2
KeyCorp
(KE)
Financial
A3
A
‐
62.53
64.26% 60.25 69.21 58.68
2
Rockwell
Automation
Inc.
(ROK)
Industrial
A3
A
62.23
41.46% 57.55 64.36 66.75
2
Autodesk
Inc
(ADSK)
Technology
Baa2
BBB
61.88
79.80% 71.17 53.60 65.65
0
The
Estee
Lauder
Companies
Inc
(EL)
Consumer,
Non
‐
cyclical
A2
A+
61.81
34.88% 71.81 58.21 53.55
2
Flowserve
Corp
(FLS)
Industrial
Baa3 BBB
‐
61.44
63.85% 64.09 57.22 63.09
2
Ecolab
Inc
(ECL)
Consumer,
Non
‐
cyclical Baa1
A
‐
59.46
53.38% 59.49 57.45 62.25
2
Avnet
Inc
(AVT)
Industrial
Baa3 BBB
‐
59.34
43.48% 58.63 49.54 74.20
0
PVH
Corp.
(PVH)
Consumer,
Cyclical
Baa3 BBB
‐
59.30
48.84% 63.30 54.72 61.04
3
Delta
Air
Lines
Inc
(DAL)
Consumer,
Cyclical
A3
A
‐
59.29
67.48% 52.05 63.06 63.39
2
Target
Corp
(TGT)
Consumer,
Cyclical
A2
A
58.93
65.67% 64.20 48.34 68.49
4
Yum!
Brands,
Inc.
(YUM)
Consumer,
Cyclical
B1
BB
57.96
62.26% 58.04 53.05 64.72
3
Tiffany
&
Co.
(TIF)
Consumer,
Cyclical
Baa2 BBB+ 57.02
61.94% 50.07 59.51 62.75
2
Ingredion
Incorporated
(INGR)
Consumer,
Non
‐
cyclical Baa1
BBB
56.63
44.25% 67.52 45.83 58.65
2
Comerica
Incorporated
(CMA)
Financial
A3
BBB+ 56.54
47.15% 55.83 64.45 50.43
2
Regions
Financial
Corp
(RF)
Financial
Baa2 BBB+ 54.98
42.34% 51.83 59.53 53.62
2
Republic
Services,
Inc.
(RSG)
Industrial
Baa2 BBB+ 54.88
40.70% 55.38 41.27 73.15
3
CenturyLink
Inc
(CTL)
Communications
B2
B+
53.45
31.58% 55.60 48.66 59.49
2
Cintas
Corp
(CTAS)
Consumer,
Non
‐
cyclical
A3
A
‐
52.54
33.72% 43.88 60.02 55.95
2
Darden
Restaurants,
Inc.
(DRI)
Consumer,
Cyclical
Baa2
BBB
50.79
36.79% 44.27 48.42 64.52
2
SVB
Financial
Group
(SIVB)
Financial
A3
BBB
49.57
21.32% 36.58 59.37 51.56
0
People's
United
Financial,
Inc.
(PBCT)
Financial
Baa2 BBB+ 49.35
19.22% 34.42 58.54 53.40
2
BB&T
Corp
(BBT)
Financial
A2
*
‐
A
‐
49.04
16.22% 40.50 57.09 49.01
2
AVERAGE
Baa1 BBB+ 65.51
70.16 68.19 63.24 65.87
2.00
5
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