Case study by Trillium Asset Management

We integrated diversity, including gender and race at the company and board level into our investment research process as we see it as an essential component of sound corporate governance and critical to a well-functioning organisation: companies with strong gender and ethnic diversity outperform peers when measured by return on equity and other traditional financial metrics. Diversity also helps to reduce company-specific risk in the long term, leading to a lower cost of capital.

Our analyst will adjust the discount rate when valuing companies that have improving or deteriorating corporate governance factors that aren’t believed to be priced in by the market.

At eBay we saw potential improvement in corporate governance related to the expected improvement in the board’s gender diversity. Based on third-party research3, we adjusted the discount rate used in the firm valuation analysis by 25bps. The table below shows the cost of capital calculation used in the discounted cash flow valuation model, the adjustment made for improving governance, the incremental percentage change in equity value and the expected incremental portfolio alpha.

In 2012, we began engaging portfolio companies with allmale boards and those lagging peers on diversity. A number of companies where we have filed, or co-filed, shareholder proposals have since appointed women to their boards. eBay committed to include gender and racial diversity among the qualities its seeks in its board members and the company appointed a second and third woman to its board in 2015.

 Base case valuationAdjusted valuation 
WACC  8.30% 8.05%
Intrinsic value estimate  $32.00 $33.40
Current stock price  $28.50 $28.50 
1-year expected stock return  12.30%  17.20% 

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    A practical guide to ESG integration for equity investing

    September 2016