Case study by Robeco

A packing company in our portfolio is one of the largest rigid can manufacturers in the world, enjoying high market share through oligopolistic markets. Given its large manufacturing footprint, operational health and safety is a major issue. The company claims to pay a lot of attention to it, but could do better in terms of measurement, reporting, and analysis.

In addition to the items it already reports, it could start reporting its lost time accident rate, as some of its peers do. More importantly, it could explain how safety permeates its culture and drives operational performance.

Aluminium maker Norsk Hydro is a major supplier to the company and has found a strong, positive relation between safety and operational efficiency at its plants. If the packaging company were to get an overview of this for its 150 plants, it could likely enhance value.

Our process

We integrate ESG factors into valuation models and decision-making by linking the most material ESG issues to competitive positions and value drivers.

Robeco's process for integrating ESG factors into valuation models and decision making

When building an investment case, our equity analysts consult their sustainability investing counterparts on their respective sector for an assessment of the company’s most material factors. Based on our proprietary sustainability database, additional analyses and discussions with the equity analyst, the sustainability investing analyst then expresses an opinion in a company profile, which lists the most material issues for the company, how is it performing on those issues (absolutely and relatively) and how that affects its competitive position.

Subsequently, the equity analyst gives feedback and assesses how much better or worse the firm performs or will perform versus its peers as a result of its ESG strengths and weaknesses: if the analyst concludes that a company derives a competitive advantage from an ESG issue, then that should be reflected in value drivers that are stronger than its peers, e.g. higher growth, higher margins or a lower capital burden.

In almost half of cases, no change in the value drivers is made, either because the ESG factors cancel each other out, insufficient conviction is reached, differences within the industry are minor or the company is just average. But even then, this analysis typically give the equity analyst a deeper insight into the quality of company management and the risks involved.

In practice

For our portfolio packaging company, the sustainability investing analyst identified weaknesses in reporting on material issues: the company lacks a framework for identifying and monitoring the most material sustainability issues. As mentioned above, the company claims a commitment on safety and provides some data on it, but there are no targets and KPIs. The company would benefit from analysing those data at the plant level and linking them to other performance metrics and potentially to personnel evaluation. The same applies to measures of environmental management, supply chain management and human capital.

After engaging with the company on these issues, the CFO and investor relations team acknowledged the potential for improvement. On our second call with them, they showed some improvements in their disclosure and had appointed a chief sustainability officer to help address them. They also told us they were working on a materiality assessment and subsequent target setting, as well as on improving their IT systems to allow for more rigorous analysis of indirect financial items such as safety.

The packaging company could potentially save several hundred millions of dollars through better analytics on the relation between margins, safety records, and materials use at individual plants. That would imply a margin expansion of several hundred basis points.

Various degrees of improvement imply the following impact on target price:

 Base scenario: no ESG improvementDecent ESG improvement scenario Very strong ESG improvement scenario 
EBIT margin 11.5%  12.5%  13.5% 
NOPAT margin  8.9%  9.6%  10.4% 
Upside potential to the target price  9%  22%  38% 


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    A practical guide to ESG integration for equity investing

    September 2016