The tiny hedge-fund, that master-minded the coup against the board of Exxon Mobil, hasn’t slowed down in its quest to hold the world’s biggest companies to account for dangerous levels of climate risk.
Engine No. 1 has launched its own Total Value Framework, which aims to assess the extent to which a firm’s ESG and sustainability credentials translate into financial value.
The framework puts a tangible value on a company’s impact.
It’s a reaction to the status-quo approach of ESG and sustainable investing that relies on little more than screening out sin-stocks, and building portfolios full of tech companies that don’t have a large physical footprint. Neither of these approaches have been successful in driving outcomes for the climate.
“What’s needed now is a radical new research-based approach that integrates non-traditional but financially material ESG data, methods, and systems into traditional analysis. Such a revolution must be objective, replicable, and auditable— and, as a result, readily incorporated in financial disclosures, prospectuses, and pedagogy.” The report says.
The framework first requires the generation of the right kind of data on a company’s operations. Recent developments in ESG have seen a torrent of data points flood out screens, but few are able to directly inform analyst models.
The TVF attempts to measure the value that companies create or destroy for both shareholders and stakeholders, all in dollar terms. It assesses the impacts on stakeholders (staff, local community, or the environment) and then estimates the value this creates for shareholders (investors).
It then digests it, and translates it into actionable insights that can inform the decision-making of managers and investors.
“Instead of ESG scores and ranks, which in effect constitute little more than emojis and are as difficult to incorporate into spreadsheets or algorithms, we try where possible to quantify the impact in dollars. We use independent sources and estimates to assess the firm-level costs of emissions, resource use, waste, social practices, and a host of other ESG factors.”
These insights are then used to estimate the financial value being contributed for shareholders.
“The Total Value Framework finally makes sense of all of these ESG criteria and will help identify and maximize high-value impact opportunities that lead to improved financial value,” said Jennifer Grancio, CEO of Engine No. 1. “There should not be a tradeoff between impact and returns, and the framework’s analysis shows the significant financial upside of material, high-impact actions. This framework unites CEOs, board members, investors and those seeking impact.”
The Total Value Framework was developed by Engine No. 1 in collaboration with Witold J. Henisz, Professor of Management at The Wharton School, The University of Pennsylvania.