Driving the outcome
As the links between intangibles – environmental policy for example – and corporate performance are strengthened so it is clear that they also are generating an increasingly large portion of corporate growth and shareholder value. This explains the increasing demand for information about these aspects of corporate activity, from the investment managers and their institutional investor clients to the corporations which are the focus of their attention.
Last year Asset4, based in Zug just south of Zürich, launched a system which is intended to cater for these needs. For every company, 278 available and traceable indicators measure it on four performance criteria: economic, governance, social and environmental.
“We consider ourselves to be a Thomson Financial for non-financials – would complement a Reuters service,” says Asset4’s vice president of marketing and business development Henrik Steffensen.
Examples of economic criteria include factors such as market leadership, client satisfaction and operating income growth; environmental criteria include animal testing, renewable energy use and greenhouse gas emissions; among the social criteria are announced lay-offs, health and safety compliances and hours of training; aspects of corporate governance include the percentage of independent board members, average board member compensation and stakeholder engagement.
For example, Asset4’s research shows that there is a significant correlation between corporate governance and equity performance. In a survey of 160 companies in the MSCI world index from 2000 to 2005, the 80 companies rated best performing by Asset4’s ranking achieved a 32% out performance (total return) over the 80 companies rated worst performing.
At present data is available for 250 companies. “This is a subset of the MSCI world index,” Steffensen explains. “This will be increased to 500 in March, 800 in July, 1,200 by December and 1,800 next year, and in time we will have around 3,000.”
The system targets four main user groups:
q Investment research to enable the design of financial products, enhance research reports, drive down cost for data collection and focus on interpretation;
qInvestment management to improve investment decisions with extra financials, portfolio and risk monitoring, engagement layer;
q Pension funds for portfolio risk monitoring, engagement layer;
q Corporations who need an objective outside view, and wish to encourage and facilitate stakeholder dialogue and manage risk.
“A pension fund would put in a monitoring layer so that they can ask questions of their investment managers,” says Steffensen. “They will also use it to compare the rating of their portfolio with that of the FTSE100, for example. They need this because they have to report on the companies in which they invest.”
Data is collected by looking at publicly available data including company reports and any relevant newspaper articles. “We take this information and quantify it; we take qualitative statements and turn them into quantifiable data,” says Steffensen.
Companies are evaluated using a combination of ‘driver’ and ‘outcome’ indicators for each of the four main criteria.
Driver indicators provide information on management quality by looking at the different policies, implementation, monitoring and improvements. Each are assigned a weight which then produces a total driver score. These are what Asset4 terms “lead indicators forecasting future outcome”. These are typically points requiring yes/no answers, for example: does the company under review have an environmental policy?
Outcome indicators give a picture of actual performance, performance improvements, transparency and areas with higher than average risk exposure. These are more measurable, for example how far has the company under review succeeded in reducing CO2 emissions?
From this summer, Asset4 will be adding a new feature to the service; if there is a controversy this will be flagged up for the users and then built into the ratings at the end of the year when the annual adjustment is made. “Soon we hope to be able to make the adjustments more often,” says Steffensen.
Users can apply their own weights to each of the four performance and to the driver and outcome indicators, depending on their own views of their relative importance. “Investors tell us which areas they want to focus on,” says Steffensen. “The views of the data are client-specific.”
The driver score and the outcome score produce an overall category score which, when combined with the individual pillar weights, produce an overall rating.
“Until now the problem has been a lack of data transparency,” Steffensen explains. “The new system allows users not only to compare companies in which they invest with others within a given sector but it also allows them to drill down into the raw data to assess individual companies for themselves.”
The companies that form Asset4’s universe have the opportunity to verify the information that is collected and fill in the gaps where information is missing. Yet more good news for advocates of transparency.