We believe these companies’ strong ESG management practices give them a long-term advantage. July 27, 2023.
Morningstar
This list is about long-term sustainability—not valuations.
Strong competitive advantage & effective ESG management is key
Companies possessing strong competitive advantages, often referred to as wide moats, become formidable contenders in their respective industries. This advantage becomes even more compelling when combined with effective management of environmental, social, and governance (ESG) risks.
In essence, the concepts of durability and sustainability, encompassed by ESG, naturally complement each other. ESG takes into account long-term risks that extend beyond conventional financial considerations.
All companies encounter sustainability risks, largely influenced by the nature of their sectors. For instance, an oil and gas enterprise would face significant environmental challenges, whereas a consumer technology firm would be exposed to social risks such as breaches of data privacy.
According to Morningstar, research finds that the biggest ESG risk is in energy and utilities, with the smallest in technology and real estate.
A companies approach demonstrates long-term risk management
A company’s approach to sustainability demonstrates how it anticipates and addresses these long-term risks. Companies that mishandle ESG issues could incur significant economic costs that jeopardize their ability to earn long-term, maintainable profits.
52 companies ranked by risk score
The table below, highlights the companies with Morningstar ESG Risk Rating Assessments of Negligible or Low. This rating is based on the ESG Risk Rating. It considers two main factors—exposure, or a company’s vulnerability to ESG risk, and management, which describes actions taken by a company to manage a particular ESG issue—and blends them into a single score. The lower the number, the lower the risk.
Morningstar does not focus on valuations for these companies. Rather, it looks at the criteria that may set a company up for success in the long term. This can serve as a great watchlist.
Here are the 52 companies that made the cut, ranked by the risk score.
Keysight Technologies KEYS
Keysight Technologies is the leader in communications testing and measurement solutions. We think it has the strongest and broadest communications testing capabilities in the market across hardware, software, and services. Its wide Morningstar Economic Moat Rating, according to analyst William Kerwin, is owing to “intangible assets in the design of test and measurement equipment and software and switching costs for its portfolio of solutions.”
Because of Keysight’s strong ESG reporting and oversight of ESG issues, Sustainalytics gives the company an ESG Risk Management rating of Strong. Sustainalytics notes that the firm has implemented a strong whistleblower program, has an adequate policy governing environmental issues, and employs solid social supply chain standards.
Keysight’s greatest material ESG issue is the risk of losing human capital to competitors, but we don’t think this is likely to happen, and we think the firm’s strong variable compensation program helps retain talent.
The only recent controversy attributed to Keysight is an investigation into alleged patent infringement practices. Still, this incident had minimal impact on Sustainalytics’ broader analysis of the firm’s ESG practices.
ASML Holding NV ASML
ASML is the leader in photolithography equipment for semiconductor manufacturers. Lithography tools account for a significant portion of chipmakers’ capital expenditures, with EUV platforms approaching $200 million in price. ASML’s immersion lithography tools allowed the company to capture and maintain the leading position in the marketplace.
Because of ASML’s low exposure to material ESG issues and strong management, Sustainalytics assigns its ESG Risk Rating as low risk. It is also ranked as having the lowest ESG risk within the semiconductor industry. Because of its status as a publicly traded company and the nature of its business, ASML is inherently exposed to baseline corporate governance risk. But its greatest ESG risk may be the potential scarcity of experienced engineering talent within the industry, though Morningstar believes ASML has exhibited an effective human capital management program.
Sustainalytics also notes that ASML is effectively integrating climate risk into its enterprise risk management process, with a goal to reach net-zero scope 1 and 2 emissions by 2025.
Despite having an overall “low” controversy level according to Sustainalytics, ASML did report a fire accident in its Berlin factory in January 2022, inviting doubts about the safety of its overall production environment.
Accenture ACN
Consulting firm Accenture’s risk is mainly related to its exposure to cyberattacks and its dependency on specialized talent, such as IT consultants and engineers, as it tries to keep up with client demand.
Clearly, Accenture is taking sustainability considerations seriously. Accenture CEO Julie Sweet noted during a quarterly call that sustainability “is a critical area for which technology is still evolving. … We believe that every business must be a sustainable business, and yet companies are at very early stages of figuring out how to make this shift.”
Sustainalytics gives Accenture an ESG Risk Management rating of Strong. The board has a comprehensive data privacy policy. To attract and keep employees, Accenture has set gender and racial diversity targets and provides same-sex and gender-transition benefits. It is building employee skills in high-demand technologies like the cloud.
Morningstar analyst Julie Bhusal Sharma is a fan, citing Accenture’s strong reputation for reliability and its “treasure trove of institutionalized industry expertise and experience.” Accenture’s technological and strategic know-how, paired with its attention to sustainability considerations, is helping bolster profits. Accenture’s operating margin for the third quarter of fiscal year 2023 was 14.2%, and though a slight decline (210 basis points) from a year prior, we believe this will be worth the short-term pain.
Sustainable companies can still have controversies
Clearly, a spot on this list doesn’t mean that a company’s sustainability efforts are flawless.
For example, though Sustainalytics has assigned Experian EXPGY an overall ESG Risk Rating of Low, multiple data security incidents in both the U.S. and in Experian’s international subsidiaries have resulted in a Controversy Assessment of Significant. The frequency of these incidents has contributed to operational and reputational risk, as shareholders and customers may lose confidence in the company’s management.
Even so, Experian holds a spot in our catalog of sustainable companies because it is on the right track to improve data privacy and cybersecurity programs. The firm has started reporting according to the Sustainability Accounting Standards Board standards, which is a best practice, and has improved its quality management system to ensure secure data management. It also has Negligible risk ratings in the areas of Business Ethics and Product Governance.
Source: Morningstar
