Rankings

Sustainability

This score aims at providing a sense of sustainability on a scale from 1 to 10. This score covers all issuers and is based on repeatable, checkable, reasonably stable data so that it can be used across the universe. The aim is comparability, easiness of updating and transparency at the expense of depth.

Sustainability is built using data sets already deployed in defining the Environmental, Social and Governance separate scores. Data is solely AlphaValue’s. It is an arbitrary view that some of these data sets can be recombined to provide ex ante sustainability signals. They include boards’ independence, board’s geographic diversity, split leadership, CO2 emission dynamics, water consumption dynamics, wage dispersion trends, job satisfaction and internal communication. Governance items get the biggest weight.

Governance

AlphaValue's governance metrics are designed to cater for minority investors in secondary markets. It may not reflect the best interests of debt holders for instance.

Founding principles are that all stocks are scored on the same basis using the same set of questions.

Central to AlphaValue's assessment of governance matters is that processing must allow for what professional investors ought to know, i.e. the corporate profile. Typically, a partnership in shares does not give its shareholders a usable voting right for instance. Smaller companies are intrinsically more risky governance propositions mainly because there is a dominant shareholder whose best interests may not always be aligned with those of minorities.

Social

Social data sets are highly qualitative and hard to challenge.

Answers to ticking boxes such as “are all employees trained for tomorrow’s objectives “ tend to be universally positive. While those questions are raised and account for one third weighting, 2/3rd of the AlphaValue Social metrics rely on numerical data sets hinging on staffing, wages and management compensations. The dynamic of sharing wealth to the benefit of staff is the prime logic behind Social scoring. It is in this respect at odd with the best interests of non-staff stakeholders.

Environment

AlphaValue’s philosophy in Environmental matters is that only progress in containing emissions counts. Somebody has to own cement or steel manufacturing so that it is pointless to exclude sectors/firms because of the very nature of what they do. Conversely those are industries were efforts matter most.

All firms are on an equal footing, in the sense that their progress is assessed relative to their peers when it comes to reducing their environmental footprint. The grading system, applying for all the companies in our AV universe, is based on four factors:

1. - Energy consumption
2. - GHG emission
3. - Water consumption
4. - Waste generation

To make it a fair play, we use the good old unitary method to bring them to the same scale (emission or consumption per € of capital employed). Looking at capital employed rather than say sales or staff does away with business model differences and is a stable reference across the coverage board. That will include Financials as capital employed is computed from the liabilities side of the balance sheet. Stocks with negative capital employed have their environmental metrics defaulted to sector average.

Impact on Target Price

The sustainability score impacts the long-term growth as used in any DCF or intrinsic/embedded valuation metrics. The choice of impacting the long-term growth in the DCF is consistent with the fact that sustainability matters are long-term issues.

Obviously, a higher sustainability score will positively impact the DCF (35% weighting of the valuation for Non-Financials)/Intrinsic (20% for Banks)/Embedded value (40% for Insurers).