France’s CAC40 index scores better than Germany’s DAX30 when judged on the average environmental impact of its component stocks, according to Scope Group’s ESG impact review. The Frankfurt stock index performs better on social and governance factors.
The average environmental score of the CAC40 is 6.5 out of 10 – where 10 represents optimal ESG impact – compared with 6.3 for the DAX30. In contrast, the average social score for Paris-listed companies is 6.6 compared with 7.0 for the Frankfurt-listed stocks, with a governance score of 6.6 compared with 7.6.
“Comparing the ESG impacts of stock portfolios such as the benchmark indexes of the euro area’s two largest economies illustrates, first, how sustainability differs from sector to sector and, secondly, how much it depends on where companies’ activities are based and their inputs are sourced from,” says Diane Menville, head of ESG at Scope.
In the case of the DAX30, the average cost of environmental impact of its component companies is EUR0.15 for every euro of revenue compared with EUR0.10 for the CAC40’s. For social and governance impacts, the average cost is EUR0.02 for the DAX30 stocks compared with EUR0.03 for the Paris-listed companies.
“Our assessment of environmental, social and governance impacts acts like an early warning system for portfolio managers, showing where future regulatory risks and associated costs lie through the analysis of today’s impacts by factor, sector and geography,” says Menville.
ESG impact reviews are also a way for fund managers to conform with Sustainable Finance Disclosure Regulation (SFDR) on the principal adverse impacts of investors’ investment decisions, Menville says.
The ESG impact score is based on calculating the cost of the externalities of a company’s activities including its supply chain – using well-established, publicly available macro-economic data describing the interdependence of sectors and geographies – for every euro of revenue the company generates.
“Monetising ESG impacts allows us to directly compare different factors such as air and water pollution, labour standards and health and safety and relate them to how much value a company creates – whereas others rely on fixed weights for ESG factors to aggregate comparisons and rankings,” she says.
The average ESG impact score of the biggest listed companies by market capitalisation that the two indexes represent is the same at 6.9, but the German index includes a greater concentration of lower-impact companies. Nearly half of the Frankfurt-listed companies scored above eight compared with only a third among CAC40 stocks.
“Our analysis also shows subtle differences in the importance of ESG factors for the two groups of companies,” says Menville. Greenhouse-gas emissions account for more of the DAX30’s ESG impacts than the CAC40’s while the reverse is true for exposure to countries where corruption is a problem, though they are both the main drivers of ESG impacts. Airborne pollution is a relatively more important factor for DAX30 companies.