Examining material ESG issues in the transportation sector

By Chris Hill

Federal law requires companies to disclose material information through various standardized forms and the U.S. Securities and Exchange Commission (SEC) has explicitly noted that this includes extra-financial factors that may affect investment outcomes. Furthermore, institutional investors and asset managers have a fiduciary duty to consider all material issues when making investment decisions.

However, determining which environmental, social and governance (ESG) issues are material for particular businesses and industries has long been a challenge for both investors and corporate managers.

SASB seeks input on proposed ESG disclosure standards for transportation companies

The Sustainability Accounting Standards Board (SASB) has been attempting to address the materiality question by creating sector and industry specific standards for identifying and disclosing information about ESG areas where there is significant evidence of investor interest and financial impact. In determining which issues should be the subject of standardized disclosure, SASB also considers whether pertinent data can be reliably audited in a consistent way and disclosed in a cost-effective manner.

Last year, experts in SASB's working groups began developing a set of standards for the transportation sector. The organization will be accepting public comments on its proposed sustainability accounting standards for the transportation sector from April 18 to July 17. SASB notes that those who wish to provide comments must keep in mind that "the proposed disclosure standards are intended to be integrated in standard filings of publicly-traded companies, such as the Form 10-K."

Why GHG emissions are material for transportation companies

One of the key ESG factors that investors may want to consider when evaluating transportation companies is their disclosure of greenhouse gas (GHG) emissions. This area holds both risks and opportunities. For example, the Obama administration is currently working on new regulations that will limit automobile emissions, and regulatory risks related to environmental performance are present for companies in all parts of the transportation sector.

On the other hand, reducing emissions by cutting fuel consumption is not only a good way for a company to improve its environmental performance, but can also play a role in improving the bottom line by reducing operating costs. There is also evidence that investors favor companies that make incremental progress on reducing their emissions.

A study performed by researchers at the University of California and the University of Otago in New Zealand found that there is a negative correlation between a company's total emissions and its stock price. A separate study led by UC Davis Professor Paul Griffin found that a company's share price typically receives a boost in the days following a sustainability related disclosure.

IW Financial can provide capital market participants with ESG data that can help them answer several key questions about transportation companies they are thinking about investing in, such as:

  • Does this company disclose information about its GHG emissions?
  • How do the company's total GHG emissions and GHG emissions per revenue compare to those of comparable businesses?
  • Is there an enterprise-level environmental and/or climate change policy in place at the company?
  • Are senior corporate officers or the board of directors involved in overseeing implementation of these policies?

In the 21st century, it is increasingly clear that companies need to be taking a proactive approach to extra-financial issues to remain competitive. ESG benchmarking can help investors identify sustainable companies that represent a sound long-term investment opportunity.

About the author: Chris Hill is the Team Leader for the sustainability research team at IW Financial. He has responsibility for overseeing the collection, verification, and quality control of IW Financial's sustainability research. Chris also develops implementation plans for research on emerging sustainability issues and works on a range of client driven research projects.  He holds a B.B.A. in Finance and an MBA from East Tennessee State.

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