Digging Our CLAWs into Environmental Sustainability

Balancing the needs of our environment with those of a burgeoning global population and attendant economic demands is the critical imperative of our time. According to the United Nations, worldwide population is expected to reach approximately 10 billion by 2050, nearly 30% more than today.¹ New and innovative approaches to accessing, producing, distributing, consuming and optimizing the use of all goods and services that are essential to just and equitable economic prosperity are vital to fulfilling this obligation.

Clearly, our global economy needs to transform, and we believe this will create numerous compelling investment opportunities. The VanEck Environmental Sustainability Fund provides a way to access these opportunities in a direct and transparent manner by investing in companies with missions and visions directly impacting environmental sustainability via obvious and determined strategies. Key characteristics of the Fund include:

• A holistic view of environment sustainability which entails a fully comprehensive assessment of the environment including the critical roles of land and water, as well as greenhouse gas emissions.
• A dual sustainability approach that emphasizes that sustainable improvements to the environment require business models and strategies that can also be sustained over the long-run.
• A focus on measurable environmental outcomes which combines VanEck’s objective evaluation of its key CLAW (climate, land, air and water) metrics with fundamental company analysis to identify differentiated environmental advantages.

Our CLAW metrics form a core part of our investment approach, providing a way to measure a company’s environmental impact. In this blog, we look at the challenges of assessing how companies are addressing environmental sustainability, the lack of consensus among rating providers and how the CLAW metrics support our fundamental analysis of companies.

Measuring Environmental Sustainability

It may seem obvious that to make a positive impact on our environment, a company must stay in business. However, the definition and measurement of that impact is definitely not clear-cut. A universal struggle among managers of sustainable investment strategies is the standardization of relevant metrics—in particular, discerning how well portfolio companies are addressing sustainability issues as well as how much that success (or lack of success) is impacting a company’s bottom line.

In recent years, organizations such as the Sustainability Accounting Standards Board (SASB) have made significant strides in unifying and advancing company reporting standards on sustainability. In addition, companies are increasingly aware of investors’ desire to have financially material information on environmental, social and governance (ESG) issues at their disposal to aid in making more informed investment decisions. Companies are expanding their efforts at providing this data, typically in a formal, annually published Sustainability Report.

In prepared remarks at the London City Week on June 23, 2021, SEC Commissioner Gary Gensler formally stated that he has asked his staff to draft formal recommendations on mandatory company disclosures on climate risk and human capital following a public comment period, which ended on June 23.² The movement towards standardization is also occurring in Europe, with transparency in disclosure efforts captured within various initiatives such as the Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD).

Nevertheless, there are no requirements for what data is included or how it is reported. Access to measurement data is not necessarily the primary concern for managers either. According to a study by the SustainAbility Institute, there are over 600 ESG rating and/or ranking providers globally.³

Given the often publicly available nature of such data, ESG rating providers tend to focus more on value-added measurement by serving up their own analysis or interpretation of that data (or, in other words, actually rating companies on E, S, and G-related factors). And this is where managers often have the most difficulty.

Many of these ratings, scores or grades, though methodologically very sound in terms of their calculation, can be vastly different by way of substance and approach. This often leads to disparities among the various providers (shockingly, in some cases, even for the same company using the same reported data).

These ratings have also been shown to be somewhat biased towards larger companies, which are often sufficiently staffed to collect and report on, in exhaustive detail, the myriad inputs utilized by ratings providers to determine their ratings, scores or grades for the companies.

ESG Ratings Tend to Favor Larger Companies, Show Little Consensus

Sample ESG Ratings From Various Ratings Providers: By Market Cap Size (Left) and For Selected Companies (Right)

Source: OECD (ESG Investing: Practices, Progress and Challenges, 2020). OECD calculations based on Refinitiv, Bloomberg, MSCI, Yahoo finance, Moody’s, Fitch, S&P.

The Fundamentals of CLAW

Recognizing the potential pitfalls of relying solely on third-party measurements to conduct fundamental analysis of company E, S and G-related factors, VanEck has adopted its own approach primarily focused on the “E” side of things.

Climate, Land, Air, Water (CLAW Metrics)

The concept of CLAW metrics were developed by our Environmental Sustainability investment team and represent the core of the team’s “Dual Sustainability” investment philosophy. Specifically, each CLAW factor is represented by one or more raw data metrics that we have deemed to provide the most comprehensive and impactful picture of a company’s current status with respect to addressing environmental sustainability imperatives.

CLAW metrics also:

• Establish a straightforward, baseline approach for evaluating a company’s environmental impact on a per-dollar-revenue basis.
• Provide a means for benchmarking companies, either versus industry peers, individually through time, or, collectively, versus other industries.
• Serve as a practical tool for facilitating one-on-one company engagements.

Importantly, collection and analysis of CLAW metrics are carried out in a similar manner as Financial Accounting Standards Board (FASB) defined accounting metrics. In these regards, a discussion with a company’s management on their carbon emission mitigation strategies would be analogous to speaking with them regarding their goals on revenue growth, capital allocation, etc. Though collection and analysis of CLAW metrics is still in its infancy, the team believes that it is a core part of its fundamental investment process and it could play a vital role in determining precisely how much one can or should attribute a portfolio company’s performance success (or failure) to its environmental track record.