Friday, 28 March 2014

Canadian Transportation Companies - Sustainability, Social, Environmental and Governance Ratings

Just as we have previously done for Consumer companies, Mining, and Oil and Gas stocks, today we will take a look at how well Canadian firms in air, rail, truck and marine transportation rate on key corporate sustainability factors. We'll also have a look at their financial and stock performance.

Same Methodology - 3 Key Factors
In the same manner as before, we dig up data through reports like the annual Proxy Circular filed on Sedar, or through a Sustainability report filed on the company website or on the Global Reporting Initiative database, on three key aspects that researchers have found (see especially the Mining post for the details and further links) are especially useful in finding companies that will outperform for the investor.

1) Board of Directors committee with a sustainability mandate
2) Executive compensation tied to ESG performance
3) Formal stakeholder engagement processes

We also gathered other evidence that a company has been taking sustainability seriously:
4) Published, annual, up to date corporate sustainability reports, preferably audited and submitted to GRI
5) Membership in voluntary sustainability-related reporting and promotion organizations like Carbon Disclosure Project, Canada's Top 100 Employers, Green Marine, Canada's Best Managed Companies, Sustainalystics / Macleans Top 50 Socially Responsible Corporations 2013, Tour Operators’ Initiative for Sustainable Tourism Development, Randstad Award for Canada’s Most Attractive Employer 2013
6) Constituent of the iShares Jantzi Social Index ETF (TSX: XEN) that holds only companies with better social and environmental ratings
7) High rating in the Board Shareholder Confidence Index published by the Clarkson Centre for Business Ethics and Board Effectiveness
8) Women on the Board of Directors

The results are a mixed bag. The pattern is, the bigger the company, the more explicit and extensive the adherence to sustainability.

No evident sustainability efforts - Cargojet, HNZ Group, Contrans Group, TransForce

Some sustainability initiatives - Air Canada, Chorus Aviation, Transat, Trimac, Algoma Central and Logistec

Integral to operations and strategy - Westjet, CN Rail and CP Rail. For example, CN's latest Sustainability Report, with its reams of pertinent statistics on environment, safety, people, and its priorization of issues in the chart reproduced below, provide convincing evidence that the company is doing more than paying lip service to sustainability.

Financial and stock performance not apparently related to Sustainability
The next table sorts the companies by their annualized total stock return (capital gains plus reinvested dividends) over the last five years.

There seems to be no relationship between sustainability rating and stock performance. (We note in passing that every stock but Transat has handily outstripped the return of the overall TSX, as measured in a benchmark fund such as iShares S&P  / TSX Capped Composite ETF (XIC), which achieved a compound return of 12.5%).

There are also seems to be no relationship between sustainability and company profitability, as measured by Return on Equity or Assets.

Bottom Line: As we noted before in the face of similar results for Oil & Gas and Consumer stocks, it may be that the research-established relationship between sustainability action and corporate success takes longer to manifest itself. In the meantime, the role of this sustainability assessment may thus be more to assist those investors who wish to select their investments on philosophical grounds in addition to the financial numbers.

Disclosure: This blogger owns shares of CNR.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.


TM said...

Looking inward to the companies, it would be worthwhile seeing how employee happiness and corporate financial performance are related. Some broad research from through Excellence Canada could be available this year that explored workplace quality indices based on several factors. Basically, are there corporate cultures complete with 'talent management' programs that feed a higher staff productivity through employee satisfaction that ultimately drive the bottom line? A peek into the results suggests there are statistically significant correlations. My personal experience in a private engineering consulting company that went through a successful ISO9001 certification leads me to believe there can be a significant payoff (when the initiative begins with culture and not just administrative QA/QC forms...)

Good corporate quality policy and procedures can wrap up many of the topics that are ranked highly for CN investors (many of the 'People' and 'Safety' topics in the chart), and not focus on the softer topics that do not have as significant a tie to the bottom line ('Environment', 'Community',...).

Keep up the great work at HowToInvestOnline !

Tracy and Rob

CanadianInvestor said...

Thanks Tracy, no doubt good culture pays off. As I found doing this post, it may be difficult to establish a simple direct link between the good culture and the financial results. Look forward to seeing results of Excellence Canada research, perhaps on your blog? Like your blog, btw.