SustainEx: Quantifying the hidden costs of companies’ social impacts

Social pressure and government intervention are forcing companies to take responsibility for the impacts their actions create.

This is a departure from the last few decades when large companies have been able to grow and thrive even as social and environmental challenges have intensified.

Among other measures, minimum wage legislation, sugar taxes, gambling restrictions or carbon prices are all spreading, creating financial expenses in place of previously unaccounted social problems. As a result, costs that were previously externalised to society will become internalised on companies’ financial statements.

New approaches to investment analysis are needed to identify, measure and manage the impacts of these changing pressures.

What is SustainEx?

SustainEx, a ground-breaking new tool, measures the costs companies would face if all of their negative externalities were priced, or the boost if benefits were recognised financially. SustainEx is designed to help our analysts, fund managers and clients identify those risks to help ensure they are reflected in investment decisions and valuations.

If all of the impacts our research identifies were crystallised as financial costs the $4.1 trillion of profits generated by listed companies would fall by 55%, our analysis shows. One third of companies would become loss-making. The research also highlights the total positive or negative impact of each sector, relative to the sales of companies in each sector.

Andrew Howard, Head of Sustainable Research, said: "Companies don’t operate in a vacuum – they are affected by society and have impacts on society.

"We have developed a new framework and tool – SustainEx – to quantify those impacts in economic terms.

"It asks the question – if companies were given a bill for the costs they impose or the benefits they create, how large would that credit or debit be?

"That isn’t a theoretical question.  Companies face carbon pricing, sugar taxes, minimum wages and a raft of other political changes that will turn more of those social impacts into financial costs.

"The analysis we’ve done is built up by looking at close to 50 individual measures – like wages, carbon emissions, tobacco sales, workplace stress and so on.

"We have examined close to 500 academic studies to put an economic cost to those activities and we use data from dozens of sources to measure the effects for close to 9,000 companies.

"The net result is a measure of the risk every company faces.

"We can use that analysis with our analysts, fund managers and clients to measure the risks companies face and make sure we are as prepared for the uncertain future ahead as possible."

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.