Highlights from Growth & Innovation

Martin Toner, MBA, CFA

We are publishing our inaugural ESG scores across our nine North American Growth & Innovation companies under coverage. Integrating ESG with traditional fundamental analysis is growing in importance. Disclosure is revealing more about the risks and opportunities that exist for the companies in our coverage universe. We use the Sustainability Accounting Standards Board (SASB) standards and incorporate additional analysis to provide investors with a risk assessment tool and improve comparability across companies. It remains difficult to quantify ESG performance, but the discussions being generated are already providing new insight into our Companies. In this report, we examine the key issues and put them into context. We plan to incorporate ESG analysis within our broader research practice and update our methodology periodically as disclosures improve. 

Tread Lightly
Quantitative ESG disclosure is sparse, and given the modest environmental footprint of most software companies, the data is not very revealing. However, energy mix and carbon emissions are important to the sector’s customers and employees and becoming carbon neutral has become a high priority. Offsetting emissions has been achievable, and Kinaxis and Shopify were both carbon neutral in 2020, but we believe there is risk to the sustainability of low prices for carbon offsets and the low cost of water consumption. 

Secure Talent
Data Security and Privacy and Talent Management are the two performance metrics most connected to value creation, and the most important ones in our scoring framework. To date, an effective way to quantify performance is lacking and existing SASB metrics are poorly disclosed. 

Opportunities for a Positive Impact
We believe many Growth & Innovation companies are positive enablers of environmental and societal change. In our opinion, these attributes are not well-quantified or recognized by traditional ESG reporting. For example, cloud computing, which Softchoice helps its customers deploy, is more energy efficient than the alternative, and Kinaxis’ RapidResponse helps its customers remove cost and carbon from its supply chain. Given the substantial positive ESG impacts some of our companies under coverage are having on their customers, we would argue it is likely they have a net positive impact from a holistic view.

Scoring Growth & Innovation ESG Performance
We outline a framework and scoring methodology to give investors a way to compare companies in this space. In order to evaluate both companies who disclose performance on SASB metrics and those who do not, we incorporate a business mix score. It estimates the risk to SASB metrics for each company. In our inaugural score, Kinaxis and Shopify, the companies who disclose quantitative metrics and incorporate ESG into corporate governance, score highest. We believe investors should utilize our scoring methodology as a risk and opportunity assessment tool.

Martin Toner, MBA, CFA 416.428.5150