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Earlier this year, Wells Fargo passed ModernGraham’s Enterprising Investor requirements. Also, recently, a Seeking Alpha commenter asked about WFC’s sustainability performance after reading our blog about JPMorgan’s (NYSE:JPM) sustainability performance. If a company has passed a ModernGraham financial test, we’re glad to get requests from Seeking Alpha readers to conduct an ESG analysis for a specific company.

The graphic below was designed by the Sustainability Accounting Standards Board (SASB) who is working on industry-by-industry ESG accounting standards to guide corporate ESG disclosures in filings to the Securities and Exchange Commission (SEC). SASB has released a provisional standard for the financial sector and the commercial banking group, which can be downloaded here. The graphic below provides an overview of the universe of ESG issues that might impact a company or industry.

A growing number of investors are examining a public company’s ESG performance data to make more informed investment and business decisions. This growth complements Ocean Tomo’s primary finding in their Intangible Asset Market Value Study: in 1975, the market value of S&P 500 companies represented about 80% tangible assets and 20% intangible assets. In 2005, that flipped. Now, the market value of the S&P 500 is about 20% tangible assets and 80% intangible assets. Ocean Tomo also found that a significant portion of the intangible asset value gap is attributable to patents and innovation.

ESG performance disclosures also serve as proxies to address the “value gap” -- by highlighting risks and opportunities related to material environmental, social and governance issues for specific companies and/or industrial sectors.

Analysis of WFC’s 2013 ESG performance.

The data in Table 1 shows Wells Fargo’s 2012 ESG performance because the company’s 2013 ESG data has not yet been disclosed. ESG Disclosure Scores (Column 2) range between 0 (no disclosure) and 100 (full disclosure). WFC’s ESG disclosure score of 30 is just below the group average of 31. The Average performance shown in Table 1 is a based on Bloomberg’s selection of 24 peers for Wells Fargo.

Table 1: A Snapshot of Wells Fargo’s 2012 ESG Performance

Name

ESG Disc Score

Engy Intens/Sls

Wtr Intens/Sls

Invest in Op Sust

% Women Emp

% Women Mgt

% Women on Bd

Commun Spend

% Indep Directors

Average (24 securities

31

32

83

$87,900,000.00

53

26

20

$81,245,078.75

88

WELLS FARGO & CO

30

37

NA

$ 1,000,000.00

59

30

29

$315,800,000.00

93

Source for Table 1: Bloomberg Professional Finance and ESG Platform June 9, 2014

The commercial banking industry group, as a whole, leads other industries in terms of disclosing ESG metrics. This is likely attributable to the banks' desire to rehabilitate their reputation by being more accountable and transparent after the financial crisis. As with JPMorgan, see how Wells Fargo’s ESG disclosure score jumped up between 2008 and 2009, but has only slightly improved since then,

and has even declined.

Table 2: Wells Fargo’s ESG Disclosure Score Trend for the Years 2005-2012

2005

2006

2007

2008

2009

2010

2011

2012

21

23

22

29

43

44

42

30

Source for Table 2: Bloomberg Professional Finance and ESG Platform June 9, 2014

The environmental footprint of a global commercial bank is of value to capital markets because it relates to operational costs. Columns 3 and 4 of Table 1 show Wells Fargo’s energy and water intensity ratios as a percentage of sales. WFC’s Energy Intensity, calculated as megawatt hours of energy consumed per million of sales revenue in the company's reporting currency, is higher than the group average. WFC’s Water Intensity cannot be calculated because the company has not yet reported total water usage.

As with other commercial banking enterprises, environmental metrics like Wells Fargo’s raise questions about whether and how well WFC has systematically addressed internal operational efficiencies to reduce energy and water usage, to reduce the costs of operating. Column 5 of Table 1 indicates that in 2012, WFC invested 88% less than the industry average when it comes to improving the sustainability performance of internal operations – meaning using less energy and water to run the WFC enterprise.

While Wells Fargo's environmental metrics may not be robust, WFC’s social performance in disclosing key metrics is more impressive. In 2012, Wells Fargo employed 59% women in their workforce, 30% women in management, and 29% women in board positions. Good follow up questions for Wells Fargo include finding out how WFC’s apparent commitment to gender diversity translates into business value for Well Fargo.

When it comes to Community Spending, Wells Fargo exceeds the group average by almost three times, which indicates the company is actively engaging in the communities where it operates. You can read about Wells Fargo’s community focus in their 2013 Corporate Responsibility report. When it comes to internal governance, 93% of WFJP Morgan’s board directors are independent, which slightly exceeds the group average.

Finally, SASB issued a provisional ESG accounting standard for the financial sector in February 2014. Investors should expect further development of ESG disclosures by commercial banks in the near future because of the SASB provisional standard, which identifies these additional material issues for the commercial banking industry group:

  • Financial inclusion and capacity building

  • Customer privacy and data security

  • The legal and regulatory environment

  • Systemic risk management

  • Integration of ESG issues into credit risk assessment

Lesson: Public companies (and the private companies who do business with them) need to recognize that best practices for sustainability disclosures include standard ESG aggregate data like what is presented above. When companies in an industrial sector first disclose sustainability performance, aggregate ESG scores reflect the level of disclosure. Once ESG disclosures are mature for an industry sector, intensity and productivity metrics can be calculated as proxies for operational and management efficiency. Companies that do not disclose ESG data at all risk being eliminated in a competitive situation because of the appearance of risk and lack of transparency and accountability. For a more detailed explanation of ESG data as a game-changer, read this white paper.

Where does this data come from? Since 2009, Bloomberg’s Professional equity platform has provided corporate financial and ESG performance data to the capital markets. Corporate ESG data is typically released through annual corporate sustainability reports. Bloomberg Finance dashboards now contain public corporate financial and ESG performance data, and this information is available to subscribers via nearly 400,000 Bloomberg terminals installed in investment and financial institutions throughout the world, including Fortune 500 CFO offices, academic settings, and public libraries. Anyone with access to these terminals has access to the information.

Disclosure: The author does not currently hold a position in WFC and has no intention of changing that position within the next 72 hours.

Source: Wells Fargo: A Focus On Environmental, Social And Governance Metrics