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Heading into Independence Day, Harley Davidson (NYSE:HOG) seemed a great choice to analyze because of its independence and freedom- loving mission to “[P]reserve and renew the freedom to ride” (Keith Wandell, Chairman, President &CEO, Harley-Davidson, Inc.). Of course, Harley Davidson or HOG has passed either ModernGraham’s Defensive or Enterprising Investor requirements, or else we would not analyze the company’s ESG metrics. So now we want to know more about how the company operates and manages natural resources, its workforce, customer, and local community relationships – also known as environmental, social and governance (ESG) data. 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. According to Ocean Tomo, 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 HOG’s ESG performance. The data in Table 1 provides HOG’s ESG disclosure score trend for the years 2007 to 2012. According to Bloomberg, HOG has not yet released its environmental metrics for 2013. ESG Disclosure Scores range between 0 (no disclosure) and 100 (full disclosure).

Table 1: HOG’s ESG Disclosure Score Trend for the Years 2007-2012

2007

2008

2009

2010

2011

2012

12

12

12

9.5

33

29

Source: Bloomberg Professional Finance and ESG Platform July 2014

Harley Davidson’s score was very low until 2011, when HOG disclosed for the first time its GHG emissions (Scope 1 and Scope 2), and its community spending, explained more below. To put HOG’s ESG disclosure performance into perspective, SPI has conducted a recent analysis of 16 top global transportation brands, which includes Harley Davidson, and found that the average ESG disclosure score for this group score is 48. The top ESG disclosure score of 65 belongs to BMW (OTCPK:BAMXY), one of Harley Davidson’s industry peers, according to Bloomberg ESG reports.

The data in Table 2 below shows that Harley Davidson lags behind its peers when it comes to disclosing key environmental metrics, or the “E” in ESG. N/A means information is not available. The environmental footprint of a transportation manufacturer is of value to capital markets because it relates to operational costs and good management of natural resources.

Table 2: A Snapshot of HOG’s 2012 Environmental Performance

Name

GHG Emissions

GHG Intens/Sls

Energy Consump

Tot Wtr Use

Wtr Intens/Sls

Total Waste

Invest in Op Sust

Average
(16 securities)

3,958

86

12

189,253

2001

1.10

$ 77,691,749.53

HARLEY-DAVIDSON

162

37

N/A

N/A

N/A

N/A

NA

Source: Bloomberg Professional Finance and ESG Platform July 2014

Columns 2 and 3 of Table 2 provide HOG’s 2012 total greenhouse gas (GHG) emissions, and GHG intensity as a percentage of sales. Not only are HOG’s total GHG emissions much lower than the industry average, but HOG’s GHG intensity as a percentage of sales is significantly below the industry average. Remember that the lower the natural resource intensity metrics are, the better. HOG significantly outperformed industry peers on GHG intensity per sales, except for BMW, whose GHG intensity/sales metric is 19. HOG GHG intensity metric is similar to Hyundai (OTC:HYMPY) and KIA (OTC:KIMTF), who have 40 and 36, respectively, for GHG intensity/sales metrics. Good questions for HOG are: why does it have GHG intensity metrics equal to automakers? What has it done to reduce GHG intensity in the manufacturing of its products?

When it comes to total energy consumption (Column 4), HOG has not disclosed this metric. In addition, HOG has not disclosed total water usage (Column 5), so HOG’s water intensity metric cannot be calculated (Column 6) for comparison with top peers. Moreover, HOG has not disclosed total waste generated (Column 7). So good questions for HOG are: what steps is it taking to achieve operational efficiency when it its environmental footprint for its enterprise? What is its strategy? What is its budget? What priority does HOG give operational efficiency goals and objectives goal?

Further to our analysis, in Column 8, HOG has not released its total annual investment in operational sustainability. This metric provides evidence of a company’s actual investment in areas such as energy and/ or operational improvements that help implement sustainability goals. By not providing this metric, HOG (perhaps unintentionally) conveys a lack of financial commitment to continual improvement in sustainable operations. If HOG has made investments in operational efficiencies, which its 2013 sustainability report indicates it has, HOG can increase its ESG disclosure score by disclosing its budget.

The data in Table 3 provides key metrics for HOG’s 2012 social and governance performance. A transportation manufacturer’s treatment of employees is of material value to the capital markets because it relates to whether a company is able to attract and retain the best and brightest employees necessary to sustain and generate innovation and market growth.

Table 3: A Snapshot of Harley Davidson’s Social and Governance Performance

Name

% Women Emp

% Women Mgt

Commun Spend

% Indep Directors

Average (16 securities)

15

12

$32,331,549.47

58

HARLEY-DAVIDSON

N/A

N/A

$ 3,501,867.00

85

Source: Bloomberg Professional Finance and ESG Platform July 2014

Harley Davidson has not disclosed the percentage of women in its workforce (Column 2) or in management (Column 3), but it has disclosed that 15% of its board directors (Column 4) are women, which exceeds the industry average of 9%. When it comes to minorities in the workforce and in management, no top global transportation brand other than Fiat (OTCPK:FIATY) has disclosed this metric. However, all the global transportation brands, including HOG, have Equal Opportunity Policies, so good follow-up questions for Harley Davidson are whether and how the company plans to attract and retain a diverse workforce of the best and brightest people to ensure continued success.

When it comes to governance, HOG has disclosed that 85% of its board is independent, which exceeds the industry average of 58%. Lastly, HOG disclosed its community investment metric (Column 4) for the first time with its 2012 ESG disclosures. Community Investment serves as a proxy to understand how well HOG exercises its unique influence to impact important issues facing its customers and the local communities where it operates. Two key issues to consider when evaluating a public company’s community spending budget are: (1) whether its community spending priorities align and drive the company’s sustainability priorities, and (2) is corporate governance sufficiently independent to insure that community spending dollars are not being allocated primarily for pet projects or marketing campaigns.

Expect More in ESG Disclosures. Stakeholders can expect further development of ESG disclosures because the Sustainability Accounting Standards Board (SASB) is working on industry-by-industry ESG accounting standards to guide corporate ESG disclosures in filings to the Securities and Exchange Commission (SEC). SASB is at various stages of developing industry-specific guidelines for the transportation, heavy machinery, and non-renewable industry sectors. Follow transportation standards development here.

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 as 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 HOG, and has no plans to change that position within the next 72 hours.

Source: Harley Davidson: A Focus On Environmental, Social And Governance Metrics