The Gap Inc.: A Focus On Environmental, Social And Governance Metrics

Sep. 4.14 | About: The Gap, (GPS)

ModernGraham has identified The Gap Inc. (NYSE:GPS) as appropriate for Enterprising Investors, so for these investors, I am providing another layer of research and analysis that provides insight into The Gap’s environmental, social and governance (or ESG) performance. ESG metrics are more meaningful when companies in the same industry are compared, so for this blog we compare The Gap to Kohl's (NYSE:KSS) on key ESG metrics. The ESG data for The Gap and Kohl’s shows 2013 performance.

Companies, through annual reports such as the 10K and the corporate social responsibility (CSR) report, release corporate ESG data. Our primary source for the ESG data is Bloomberg’s Professional Finance database (Bloomberg). Since 2009, corporate ESG data has been available through Bloomberg. If a company sees an error in their public ESG data, it should have a corporate representative contact Bloomberg and get it corrected, as it would with public financial data.

ESG Disclosure Scores range between 0 (no disclosure) and 100 (full disclosure). Bloomberg calculates an ESG disclosure score for each public company, which provides a quick read on how accountable and transparent a company chooses to be when it comes to sustainability performance. Table 1 provides GPS’ ESG disclosure score trend for the years 2009 to 2013. According to these scores, The Gap’s sustainability performance appears to be relatively flat.

Table 1: The Gap’s ESG Disclosure Score Trend for the Years 2009-2013

2009

2010

2011

2012

2013

42

32

39

42

48

Click to enlarge


Table 2, Column 2 shows that The Gap has a slightly higher aggregate ESG disclosure when compared to Kohl’s. The Gap’s ESG disclosure score of 48 is currently the highest ESG score among its U.S.-based peers, with Kohl’s a close second.

Table 2: Environmental Performance

Name

ESG Disc Score

GHG Emissions

GHG Intensity/Sales

Energy Consump

Tot Wtr Use

Total Waste

Wtr Intens/Sls

Invest in Op Sust:

GAP INC. (GPS)

47

448.76

28.67 (2013)

1.19

NA

NA

NA

NA

KOHL'S CORP (KSS)

43

868.01

45.61 (2014)

1.54

3331.31

0.14

181.14

NA

Click to enlarge


Next, consider that The Gap’s Total Greenhouse (GHG) emissions (Table 2, Column 3) are almost half those of Kohl’s. Then consider that The Gap’s GHG intensity as a percentage of sales (Column 4) is also about half of Kohl’s. Taken together, these two metrics suggest that The Gap’s operations not only emit significantly less GHG emissions, but the lower GHG intensity metric suggests that the Gap’s operations are also more energy efficient and cost-effective.

When it comes to total water usage (Column 6), however, only Kohl’s has disclosed this metric, whereas The Gap has not. Similarly, Kohl’s has disclosed Total Waste data (Column 8), whereas The Gap has not. Until The Gap discloses its total water usage, investors cannot compare The Gap’s water intensity ratios to its peers'. Some investors may want to know when The Gap will disclose total water usage so that the company’s usage can be compared to its peers' to assess overall water use and efficiency within the enterprise. As with GHG intensity, water intensity metrics provide investors with a due diligence perspective on operational costs related to water use.

A final point about The Gap’s environmental metrics is that the company appears not to have a budget to invest in operational sustainability (Column 9). Kohl’s has also not disclosed this metric. This metric is the amount of money spent by the company, in millions, on operational environmental and social compliance and other internal environmental and social initiatives, as defined by the company. Many companies are not used to reporting this metric. By providing this metric to investors, companies appear more accountable and transparent because investors can see there is a budget that helps drive progress to meet important sustainability goals and objectives.

Table 3: Social and Governance Metrics

Name

% Women Employed

% Women on Bd

% Women Mgt

Commun Spend

% Indep Directors

GAP INC. (GPS)

74

20

71

NA

90

KOHL'S CORP (KSS)

NA

20

NA

NA

80

Click to enlarge


The Gap has disclosed key social metrics indicating that 74% of its total work force is women, which is an imbalance when it comes to gender parity. Although nearly 75% of The Gap’s workforce and management are women, The Gap’s board of directors has only 20% women. Why should investors care about gender parity at all levels of an enterprise?

According to research by Catalyst, there is evidence that gender parity on the board of directors, defined as at least three or more women on the board, results in stronger financial performance than those companies that do not have gender parity. On average, companies with the highest percentages of women board directors outperformed those with at least by (1) 53% on return on equity; (2) 42% on return on sales, and (3) 66% on return on invested capital.

Beyond financial returns, the issue of gender parity in leadership is of material value to investors who are also interested in whether the company is able to attract and retain the best and brightest employees necessary to sustain and generate innovation and market growth.
Further to our analysis, when it comes to governance, The Gap has one of the most independent boards among its peers at 90% independence.

When it comes to community spending, The Gap and most of its peers have not disclosed this metric. Community Investment serves as a proxy to understand how companies exercise their unique influence to impact important issues facing its customers and the local communities where they operate. 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.

Who values this data? Investors seeking long-term investments in maturely positioned companies to absorb identifiable risks and opportunities value the data. Other stakeholders -- such as future and current employees and customers -- value ESG data, too. If you want a deeper explanation of this megatrend towards corporate disclosures, please click here.

Disclosure: The author does not hold a position in any of stocks mentioned in this article, and has no plans to change that position within the next 72 hours.