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Which part of the Cost Structure reflects “S” and which reflects “E”!

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We consider sales as a good indicator of the ESG Footprint of a company. Why is this so? Of the total sales achieved by a company some part is its profit margin. Let us assume sales to be Rs. 100 and the margin to be 20%.

This means Rs. 80 worth of factor inputs are paid for by the company. Wages and purchase of materials are made. Further costs are incurred in processing the material into finished goods.

The wages reflect the people intensity of the business. Some businesses are more people intense; the IT / ITeS sector is a good example. In such businesses Social / Human factors are a big issue.

Other businesses are typically manufacturing intensive. A tea, coffee and beverages company might fit this description. In these companies Environment issues are a larger part of the story.

And then of course, some businesses have a good mix of both people intensity as well as manufacturing intensity.

Considered thus, Sales / turnover is likely to reflect the ESG footprint of a company than Market Capitalisation.

Financials, such as LIC in the Top 10 on ‘sales’, the banks that feature similarly, should actually be ranked differently. For instance, LIC has a passive income (investment income) which does not directly translate to materials purchased and employees paid.

The footprint of a bank is better determined by ranking on deposits taken and loans given, than on net interest income. These kind of analysis will appear when we do a sectoral deep-dive.