JUST Capital’s Quarterly Review of Stakeholder Performance – Q2 2022

Report by Director of Quantitative Research & Analytics Mona Patni.

Stakeholder Performance

In quant investing, factors form the basis of performance. Here, we evaluate the stakeholder and issue scores that JUST Capital computes for Russell 1000 companies as factors and see if the signal based on the score can translate into alpha over the period being considered. 

When we say stakeholder performance, we are measuring the financial performance of firms in the top 10% of each stakeholder group (D1), compared to the bottom 10% of this group (D10). The top 10% of Workers, for example, means the companies with the top 10% of scores for Workers, i.e. the best companies for workers. We then see if these signals are useful in separating one group of stocks from another by sharing the quarterly performance of the portfolios. We then apply this approach to the Issues that comprise each stakeholder. In both cases, we will refer to the portfolios by the stakeholder or Issue they represent.

In Q2 2022, JUST Capital found that four of the five stakeholders we track delivered positive performance, excluding Customers. The Environment stakeholder delivered the best performance over this period, with a long-short spread of 10.5%. Within the Customers stakeholder, underperformance was driven by both deciles, with the top decile underperforming and bottom decile outperforming.

JUST Capital’s Overall Weighted Score takes into account the 20 core Issues identified through our survey research as top priorities for just business – including paying a living wage, creating a diverse, inclusive workplace, and helping combat climate change – across key business stakeholders: Workers, Communities, Shareholders and Governance, Customers, and the Environment. This Overall Weighted Score delivered a spread of 6.3% over the period ending June 30, 2022.

 

 

Shown below is the Year-to-Date (YTD) and Q2 performance, which is quantified by the spread between the top and bottom deciles of all the stakeholders and the overall weighted score.

 

Workers Performance

The Workers stakeholder measures a company across five Issues:

• Wages – Pays a fair, living wage.
• Health – Protects worker health and safety.
• Benefits – Provides benefits and work-life balance. 
• Diversity, Equity, and Inclusion (DEI) – Cultivates a diverse, inclusive workplace. 
• Careers: Invests in workforce training. 

 

 

In Q2, we saw three out of five Worker Issues outperform. Underperformance in Benefits was driven by negative performance from both top and bottom decile companies and weak performance in Wages was driven by top decile companies.

Shown below are the top and bottom five contributors to the top decile (D1), the top-ranked companies as measured by their Workers score, and the bottom decile (D10), the lowest-ranked companies as measured by their Worker score.

Communities Performance

The Communities stakeholder measures a company across four Issues:

• Jobs – Creates jobs in the U.S. 
• Supply Chain – Respects human rights in the supply chain. 
• Community Development – Contributes to community development.
• Philanthropy – Gives back to local communities.

 

 

All issues within Communities were positive contributors to the stakeholder’s performance.

In Q2, we saw Community Development outperform other Issues within Communities. Shown below are the top and bottom five contributors to the top decile (D1), the top-ranked companies as measured by their Communities score, and the bottom decile (D10), the lowest-ranked companies as measured by their Communities score.

Shareholders and Governance Performance

The Shareholders and Governance stakeholder measures a company across three Issues:

• Accountability – Priotitizes accountability to all stakeholders.
• Ethics – Acts ethically at the leadership level.
• Returns – Generates returns for investors.

 

 

In Q2 we saw the Returns issue outperform the other Shareholder and Governance Issues, with a long-short spread of 10.3%. 

Shown below are the top and bottom five contributors to the top decile (D1), the top-ranked companies as measured by their Shareholders and Governance score, and the bottom decile (D10), the lowest-ranked companies as measured by their Shareholders and Governance score.

Customers Performance

The Customers stakeholder measures a company across four Issues:

• Privacy – Protects customer privacy.
• Experience – Treats customers fairly.
• Transparency – Communicates transparently.
• Beneficial Products – Makes beneficial products.

 

 

In Q2, we saw the Transparency outperform the other Customer Issues, with a long-short spread of 4%. Beneficial Products, Privacy, and Experience were negative contributors to Customer performance.

Shown below are the top and bottom five contributors to the top decile (D1), the top-ranked companies as measured by their Customer score, and the bottom decile (D10), the lowest-ranked names as measured by Customer score.

Environment Performance

The Environment stakeholder measures a company across four Issues:

• Sustainable Products – Develops and supports sustainable products.
• Pollution Reduction – Minimizes pollution.
• Climate Change – Helps combat climate change.
• Resource Efficiency – Uses resources efficiently.

 

 

In Q2, we saw Pollution Reduction outperform other Environment Issues. Resource Efficiency and Climate Change were also positive, while Sustainable Products had negative performance.

Shown below are the top and bottom five contributors to the top decile (D1), the top-ranked companies as measured by their Environmental score, and the bottom decile (D10), the lowest-ranked companies as measured by their Environmental score.

Appendix

Computation Methodology

We monitor the performance of these stakeholders and Issues on a long-short basis. The long and short portfolios are selected based on the factor scores as the top and bottom deciles within the universe of companies we track in the Russell 1000. Top decile (D1) companies are those that rank highest based on the factor score, and bottom decile (D10) companies are those that rank lowest based on the factor score.

D1 Performance is computed as (Equally weighted average of returns of stocks in D1 bucket) – (Equally weighted average of returns of all stocks within the Universe).

D10 Performance is computed as (Equally weighted average of returns of stocks in D10 bucket) – (Equally weighted average of returns of all stocks within the Universe).

Spread is computed as D1 Performance – D10 Performance.