Part II-5 Analyzing the Spread of Industry Performance Flashcards
How can a user gain a better understanding of where companies stand relative to one another or to an industry benchmark, and of how company performance on an ESG issue is shaped by its broader industry characteristics?
By evaluating the spread of performance
Descriptive statistics can be grouped into 2 categories
measures of central tendency or measures of variability
Measures of central tendency help to…
help analyze the average or middle values of a dataset
Measures of central tendency include the following
Mean
Median
Mode
Measures of variability (or spread) help to
- help analyze how dispersed a set of data is
Measures of variability (or spread) include the following:
Standard deviation
Mean absolute deviation (MAD)
Minimum and maximum variables
T/F - high standard deviation indicates that values tend to be closer to the average; while low standard deviations indicate that values are spread out over a wider range
False - low standard deviation indicates that values tend to be closer to the average; while high standard deviations indicate that values are spread out over a wider range
What is the standard deviation?
is a measure of how dispersed a set of values is within a dataset.
What is the Mean absolute deviation (MAD)?
the average distance between each data value and the mean
What are Minimum and maximum variables?
the difference between the minimum and maximum variables in a dataset and indicate the range of performance
What would a mean absolute deviation (MAD) of $1.5 billion mean as it relates to fines for legal proceedings?
The values of individual fines are on average $1.5 billion from the mean; and indicates the data is widely dispersed and would benefit from normalization
Why is it good to normalize metrics in the Leadership & Governance sustainability dimension by revenue?
To better assess the cash flow implications of fine-related losses
What are Quantiles?
divide a frequency distribution into equally sized groups, each containing the same number of observations
Quantiles can be helpful in…
determining thresholds for good, average, and poor performance in an industry
Quantiles can used in 2 ways
To indicate the data value at a given quartile
To indicate the ranking of a given data value
What are the most commonly used quantiles?
Quartiles (four quantiles)
Quintiles (five quantiles)
Deciles (ten quantiles); and
Percentiles (100 quantiles)
T/F - Quantiles can be used in conjunction with normalized data (i.e. employee engagement as a %)
True
What is a Normal distribution?
a smooth, bell-shaped graph representing the most common distribution of data- one with many datapoints concentrated in the middle (mean) of the range of performance and the remaining values trailing off symmetrically on each side
T/F - the farther a value is from the mean, the more likely it is to occur
False - the farther a value is from the mean, the less likely it is to occur
T/F - within a normal distribution curve, the percentage (or probability) of values occurring within a range are always different
False - within a normal distribution curve, the percentage (or probability) of values occurring within a range are always the same - 68% of values will fall within one standard deviation of the mean, 95% will fall within two standard deviations, 99.7% will fall within three standard deviations
What does it mean if the standard deviation is 5.69 and the mean is 18.1% for percentage of water withdrawn in regions with high or extremely high baseline water stress?
It means that 68% of the population is between 12.41% and 23.79% of the measured metric
What are the standard deviation %s?
One - 68%
Two - 95%
Three - 99.7%
What are some reasons a company could be an outlier?
1- It faces specific significant risks or opportunities
2- It indicates the comparison of absolute values reported by companies may be improper for drawing conclusions about their relevant performance and requires normalization
What are asymmetrical or skewed distributions in ESG information?
When ESG performance values cluster around certain points in the distribution range
What measures how often values fall above or below the average?
Skewness
At the industry level, what can skewness be caused by?
Underlying financial or operational characteristics of companies
Industry-wide regulatory conditions; and/or
Data characteristics such as performance floors and ceilings
T/F - If a certain characteristic of an industry skews the distribution of sustainability data , a user may want to consider normalizing the metric by that variable -
TRUE - Doing so can restore “normality” to the distribution
T/F - when a company is part of a cluster just under or just above a mandated limit - i.e its metric is relatively close to regulatory standards - the firm could be exposed to risks of non-compliance in the event these standards become stricter
True
T/F - when a company’s performance falls within the tail end of the distribution curve (i.e. far away from required regulatory rates), it is less likely to be exposed to risks associated with increased regulatory stringency and therefore has a competitive advantage
True - this could allow it to obtain pricing power and capture a larger share of the market
What is the type of risks where a significant share of companies in an industry will be exposed to regulatory risks?
Industry-wide or systemic risk
What is the impact of systemic risk?
Companies may be required to invest significant amounts of R&D and capex to improve
What is one way ratings agencies may develop techniques to assess the relative performance of companies?
Data aggregators will collect data structured according to a proprietary set of indicators, which may be industry agnostic or industry specific - such as Health and Safety
