As responsible investing continues to grow, with assets reaching $12 trillion in the United States alone, and more investors and funds build exclusion lists targeting different industries, it is important to be able to identify which companies will be affected by this shift. Traditional classification systems, like NAICS, are helpful in identifying a company’s industry from a top down perspective, but they do not provide the level of granularity needed for most firms’ investing policies.
To truly identify a company’s exposure to an industry, identifying the revenue derived from a particular business segment is key when evaluating whether or not they should be included in an exclusion list. Most classification systems utilize a top-down methodology, identifying the largest segment of the business, however there are inherent flaws in this approach that make these systems less useful for responsible investing. While a company may have the greatest exposure to industries that are not excluded, they may still derive a significant portion of their revenue from excluded industries.
FactSet’s RBICS with Revenue database, utilizes a bottom-up classification approach, identifying the nature of the products/services being offered and classifying the company based on the revenue being derived from these offerings. Using this data, one can identify companies which derive a significant portion of their revenue from industries with weapons exposure, for instance (from small arms to advanced combat systems). Here we take a look at Ishikawa Seisakusho, Ltd. (FACTSET_ENTITY_ID = 05JCP1-E):
With the NAICS classifications, an investor may easily miss this company in their initial screening considering all of the industries are related to general manufacturing. Digging in with RBICS, we can see that they derive close to 50% of their revenue from the “Advanced Combat and Support Systems Manufacturing” industry, as this company also manufactures and sells naval mines.