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Susan Avarde headshot

Why Brand Strength and ESG Matter To Investors

By Susan Avarde
ESG matters to investors

What is a brand? Branding is a key contributor to corporate value, yet there is no agreed upon definitions of a “brand.” Most of us have a vague understanding that it is something more than just a company’s logo or advertising campaign, but we lack a consistent way of putting some guidelines around the concept. A brand is primarily measured perceptually. So, one way to frame a brand is that it is both everything we know (or think we know) about a company and a collection of a company’s people, ideas and conduct.

Brand plays a significant role in creating value for investors.

However you define a brand, it is essentially a subset of a larger tranche of value known as intangible assets. If one subtracts book value from market value, one soon finds that intangibles often represent more than 85 percent of corporate value. This astonishing percentage has risen from an estimated 17 percent in 1975, as estimated by Ocean Tomo, a financial research firm. Meanwhile, brand value forms a significant portion of intangibles which in turn makes up somewhere between 14 and 21 percent of the market value of the S&P 500. So, it is well worth considering a brand's value when investing. 

Strong brands deliver for investors.

Marketers build and protect brands, resulting in an “economic halo" that enables a brand to recover from an economic downturn more quickly. Companies with strong brands are also less volatile than their competitors. This is a significant advantage for investors seeking to avoid risk.

Not so coincidentally, strong brands also tend to have high environmental, social and governance (ESG) scores. In this way, strong brands offer investors a great way to align their values with their investments.

How is a brand’s contribution and impact measured without industrywide standards?

While intangible assets don’t “sit on the books,” academics and researchers have been tracking changes in brand strength in one way or another for decades. Beginning in the late 1980s, many marketing consultancies created baseline performance measures to track important brand metrics for new clients. The idea was to demonstrate the value that marketing delivered to a business by measuring and evaluating brand strength. 

One of the earliest consultancies to collect data on corporate brands was CoreBrand Analytics. Currently they track a base of 500 companies identifying powerful brands by quantifying three key aspects of brand perception. Their proprietary methodology annually surveys 10,000 respondents, all of whom are experts or senior business leaders. Respondents rank a brand on favorability measures such as: reputation, investment potential and strength of the management team.

Why do strong brands have good ESG scores?

Strong environmental, social and governance scores lend credibility when brand building, which is good news for investors because interest in ESG is at an all-time high. While there is no single standardized ESG scoring method, many research firms have filled the gap to provide investors with ways of understanding which companies are outperforming their benchmarks while remaining committed to ESG representation. 

Brands need to be good corporate citizens. Customers and investors expect environmental responsibility, fair treatment of employees, and highly ethical behavior from management—and ESG scores are a leading indicator that helps ensure those outcomes.

Over the last five years, the undervalued strong brands in Brandometry’s EQM Brand Value Index demonstrated an average ESG score of 68, as scored by Sustainalytics, compared to 52 for the S&P 500 as a whole. This year 37 out of the 50 top performing brands in the index scored above the median on ESG measures—including HP, which has a perfect 100 ESG score, and Microsoft with a 96.

The bottom line

Although brand strength and ESG scores lack standardized methods of measurement, they are indeed measurable and are important indicators of a company’s strength. By taking these metrics into account, investors may be well-positioned to better evaluate companies going forward, especially as intangible assets continue to play an outsized role in corporate valuations. 

Image credits: Sam Valadi and Craig via Flickr

Susan Avarde headshot

Susan Avarde is a founder of Brandometry. Susan and her co-founders, Larry Medin and Tony Wenzel, bring a broad range of expertise from the worlds of finance, brand, and tech. Brandometry created the EQM Brand Value Index, a core, thematic investment index using qualitative brand signals to identify undervalued strong brands. The index can be accessed through an SMA or 40 Act Fund.

Read more stories by Susan Avarde