Investing responsibly and for profit

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Posted in: Analysis/Comment, Speaking Out, Sustainable Investment

Investing responsibly and for profit

October 01, 2000

Dow Jones names top sustainable companies

Dow Jones marked the first anniversary in September of its global sustainability index by publishing for the first time details of the top companies. The DJSGI tracks the performance of the top 10% most sustainability-conscious companies from its wider Dow Jones indexing system, based on a detailed questionnaire covering over 200 topics and performance scoring system. In the first half of 2000, the ‘sustainable’ companies outperformed the wider DJGI World Index in three ways:

• ROE (return on equity) averaged 14.89% compared to 8.43%;

• ROI (return on investment) 11.09% to 7.37%;

• ROA (return on assets) by 5.81% to 3.63%.

Top performers for their market sectors include BMW, BG , Procter & Gamble, Thames Water, Bristol Myers Squibb and Deutsche Telekom . Unilever and Dow Chemical are among selected industry group leaders. Dow Jones says that corporate sustainability as a business strategy creates long-term shareholder value by embracing opportunities and managing risks associated with economic, social and environmental developments. Contact Scott Stark, Dow Jones, on 020 7842 9682 (http://www.sustainability-index.com)

Study links shareholder value to ‘green’ standards

Large companies that adopt strict environmental standards in developing countries achieve higher stock market performance, according to a study published August 31 by the Institute for Operations Research and the Management Sciences (INFORMS). The study, Do Corporate Environmental Standards Create or Destroy Market Value? , covers 89 Standard & Poor’s 500 manufacturing and mining companies headquartered in the US. It found that firms with strict environmental standards had an individual value $10.4 billion higher than those which adopt the minimum standards required by host countries.

Although increased productivity among stringent firms may be a result of using new technologies and equipment, the study suggests that firms which adopt higher standards are those that strive for eco-efficient productions systems and so gain greater resource productivity. Quality firms generate less pollution and strive to be the best in all their operations, whereas lower-quality companies engage in a ‘race to the bottom’ to gain short-term financial advantage. Contact Barry List, INFORMS, on 001 410 691 7852 (http://www.informs.org)

Limiting the impact of catastrophes

Management factors including good corporate governance and responsibility to stakeholders are key to surviving corporate catastrophes. They have a bigger impact on share performance than taking out insurance to soften the financial blow. The findings come in the latest research from Oxford University , which is tracking major corporate catastrophes (defined as man-made, not natural, disasters involving a publicly quoted company receiving headline coverage in world news). These include Coca-Cola ‘s product recall, Firestone tyres and the Concorde tragedy. Although all catastrophes had a significant negative initial impact on stock returns, thereafter the companies’ performance diverged: ‘recoverers’ actually saw an overall increase in share returns by the fiftieth day after the disaster; ‘non-recoverers’ were still suffering negative share returns up to one year later.

The main difference is management’s ability to deal with the aftermath of the catastrophe. The Impact of Catastrophes on Shareholder Value, says the firm as a whole must demonstrate good corporate governance, including responsibilities to customers, shareholders, staff and the public at large. Honesty, transparency and effective communication have clear and fundamental financial value. Contact Deborah Petty, University of Oxford, on 01865 422 500 (http://www.templeton.ox.ac.uk)

Brand value matters to investors

Three quarters of city analysts and FTSE 350 investor relations executives believe that brand value will become more important in the next five years and that companies should publish more information about it. Yet an analysis of FTSE 350 accounts, released August 23, reveals that fewer companies than last year are reporting brand values. The Case for Brand Value Reporting is based on the views of almost 300 city analysts and almost 50 company investor relations executives. It argues strongly that future success will lie in a company’s intangible assets such as brands. Contact Stephen Cheliotis, Brand Finance, on 020 8607 0300 (http://www.brandfinance.com)

Green telecoms companies do better

‘Green’ telecommunications companies outperformed their rivals by 35% over the past two years, according to research from Innovest Strategic Value Advisors published in September. AT&T, Deutsche Telekom, NTT in Japan and Swisscom are among leaders highlighted. Contact Hewson Baltzel, Innovest, on 001 212 421 2000 (http://www.innovestgroup.com)

More from occupational pension holders

Three-quarters (74%) of occupational pension holders want pension funds to use their influence to encourage socially responsible behaviour by companies, according to a survey of 1,000 people carried out by NOP for Friends Ivory & Sime in July. Two- thirds say they want a yearly report detailing efforts to influence companies on ethical issues. Contact Craig Mackenzie, Friends Ivory & Sime, on 020 7506 1538 (http://www.friendsis.com)

Ethical investing online

The UK’s first online guide to funds for ethical investors has been launched by Ethical Investment Services (EIS). The Ethical Fund Selector allows users to access research into the holdings of different funds by selecting a set of ethical and financial priorities. The selector takes this information and then generates graphs and diagrams about the most appropriate funds to examine in greater detail. Contact John Fleetwood, Ethical Services, on 0800 0188557 (http://www.ethicalservices.co.uk)

Comment

Optimists celebrate the fact that ‘ethical’ funds screened against environmental or social criteria are currently growing by about a third a year in the UK. Pessimists point out that all together they still only account for around £3 billion, against pensions funds of £800 billion and much more in other institutional funds. Both optimists and pessimists despair of the mainstream investment analysts – the hard-nosed moneymen and not just a few women today too – ever taking the subject seriously.

But realists understand that the ‘pull effect’ of demand for ethical investment will never be strong enough to change corporate behaviour, nor influence most analysts’ attitudes. What is needed is the ‘push effect’ of evidence that corporate social responsibility is good for business. Realists know, as that ribald saying might go, when you grab them by the numbers, their hearts and minds will follow.

Indeed evidence is slowly accumulating that well managed companies, which set high environmental and social standards, are being rewarded with above- average stock market performance. We say good management advisedly, because most of the studies are still bedevilled by the lack of proof of causality. Which comes first: higher social responsibility leading to profit, or commercial success allowing companies to be responsible? In fact, the more likely scenario is this: already successful companies can do even better by setting high standards for all stakeholders without exception – customers, communities, environment and wider society.

In any event, the question for Briefing readers is surely ‘what am I doing to help generate that hard evidence which will persuade the City analysts?’ Apply a simple test by reading some of the new breed of social reports and ask yourself: would the contents persuade them that this concern for ‘doing good’ is about securing a sustainable business – or make them think management had lost the plot and was being diverted from its core mission? In short, where are the numbers?

Corporate Citizenship Briefing, issue no: 54 – October, 2000

COMMENT:

Optimists celebrate the fact that ‘ethical’ funds screened against environmental or social criteria are currently growing by about a third a year in the UK. Pessimists point out that all together they still only account for around £3 billion, against pensions funds of £800 billion and much more in other institutional funds. Both optimists and pessimists despair of the mainstream investment analysts – the hard-nosed moneymen and not just a few women today too – ever taking the subject seriously.

But realists understand that the ‘pull effect’ of demand for ethical investment will never be strong enough to change corporate behaviour, nor influence most analysts’ attitudes. What is needed is the ‘push effect’ of evidence that corporate social responsibility is good for business. Realists know, as that ribald saying might go, when you grab them by the numbers, their hearts and minds will follow.

Indeed evidence is slowly accumulating that well managed companies, which set high environmental and social standards, are being rewarded with above- average stock market performance. We say good management advisedly, because most of the studies are still bedevilled by the lack of proof of causality. Which comes first: higher social responsibility leading to profit, or commercial success allowing companies to be responsible? In fact, the more likely scenario is this: already successful companies can do even better by setting high standards for all stakeholders without exception – customers, communities, environment and wider society.

In any event, the question for Briefing readers is surely ‘what am I doing to help generate that hard evidence which will persuade the City analysts?’ Apply a simple test by reading some of the new breed of social reports and ask yourself: would the contents persuade them that this concern for ‘doing good’ is about securing a sustainable business – or make them think management had lost the plot and was being diverted from its core mission? In short, where are the numbers?

Corporate Citizenship Briefing, issue no: 54 – October, 2000

COMMENTS