business insights

Green wall on Wall Street

Stock analysts don't consider envi­ronmental performance as a ma­jor factor in determining corpo­

rate valuations. Whether you consider that good or bad news depends on your point of view.

For companies spending large amounts of time and money trying to improve their environmental performance, this may be bad news. They might like to get some recognition for their efforts. Others with sizable liabilities may welcome the lack of interest.

Potential stockholders—possibly look­ing to make "green investments"—may want to know about such corporate ac­tivities, bad and good, as a basis for com­parison and to avoid risk. Others assess­ing environmental, social, and govern­ment directions are hoping to make connections between private capital, en­vironmental performance, and sustain­able development.

A United Nations Development Pro­gram (UNDP) study has explored these issues. The apparent "green wall on Wall Street" was evident in a survey of 30 an­alysts and eight corporate chief financial officers (CFOs) in eight industrial sectors including chemicals, drugs, and oil refin­ing. The results are in a UNDP Office of Development Studies working paper, "Valuing the Environment: How Fortune 500 CFOs & Analysts Measure Corporate Performance."

UNDP is interested in the implica­tions for international development-linking private corporate investment and sound environmental practices through financial market incentives. Although not definitive, the survey does offer several general findings, says Lisa Fernandez, one of the authors of the study and an associate at the Yale Center for Environ­mental Law & Policy in New Haven, Conn.

The study found that although envi­ronmental factors are considered, they are far from being key criteria for corpo­rate valuations. To the extent that these factors matter, analysts take notice of the risks—compliance costs, violations, and liabilities—and not the opportunities-pollution prevention or waste reduction savings. What this means is that analysts discount a company's value for poor per­formance, but they do not increase it for exceptional performance.

Analysts typically aren't interested in average or expected behavior. So should companies be rewarded for doing what is either required for regulatory compli­ance or expected through industry initia­tives such as Responsible Care? Still, one chemical industry manager suggests that companies should "publicize the posi­tives, because the negatives take care of themselves."

Analysts rely on traditional sources of financial information, largely compa­ny reports and corporate officers who, they say, rarely speak about environ­mental issues. Fernandez calls this the corporate version of "don't ask, don't tell." Analysts also believe that compa­nies, or at least their contacts with the investment community, do only a poor to fair job communicating the rationale for environmental spending.

Analysts, the study found, also per­ceive a lack of useful, relevant, or reliable data on environmental issues. Along with a lack of data, what information is available is difficult to quantify for mak­ing objective comparisons. Beyond that,

Environment ranks low in rating company performance

Importance to analysts (mean: 5 = high, 1 = low)

Quantitative measures Cash flow Margins Earnings growth Potential to gain market share Return on equity Potential for industry growth Sales R&D Employee turnover Environmental spending

Qualitative measures Quality of management Customer satisfaction Reputation in business

community Reputation among public Employee satisfaction Corporate environmental

policy

Source: United Nations Development Office of Development Studies

4.42 4.39 4.00 3.87 3.71 3.70 3.30 2.74 2.44 1.91

4.74 3.74 3.43

3.09 3.00 2.33

Program,

even if quantified, analysts believe it has little financial impact.

CFOs disagree, rating environmental factors higher in their effect on finan­cial, management, and competitive considerations. Both analysts and CFOs expect environmental factors to have more impact on business decisions in the future, particularly in overall strate­gy and product design.

The report connects these disparate views, proposing that "unless sound en­vironmental practices are reflected in corporate valuations performed by ana­lysts, corporate managers are unlikely to maintain enthusiasm for such poli­cies." But this contradicts the reality the report so carefully tries to describe— analysts already don't care about envi­ronmental matters, and that hasn't pre­vented many companies from implement­ing environmental programs, so why should not caring in the future change anything?

The answer, according to the report and coming more often from industry it­self, is "eco-efficiency" (C&EN, April 13, page 50). UNDP notes that "more com­panies are viewing improved environ­mental performance as a source of com­petitive—hence, financial—advantage. While evidence of these benefits is grow­ing in the business community, it has yet to lead to lower costs of capital for the firms involved."

The difficulty is getting recognition from the financial community. CFOs disagreed strongly with analysts re­garding communication—they think they are doing a much better job. Still, companies do most of their communi­cating about environmental concerns to those groups they view as the "stake­holders," such as plant communities, regulators, customers, and environmen­tal groups.

These environmental discourses, says Fernandez, are not directed toward ana­lysts or written in language that they un­derstand. Thus, she suggests, executives who have access to the investment com­munity should "spell it out for analysts" so they get the message.

If good environmental performance is good business, and can "create share­holder value," then corporate officers face the challenges of coming up with useful, relevant, and quantifiable data; re­lating performance to the bottom line; and communicating the connection.

Ann Thayer

MAY 4, 1998 C&EN 31