PP290 UCLA Leaders in Sustainability Evaluating Corporate Environmental Performance

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PP290 UCLA Leaders in SustainabilityEvaluating
Corporate Environmental Performance

• Magali Delmas
• Associate Professor
• Donald Bren School of Environmental Science and
  Management
• University of California, Santa Barbara

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Environmental Screening Indicators

• Inclusion or exclusion of corporate securities in
  investment portfolios based on environmental
  criteria.
• Physical indicators material and energy input
  and output from production process or product use
• Management indicators concerned with efforts of
  environmental management within a firm
• Impact indicators relate to physical output data
  (on emissions for instance) to potential
  environmental impacts (global warming potential)

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2. Contributor measures or management indicators

• Measure the internal workings of the organization
• such as management systems
• Environmental investment
• money invested in technology change
• Training
• number of sites with employees trained in
  environmental health and safety
• Management commitment
• number of times a year plant managers address
  environmental issues with staff
• Employee awareness
• percentage of employees aware of environmental
  issues, tracked by survey
• Systems
• existence of a management plan for each
  underground storage site

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Reporting and Transparency

• Based on voluntary information
• Example of indicators
• Environmental or sustainability report
• Global Reporting Initiative guidelines
• Management commitment
• Information availability on the web
• Goals and improvement targets
• Performance numbers
• Third party verification
• Similar indicators are used by SRI companies as
  SAM, KLD Environmental reports are the main data
  source for SRI companies

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(No Transcript)
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Comparing rankings
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KLD Environmental Strengths and Concerns

• Beneficial Products Services
• Pollution Prevention
• Recycling
• Alternative Fuels
• Communications (added in 1996)
• Property, Plant, and Equipment (through 1995)
• Other Strength
• Total Number of Environment Strengths

• Hazardous Waste
• Regulatory Problems
• Ozone Depleting Chemicals
• Substantial Emissions
• Agricultural Chemicals
• Climate Change (added in 1999)
• Other Concern
• Total Number of Environment Concerns

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KLD 2002
Env Concerns
Env Strength
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KLD 1991-2002
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EcoValue21 Quantifying Eco-Value
EcoVALUE 21 analyzes 60 key variables using
over 20 data sources

• Historical Contingent Liabilities
• Superfund
• State and hazardous waste sites
• RCRA
• Toxic torts

• Financial Risk Efficiency Capacity
• Balance sheet strength
• Insurance cover adequacy

• Managerial Efficiency Capacity
• Strategic corporate governance
• capability
• Environmental management
• systems strength
• Environmental audit/accounting
• capacity
• Supply chain management
• Training capacity and intensity
• Generic environmental management protocols
• Relationships with stakeholders
• Industry-specific protocols

• Operating Risk Exposure
• Toxic emissions
• Product risk liabilities
• Hazardous waste disposal
• Waste discharges
• Supply chain management risk

EcoVALUE 21 RATING

• Eco-Efficiency and Sustainability Risk
• Energy intensity and efficiency
• Raw materials natural efficiency and
  intensity
• Product life-cycle durability/ recyclability
• Exposure to shifts in consumer values

• Strategic Profit Opportunities
• ability to profit from
• environmentally-driven industry
• and market trends

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SAM- Environment
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SAM- Economic
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SAM- Social
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SAM

• Diversifying Information Sources
• For each company, the input sources of
  information for the Corporate Sustainability
  Assessment consist of the responses to the
  Corporate Sustainability Assessment
  Questionnaire, submitted documentation, policies
  and reports, publicly available information and
  analyst's direct contact with companies.
• Verification
• To ensure quality and objectivity an external
  audit and internal quality assurance procedures,
  such as crosschecking of information sources are
  used to monitor and maintain the accuracy of the
  input data, assessment procedures and results.

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Sierra Club Mutual Funds

• Method
• 3 levels of scrutiny
• Sub-advisor identifies companies based on
  finances
• Forward Management incorporates environmental and
  social analysis and submits companies to Sierra
  Club
• Sierra club provides opinions on environmental
  policies, giving final approval of a companys
  compliance
• Combines Forward Management investment and
  knowledge and Sierra Clubs reputation

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Criteria
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ICValue Mission Purpose

• To provide capital-market managers with analyses
  of equities, bonds and bond insurance that show
  regional and community-level risks and benefits
  from business operations in environmentally
  sensitive regions across North America.
• Formed to provide independent, science-based
  research on the environmental performance of
  companies for conservation-minded investors.

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CRITERIA7 criteria clusters
Environmental Management Cluster Supply Chain and
Life Cycle Impacts Cluster Balance of 3rd Party
Awards, Costs of Sanctions, and Transparency
Cluster The Conservation of Water and Watersheds
Cluster Nutrient Enrichment, Acid Gases and
Toxics Cluster Energy and Greenhouse Gas
Management Cluster Green Layer Productivity and
Biological Diversity Conservation Cluster Human
Health Impacts Cluster
8 enviro-technical and 7 enviro-management
criteria
http//www.icvalue.com/htdocs/products_metrics.php
http//www.icvalue.com/htdocs/products_clusters.p
hp
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ICValues 15 Criteria

• Adoption of environmental management system
• Engagement of a company-wide environmentally
  sensitive Environment, Health and Safety Culture
• Operational expectation that raw material and
  services Supply Chain assures environmental and
  resource use standards equivalent to company EHS
  standards
• Consideration of Long-term, Life-Cycle
  Assessments of Products during Design,
  Production or Modification
• Demonstration of significant Third-Party awards
  and recognitions for environmental protection,
  conservation or product innovation
• Frequency and cost of environmental incidents or
  sanctions in relation to sector averages
• Transparency in environmental management,
  evidenced in annual website reporting of Resource
  Use Intensity, Waste Disposal, Emissions, and
  Recycling Capacity
• Water conservation and support of runoff or flood
  control, groundwater recharge and surface water
  planning
• Minimizes unnecessary land conversion to high
  runoff-inducing land use or unstable land cover
  and related diminishment of ecosystem functioning
• 10. Nutrient and toxics control
• 11. Energy conservation support (reducing
  coal/oil/gas extraction and transport impacts)
• 12. Air quality and climate management services,
  including improved visibility, reduced heat
  island effects, and greenhouse gas management
• 13. Conservation of green layer production,
  facilitating agriculture, timber, biological
  energy fixation, and carbon storage
• 14. Physical and biological diversity
  conservation support, including fish, wildlife,
  food chain and aesthetics
• 15. Human health benefits and services through
  reduced ozone precursors, reduced PM 2.5 aerosol
  precursors, and associated mitigation of illness
  and mortality

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Data Sources

• Company Sustainability Reports and Website
• Company Annual Report to shareholders
• EPA public records
• OSHA records
• LexisNexis searches
• Other NGO and Trade Association data
• http//www.icvalue.com/htdocs/pub/pilotcase.pdf

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Main Screening Challenges

• Which indicators and variables should be included
  in the analysis?
• Environmental impact (toxic releases, air,
  water)
• Regulatory compliance (number of violations,
  fines)
• Management practices and reporting (IS0 14001,
  environmental reporting)
• Reliable and consistent data is limited
• How do you assign weights to specific criteria?
• Static versus dynamic comparisons
• How do you select the screening cut?

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Goal of evaluation

• What is the goal of the evaluation?
• Efficiency of the company (potential for cost
  savings)
• Compliance (potential for penalties)
• Toxicity (potential for liabilities)
• Exposure of the company as compared to the
  industry (the big polluter will be more likely to
  be the target of environmental activists)
• How do each of these potentially impact the
  bottom line

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Does it pay to be green?

• Opportunities to differentiate products
• Bundle public good with private consumption
  benefit (Hayward Lumber, Patagonia)
• Discovery of unexploited cost savings
• (EMS)
• Increase productivity
• Recruit and retain high level employees with
  personal environmental convictions
• Managing environmental risks
• insurance policy to avoid sour community
  relations related costs shocks (Exxon)

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What does the score mean?

• Be clear on what the goal is
• Comprehensiveness
• Toxicity
• Trends, improvements
• Etc
• The score needs to be easy to communicate to
  investors or stakeholders in general

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Weights?
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To weigh or not to weigh?

• Not assigning weights is assigning weights.
• Be clear on the percentages and what this means
  for the ranking overall
• Model behind the ranking, how do the criteria
  relate to the bottom line?
• Survey of importance of criteria
• Transparency and replicability are required

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How are firms distributed based on the ranking

• Which part of the population is targeted for the
  ranking?

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Environmental Management System
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Issues with normalization

• facilities
• Average per facility, used to control for size
• However, some facilities may produce more than
  others
• May not vary much over time
• Revenues
• In order to control for differences in company
  size
• Takes into account changes in demand per year
• Profit
• Does not control for difference in size
• A measure of how dirty or clean are the profit
• Same idea for stock price

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Trends

• Provides information on evolution over time
• When to start?
• How long should be the time period?
• Make sure it will be comparable

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Toward a good ranking system

• Be transparent on the criteria used
• Does the ranking reflect real environmental
  impact or just management practices?
• Weigh highly criteria that the companies cannot
  easily manipulate
• Be specific on the comparison group
• Favor a dynamic approach did companies improve
  significantly?

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Implications

• Choices of metrics and weights matter
• Current lack of transparency
• Institutions creating these rankings may not have
  the incentives to disclose their methodology
• Establish minimum mandatory reporting
  requirements
• Educate firms on what to measure and what they
  are being measured on
• Data verification is required

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The challenge of alignment

• In theory we can find win-win solutions
• Information disclosure can help toward alignment
• However, the design and implementation of such
  solutions is challenging, as the SRI example
  showed

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Next Week

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• What should Barns final recommendation be for
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• Excel file on PP290 Website