Evaluating Corporate Environmental Performance UCLA PP 290

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Evaluating Corporate Environmental
PerformanceUCLA PP 290

• Magali Delmas

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What is Socially Responsible Investing?

• Integrating personal values and societal concerns
  with investment decisions
• Social investors include individuals and
  institutions such as corporations, universities,
  hospitals, foundations, insurance companies,
  pension funds, nonprofit organizations
• Inclusion or exclusion of corporate securities in
  investment portfolios based on social and
  environmental criteria.

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SRI

• SRI assets total 2.2 trillion in the U.S.,
  representing more than one out of every nine
  dollars under professional management.
• Since 1995, SRI assets have grown 40 faster than
  than all professionally managed investment assets
  in the U.S.
• Great potential to influence corporations
  behavior related to the environment

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SRI methods

• Most funds use basic screening methodologies
  (example screen out tobacco companies)
• Others use more sophisticated methodologies
  including environmental performance, compliance,
  and environmental management practices
• KLD, Innovest, SAM, Sierra Club
• Environmental performance a proxy of good
  management?

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SRI relative performance
Source http//www.kld.com/indexes/ds400index/perf
ormance.html
Beccheti et al. 2007 Deletion from DS400 has a
negative effect on returns
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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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Example Evaluation of 15 firms

• Screening of 15 publicly traded firms in the
  chemical sector based on different indicators
• Data sources for years 1998-2005
• Enforcement and Compliance History Online (ECHO)
• The Toxic Release Inventory (TRI)
• Risk Screening Environmental Indicators (RSEI)
• For each indicator, firms are ranked from 1 to 15
  and in categories best (1-4), middle (5-10), and
  worst (11-15)

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ECHO

• Facility level information
• Data available 3 years backward
• Aggregation level

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ECHO Ranking Results
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Main Results

• Four firms kept their ranking
• Within the twelve firms that changed ranking,
  eight changed categories
• The results demonstrate how different measures of
  compliance can result in different ranking for
  the same firm

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TRI Ranking Results
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Main Results

• Eight firms kept their ranking
• Within the firms that changed ranking, two
  changed categories
• Results suggest that the ranking might vary
  according to the performance measure used total
  performance based on total pounds does not equate
  the performance in one of the more specific
  categories

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TRI Ranking ResultsControl for Size
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Main Results

• Four firms kept their ranking
• Within the twelve firms that changed ranking, six
  changed categories
• The results suggest that absolute number of
  releases is not necessarily a good measure. Based
  on toxicity and location of facilities, the
  actual impact change and therefore the ranking

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Information considered in RSEI

• Amount of chemical released
• Toxicity of the Chemical
• Fate and Transport through the environment
• Route and Extent of human exposure
• Number of people affected
• The values are for comparative purposes and only
  meaningful when compared to other values produced
  by RSEI.
• The result does not provide a detailed or
  quantitative risk assessment it offers a
  screening-level perspective for relative
  comparisons of chemical releases.

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RSEI vs TRI

• TRI big impact on reduction of releases by
  corporations
• But danger of using only TRI data
• If all a company is concerned about is minimizing
  pounds, as TRI encourages, they may use the more
  toxic substance because it lowers overall
  poundage
• If the SRI community is concerned about potential
  future liabilities associated with emissions of
  toxins, then RSEI is much more useful information
  than just how many pounds of toxins a plant
  releases

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RSEI
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Pounds-based results

• These results include only the pounds of releases
  reported to TRI, and are available for all
  Indicator Elements.

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Hazard-based results

• Hazard-based results Pounds Toxicity Weight
• Each Indicator Element also is associated with a
  hazard-based result, calculated by multiplying
  the pounds released by the chemical-specific
  toxicity weight for the exposure route (oral or
  inhalation) associated with the release.
• For these results, no exposure modeling or
  population estimates are involved.
• If there is no toxicity weight available for the
  chemical, then the hazard score is zero.

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Risk-related results

• Risk-related results Surrogate Dose Toxicity
  Weight Population
• The surrogate dose is determined through
  pathway-specific modeling of the fate and
  transport of the chemical through the
  environment, combined with subpopulation-specific
  exposure factors
• It is calculated in several steps. First,
  exposure and release pathway-specific chemical
  release volumes are combined with physicochemical
  properties and site-specific characteristics in
  models to estimate an ambient concentration in
  the environmental medium of concern.
• The ambient media concentration is then combined
  with standard human exposure assumptions (for
  adults and children) to estimate the magnitude of
  the dose.
• The model calculates risk-related results for the
  entire population and also for the following
  subpopulations children under 10, children aged
  10 to 17, males aged 18 to 44, females aged 18 to
  44, and adults aged 65 and over.

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TRI and RSEI Ranking Results
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Comparing rankings
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Trends
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Business environmental indicators scale and form
Industry
Company
Scale
Division, site
Unweighted
Process, product susbstance
Weighted
Absolute
Relative
Waste in tons
Waste per ton of production
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Single indicator Ex Royal Mail

• Calculates an absolute aggregate indicator of its
  CO2 based on both electricity and fuel
  consumption
• Measure expressed as grams of CO2 per thousand
  letters delivered
• At different levels of aggregation
• individual sorting and delivery offices
• regional and national level

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ICI Global Warming Potential
potency factor Warming potential posed by the
individual substance Substances are normalized as
CO2 equivalents
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Problems with single indicators

• If the GWP indicators shows an improvement but at
  the same time water pollution has increased, has
  the company improved its overall environmental
  performance?
• Were its environmental expenditures spent more
  effectively?
• Should there be weighted indicators?

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Arguments against weighted indicators

• The result of aggregation can obscure their key
  indicators
• British Airways abandoned weighted indicators
  because the lack of a sound scientific basis left
  it open to external criticism
• European Chemical industry expressed feel that is
  might adversely affect their public relations

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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