Evaluating Corporate Environmental Performance Professor Magali Delmas UCLA ENV 188A Business and the Environment
Environmental Screening Indicators
I nclusion 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)
2. Contributor measures or management indicators
Measure the internal workings of the organization
such as management systems
money invested in technology change
number of sites with employees trained in environmental health and safety
number of times a year plant managers address environmental issues with staff
percentage of employees aware of environmental issues, tracked by survey
existence of a management plan for each underground storage site
Reporting and Transparency
Based on voluntary information
Example of indicators
Environmental or sustainability report
Global Reporting Initiative guidelines
Information availability on the web
Goals and improvement targets
Third party verification
Similar indicators are used by SRI companies as SAM, KLD: Environmental reports are the main data source for SRI companies
5.0 1 1 1 0 1 0 1 Rohm and Haas Company 5.0 0 1 1 1 0 1 1 Procter & Gamble Company 5.0 0 1 1 1 1 0 1 Pfizer, Inc. 6.0 0 1 1 1 1 1 1 Merck & Co., Inc. 6.0 0 1 1 1 1 1 1 Lilly (Eli) and Company 6.0 0 1 1 1 1 1 1 Johnson & Johnson 1.0 0 0 1 0 0 0 0 International Flavors & Fragrances Inc. 6.0 1 1 1 0 1 1 1 Ecolab Inc. 4.0 1 1 0 1 0 1 Eastman Chemical Company 7.0 1 1 1 1 1 1 1 DuPont Company 6.5 0.5 1 1 1 1 1 1 Dow Chemical Company 5.0 0 1 1 0 1 1 1 Dial** 5.0 1 1 1 0 1 0 1 Colgate-Palmolive Company 1.0 0 0 0 0 1 0 0 Clorox Company 0.0 0 0 0 0 0 0 0 Avon Products, Inc. 7 criteria score summary third party verification /auditing Reporting "hard" numbers Level of commitment (who signs policy) Performance targets? clicks to environmental Info (2 or less) Report to GRI standards*? (Y or N) Environmental report? (Y or N)
Comparing rankings 7 1 N/A N/A Dial Corporation 1 13 14 14 DuPont Company 2 9 12 13 Dow Chemical Company 12 12 13 12 Eastman Chemical Company 7 10 10 11 Rohm and Haas Company 3 15 8 10 Lilly (Eli) and Company 7 11 9 9 Pfizer, Inc. 3 14 5 8 Merck & Co., Inc. 7 8 11 7 Procter & Gamble Company 3 4 4 6 Johnson & Johnson 13 1 2 5 International Flavors & Fragrances Inc. 7 1 3 4 Colgate-Palmolive Company 13 5 7 3 Clorox Company 3 6 6 2 Ecolab Inc. 15 7 1 1 Avon Products, Inc. Reporting (7 criteria) ECHO (Non-Compliance Quarters) RSEI (risk 02) TRI (total pounds) Firm
KLD: Environmental Strengths and Concerns
Beneficial Products & Services
Communications (added in 1996)
Property, Plant, and Equipment (through 1995)
Total Number of Environment Strengths
Ozone Depleting Chemicals
Climate Change (added in 1999)
Total Number of Environment Concerns
Env Strength Env Concerns KLD 2002
EcoVALUE ‘21 analyzes 60+ key variables using over 20 data sources:
Historical Contingent Liabilities :
State and hazardous waste sites
Operating Risk Exposure:
Product risk liabilities
Hazardous waste disposal
Supply chain management risk
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
EcoVALUE ‘21 RATING
Managerial Efficiency Capacity
Strategic corporate governance
Supply chain management
Training capacity and intensity
Generic environmental management protocols
Relationships with stakeholders
Strategic Profit Opportunities
ability to profit from
and market trends
Financial Risk Efficiency Capacity
Balance sheet strength
Insurance cover adequacy
EcoValue’21™: Quantifying Eco-Value:
SAM- Economic *Criteria assessed based on publicly available information only
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.
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 .
Sierra Club Mutual Funds
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 company’s compliance
Combines Forward Management investment and knowledge and Sierra Club’s reputation
Criteria No companies that manufacture weapons Weapons No companies primarily involved in tobacco business Tobacco No companies that fail to recognize and minimize environmental costs Pollution No companies generating nuclear power generation Nuclear Power No companies involved in irresponsible development Land Management No labor relations issues Labor Relations Exclusion of companies that significantly contribute to climate change Fossil fuels No predatory lending Disadvantaged Communities Full disclosure and transparency; no companies involved in malfeasance CSR No animal testing unless mandated; cruelty-free practices only Animal Treatment No concentrated animal feeding ops; no gmos Agricultural Practices
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.
CRITERIA 7 criteria clusters http://www.icvalue.com/htdocs/products_metrics.php http://www.icvalue.com/htdocs/products_clusters.php 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
ICValue’s 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 EH&S 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
Company Sustainability Reports and Website
Company Annual Report to shareholders
EPA public records
Other NGO and Trade Association data
Main Screening Challenges
Which indicators and variables should be included in the analysis?
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?
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
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
Recruit and retain high level employees with personal environmental convictions
Managing environmental risks
insurance policy to avoid sour community relations & related costs shocks (Exxon)
What does the score mean?
Be clear on what the goal is:
The score needs to be easy to communicate to investors or stakeholders in general
Weights? 0 N/A N/A N/A Dial Corporation (The) 0 1 11 14 DuPont Company 0 12 14 13 Eastman Chemical Company 0 2 8 12 Dow Chemical Company 1 8 6 11 Procter & Gamble Company 1 9 12 10 Rohm and Haas Company 0 9 10 9 Pfizer, Inc. 0 6 12 8 Lilly (Eli) and Company 1 13 5 7 Clorox Company 1 4 1 6 Ecolab Inc. 1 5 9 5 Merck & Co., Inc. 1 3 3 4 Johnson & Johnson 1 7 2 3 Colgate-Palmolive Company 0 11 4 2 International Flavors & Fragrances Inc. 1 14 7 1 Avon Products, Inc. DS400 (2002) 90% reporting 1/3 TRI, ECHO, Report RSEI Risk (2002) Firm
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
How are firm’s distributed based on the ranking
Which part of the population is targeted for the ranking?
Environmental Management System 1 yes yes Rohm and Haas Company N/A (66%) yes yes Procter & Gamble Company 7 yes yes Pfizer, Inc. 1 yes yes Merck & Co., Inc. 3- not in the USA yes yes Lilly (Eli) and Company N/A yes yes Johnson & Johnson N/A (96%) N/A N/A International Flavors & Fragrances Inc. 14 yes yes Ecolab Inc. 13 yes yes Eastman Chemical Company 10 yes yes DuPont Company 12 yes yes Dow Chemical Company 10 yes yes Dial Corporation (The) N/A no yes Colgate-Palmolive Company N/A N/A N/A Clorox Company N/A yes yes Avon Products, Inc. # certified facilities ISO14001/ RC 14001 EMS (Yes/No) Firm
Issues with normalization
Average per facility, used to control for size
However, some facilities may produce more than others
May not vary much over time
In order to control for differences in company size
Takes into account changes in demand per year
Does not control for difference in size
A measure of how dirty or clean are the profit
Same idea for stock price
Provides information on evolution over time
When to start?
How long should be the time period?
Make sure it will be comparable
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?
Choices of metrics and weights matter
Current lack of transparency
Institutions creating these rankings may not have the incentives to disclose their methodology