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Evaluating Corporate Environmental Performance


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Evaluating Corporate Environmental Performance

  1. 1. Evaluating Corporate Environmental Performance Professor Magali Delmas UCLA ENV 188A Business and the Environment
  2. 2. Environmental Screening Indicators <ul><li>I nclusion or exclusion of corporate securities in investment portfolios based on environmental criteria. </li></ul><ul><li>Physical indicators : material and energy input and output from production process or product use </li></ul><ul><li>Management indicators : concerned with efforts of environmental management within a firm </li></ul><ul><li>Impact indicators : relate to physical output data (on emissions for instance) to potential environmental impacts (global warming potential) </li></ul>
  3. 3. 2. Contributor measures or management indicators <ul><li>Measure the internal workings of the organization </li></ul><ul><ul><li>such as management systems </li></ul></ul><ul><li>Environmental investment </li></ul><ul><ul><li>money invested in technology change </li></ul></ul><ul><li>Training </li></ul><ul><ul><li>number of sites with employees trained in environmental health and safety </li></ul></ul><ul><li>Management commitment </li></ul><ul><ul><li>number of times a year plant managers address environmental issues with staff </li></ul></ul><ul><li>Employee awareness </li></ul><ul><ul><li>percentage of employees aware of environmental issues, tracked by survey </li></ul></ul><ul><li>Systems </li></ul><ul><ul><li>existence of a management plan for each underground storage site </li></ul></ul>
  4. 4. Reporting and Transparency <ul><li>Based on voluntary information </li></ul><ul><li>Example of indicators </li></ul><ul><ul><li>Environmental or sustainability report </li></ul></ul><ul><ul><li>Global Reporting Initiative guidelines </li></ul></ul><ul><ul><li>Management commitment </li></ul></ul><ul><ul><li>Information availability on the web </li></ul></ul><ul><ul><li>Goals and improvement targets </li></ul></ul><ul><ul><li>Performance numbers </li></ul></ul><ul><ul><li>Third party verification </li></ul></ul><ul><li>Similar indicators are used by SRI companies as SAM, KLD: Environmental reports are the main data source for SRI companies </li></ul>
  5. 5. 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 &quot;hard&quot; 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)  
  6. 6. 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
  7. 7. KLD: Environmental Strengths and Concerns <ul><li>Beneficial Products & Services </li></ul><ul><li>Pollution Prevention </li></ul><ul><li>Recycling </li></ul><ul><li>Alternative Fuels </li></ul><ul><li>Communications (added in 1996) </li></ul><ul><li>Property, Plant, and Equipment (through 1995) </li></ul><ul><li>Other Strength </li></ul><ul><li>Total Number of Environment Strengths </li></ul><ul><li>Hazardous Waste </li></ul><ul><li>Regulatory Problems </li></ul><ul><li>Ozone Depleting Chemicals </li></ul><ul><li>Substantial Emissions </li></ul><ul><li>Agricultural Chemicals </li></ul><ul><li>Climate Change (added in 1999) </li></ul><ul><li>Other Concern </li></ul><ul><li>Total Number of Environment Concerns </li></ul>
  8. 8. Env Strength Env Concerns KLD 2002
  9. 9. KLD 1991-2002
  10. 10. EcoVALUE ‘21 analyzes 60+ key variables using over 20 data sources: <ul><li>Historical Contingent Liabilities : </li></ul><ul><li>Superfund </li></ul><ul><li>State and hazardous waste sites </li></ul><ul><li>RCRA </li></ul><ul><li>Toxic torts </li></ul><ul><li>Operating Risk Exposure: </li></ul><ul><li>Toxic emissions </li></ul><ul><li>Product risk liabilities </li></ul><ul><li>Hazardous waste disposal </li></ul><ul><li>Waste discharges </li></ul><ul><li>Supply chain management risk </li></ul><ul><li>Eco-Efficiency and Sustainability Risk: </li></ul><ul><li>Energy intensity and efficiency </li></ul><ul><li>Raw materials & natural efficiency and intensity </li></ul><ul><li>Product life-cycle durability/ recyclability </li></ul><ul><li>Exposure to shifts in consumer values </li></ul>EcoVALUE ‘21 RATING <ul><li>Managerial Efficiency Capacity </li></ul><ul><li>Strategic corporate governance </li></ul><ul><li>capability </li></ul><ul><li>Environmental management </li></ul><ul><li>systems strength </li></ul><ul><li>Environmental audit/accounting </li></ul><ul><li>capacity </li></ul><ul><li>Supply chain management </li></ul><ul><li>Training capacity and intensity </li></ul><ul><li>Generic environmental management protocols </li></ul><ul><li>Relationships with stakeholders </li></ul><ul><li>Industry-specific protocols </li></ul><ul><li>Strategic Profit Opportunities </li></ul><ul><li>ability to profit from </li></ul><ul><li>environmentally-driven industry </li></ul><ul><li>and market trends </li></ul><ul><li>Financial Risk Efficiency Capacity </li></ul><ul><li>Balance sheet strength </li></ul><ul><li>Insurance cover adequacy </li></ul>EcoValue’21™: Quantifying Eco-Value:
  11. 11. SAM- Environment
  12. 12. SAM- Economic *Criteria assessed based on publicly available information only
  13. 13. SAM- Social
  14. 14. SAM <ul><li>Diversifying Information Sources </li></ul><ul><ul><li>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. </li></ul></ul><ul><li>Verification </li></ul><ul><ul><li>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 . </li></ul></ul>
  15. 15. Sierra Club Mutual Funds <ul><li>Method: </li></ul><ul><ul><li>3 levels of scrutiny: </li></ul></ul><ul><ul><ul><li>Sub-advisor identifies companies based on finances </li></ul></ul></ul><ul><ul><ul><li>Forward Management incorporates environmental and social analysis and submits companies to Sierra Club </li></ul></ul></ul><ul><ul><ul><li>Sierra club provides opinions on environmental policies, giving final approval of a company’s compliance </li></ul></ul></ul><ul><ul><li>Combines Forward Management investment and knowledge and Sierra Club’s reputation </li></ul></ul>
  16. 16. 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
  17. 17. ICValue Mission & Purpose <ul><li>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. </li></ul><ul><li>Formed to provide independent, science-based research on the environmental performance of companies for conservation-minded investors. </li></ul>
  18. 18. CRITERIA 7 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
  19. 19. ICValue’s 15 Criteria <ul><li>Adoption of environmental management system </li></ul><ul><li>Engagement of a company-wide environmentally sensitive Environment, Health and Safety Culture </li></ul><ul><li>Operational expectation that raw material and services “Supply Chain” assures environmental and resource use standards equivalent to company EH&S standards </li></ul><ul><li>Consideration of Long-term, Life-Cycle Assessments of Products during Design, Production or Modification </li></ul><ul><li>Demonstration of significant Third-Party awards and recognitions for environmental protection, conservation or product innovation </li></ul><ul><li>Frequency and cost of environmental incidents or sanctions in relation to sector averages </li></ul><ul><li>Transparency in environmental management, evidenced in annual website reporting of Resource Use Intensity, Waste Disposal, Emissions, and Recycling Capacity </li></ul><ul><li>Water conservation and support of runoff or flood control, groundwater recharge and surface water planning </li></ul><ul><li>Minimizes unnecessary land conversion to high runoff-inducing land use or unstable land cover and related diminishment of ecosystem functioning </li></ul><ul><li>10. Nutrient and toxics control </li></ul><ul><li>11. Energy conservation support (reducing coal/oil/gas extraction and transport impacts) </li></ul><ul><li>12. Air quality and climate management services, including improved visibility, reduced heat island effects, and greenhouse gas management </li></ul><ul><li>13. Conservation of green layer production, facilitating agriculture, timber, biological energy fixation, and carbon storage </li></ul><ul><li>14. Physical and biological diversity conservation support, including fish, wildlife, food chain and aesthetics </li></ul><ul><li>15. Human health benefits and services through reduced ozone precursors, reduced PM 2.5 aerosol precursors, and associated mitigation of illness and mortality </li></ul>
  20. 20. Data Sources <ul><li>Company Sustainability Reports and Website </li></ul><ul><li>Company Annual Report to shareholders </li></ul><ul><li>EPA public records </li></ul><ul><li>OSHA records </li></ul><ul><li>LexisNexis searches </li></ul><ul><li>Other NGO and Trade Association data </li></ul><ul><li> </li></ul>
  21. 21. Main Screening Challenges <ul><li>Which indicators and variables should be included in the analysis? </li></ul><ul><ul><li>Environmental impact (toxic releases, air, water…) </li></ul></ul><ul><ul><li>Regulatory compliance (number of violations, fines…) </li></ul></ul><ul><ul><li>Management practices and reporting (IS0 14001, environmental reporting) </li></ul></ul><ul><li>Reliable and consistent data is limited </li></ul><ul><li>How do you assign weights to specific criteria? </li></ul><ul><li>Static versus dynamic comparisons </li></ul><ul><li>How do you select the screening cut? </li></ul>
  22. 22. Goal of evaluation <ul><li>What is the goal of the evaluation? </li></ul><ul><ul><ul><li>Efficiency of the company (potential for cost savings) </li></ul></ul></ul><ul><ul><ul><li>Compliance (potential for penalties) </li></ul></ul></ul><ul><ul><ul><li>Toxicity (potential for liabilities) </li></ul></ul></ul><ul><ul><ul><li>Exposure of the company as compared to the industry (the big polluter will be more likely to be the target of environmental activists) </li></ul></ul></ul><ul><li>How do each of these potentially impact the bottom line </li></ul>
  23. 23. Does it pay to be green? <ul><li>Opportunities to differentiate products </li></ul><ul><ul><li>Bundle public good with private consumption benefit (Hayward Lumber, Patagonia) </li></ul></ul><ul><li>Discovery of unexploited cost savings </li></ul><ul><ul><li>(EMS) </li></ul></ul><ul><li>Increase productivity </li></ul><ul><ul><li>Recruit and retain high level employees with personal environmental convictions </li></ul></ul><ul><li>Managing environmental risks </li></ul><ul><ul><li>insurance policy to avoid sour community relations & related costs shocks (Exxon) </li></ul></ul>
  24. 24. What does the score mean? <ul><li>Be clear on what the goal is: </li></ul><ul><ul><li>Comprehensiveness </li></ul></ul><ul><ul><li>Toxicity </li></ul></ul><ul><ul><li>Trends, improvements </li></ul></ul><ul><ul><li>Etc… </li></ul></ul><ul><li>The score needs to be easy to communicate to investors or stakeholders in general </li></ul>
  25. 25. 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
  26. 26. To weigh or not to weigh? <ul><li>Not assigning weights is assigning weights. </li></ul><ul><li>Be clear on the percentages and what this means for the ranking overall </li></ul><ul><li>Model behind the ranking, how do the criteria relate to the bottom line? </li></ul><ul><li>Survey of importance of criteria </li></ul><ul><li>Transparency and replicability are required </li></ul>
  27. 27. How are firm’s distributed based on the ranking <ul><li>Which part of the population is targeted for the ranking? </li></ul>
  28. 28. 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
  29. 29. Issues with normalization <ul><li># facilities </li></ul><ul><ul><li>Average per facility, used to control for size </li></ul></ul><ul><ul><li>However, some facilities may produce more than others </li></ul></ul><ul><ul><li>May not vary much over time </li></ul></ul><ul><li>Revenues </li></ul><ul><ul><li>In order to control for differences in company size </li></ul></ul><ul><ul><li>Takes into account changes in demand per year </li></ul></ul><ul><li>Profit </li></ul><ul><ul><li>Does not control for difference in size </li></ul></ul><ul><ul><li>A measure of how dirty or clean are the profit </li></ul></ul><ul><ul><li>Same idea for stock price </li></ul></ul>
  30. 30. Trends <ul><li>Provides information on evolution over time </li></ul><ul><li>When to start? </li></ul><ul><li>How long should be the time period? </li></ul><ul><li>Make sure it will be comparable </li></ul>
  31. 31. Toward a good ranking system <ul><li>Be transparent on the criteria used </li></ul><ul><li>Does the ranking reflect real environmental impact or just management practices? </li></ul><ul><li>Weigh highly criteria that the companies cannot easily manipulate </li></ul><ul><li>Be specific on the comparison group </li></ul><ul><li>Favor a dynamic approach: did companies improve significantly? </li></ul>
  32. 32. Implications <ul><li>Choices of metrics and weights matter </li></ul><ul><li>Current lack of transparency </li></ul><ul><li>Institutions creating these rankings may not have the incentives to disclose their methodology </li></ul><ul><li>Establish minimum mandatory reporting requirements </li></ul><ul><li>Educate firms on what to measure and what they are being measured on </li></ul><ul><li>Data verification is required </li></ul>
  33. 33. The challenge of alignment <ul><li>In theory we can find win-win solutions </li></ul><ul><li>Information disclosure can help toward alignment </li></ul><ul><li>However, the design and implementation of such solutions is challenging, as the SRI example showed </li></ul>
  34. 34. Next Week LCA <ul><li>Alpha Motors Case: </li></ul><ul><ul><li>What should Barns’ final recommendation be for material choice for the hood assembly? </li></ul></ul><ul><ul><li>Excel file on ENV 188 Website </li></ul></ul>