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A Capital Idea - Realising Value from Environmental and Social Performance

Deni Greene Consulting Services, Standards Australia and Ethical Investment Services
August 2001
ISBN 0 957 91460 1

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Executive Summary

Financial success for business is increasingly linked to good environmental and social performance. Companies are subject to the ever-rising expectations of stakeholders, including customers, employees, the community, non-government organisations, and lenders, insurers and investors.

Mounting evidence shows that companies that are environmentally and socially responsible are more profitable and provide greater returns and lower risks to their shareholders. Eco-efficient firms are able to create greater shareholder value than their industry competitors while minimising environmental risk and impact.

Changing investment analysis

Most financial analysts are still uncomfortable with numbers that are not expressed in terms of dollars, pounds or yen. A rapidly expanding group of analysts, researchers and investors, though, is able to understand factors such as tones of carbon dioxide, kilowatt-hours of electricity from coal-fired power stations, and Parts per million of heavy metals. In addition to looking at financial issues, they are undertaking risk analyses that look at how exposed a company is to changes in climate change policy and how much progress it has made towards eco-efficiency and sustainability.

They are even able to consider the risks and benefits associated with a company's approach to other aspects of social responsibility, like accountability, performance in overseas countries, and community involvement.

The research information developed by this new breed of analysts is being translated into the creation of investment vehicles that reflect the improved outlook for companies with good environmental and social performance. Large and small shareholders are also using the results to engage company management on the need for lifting its game. Increasingly, mainstream investment research is beginning to realise the need to take account of the types of environmental and social information that it has long ignored.

The dramatically increasing size and power of superannuation funds in Australia, coupled with greater ability of members to choose their own funds, and with the massive increase in share ownership, will have a significant effect on the scrutiny of company performance.

People want to invest in companies with good reputations, and they want their investments to reflect the values they hold. As they come to realise that investing in socially responsible companies doesn't have to mean foregoing desired financial returns, they will look closely at where their money is being invested and they will ask questions, and they will act. Companies whose activities can stand up well to such scrutiny will benefit from this evolution; others will lose out.

The need for clear communications

An essential Part of good performance is clear, accurate and transparent communication. Some companies are already benefiting from making their environmental and social performance known to the financial community. These aren't the companies that engage in 'greenwash' to obscure their real activities. (Such tactics are rapidly discovered and reported around the world.) They aren't limited to the companies that have long recognised that their environmental activities were subject to controversy and that they had to aim for world's best practice.

Companies in fields of growing importance, such as renewable energy, health care, and environmental management are capturing attention. So too are companies in more traditional businesses who are taking meaningful steps to be socially responsible, even if their normal activities do not create significant environmental or social impacts.

Changing demands and opportunities

Public and investor expectations of Australian business have never been higher than today. The vast majority of Australians think it is not enough for companies to make a profit, pay taxes, obey all laws, and employ people. Business is now expected to contribute to broader societal goals as well as attend to its own operations. The financial community too is asking new questions of business.

Gone are the days when a company only needed to satisfy its shareholders. Today customers and investors are rewarding companies that they see as socially responsible and punishing those seen to have a poor environmental or social performance.

Pressure on companies is taking many forms. A company's performance on issues of social responsibility has become an indicator of likely success in attracting and retaining talented employees. Shareholder advocacy is growing. Lenders and insurers are seeking to protect themselves against risks resulting from a company's past, current or future activities.

Businesses obtain direct financial benefits from operating a business in an eco-efficient manner, both in terms of cost savings and in improved profitability and achievement of a competitive advantage. They also acquire indirect benefits, because a good reputation is a major asset: enhancing the desirability of companies' jobs, attracting customers, improving productivity, affecting investor attitudes and confidence, and influencing relationships with government and other companies.

A new breed of investors

Capital markets in Australia have changed markedly over the past decade. In 1991 only 15% of adult Australians owned shares; today the figure is 52%. Australians now have the highest rate of share ownership in the world. The rate of ownership is growing fastest among young people. Ownership remains highest among people with higher education and higher income. Young people and people with higher education and higher income are also the groups most likely to be concerned about environmental issues.

Socially responsible investment (SRI) is attracting great interest worldwide. Activity has increased dramatically in Australia, and a large number of new SRI funds have been introduced to the Australian market, many from firms such as Westpac, AMP, Tower, Challenger, Rothschild and other organisations well known to mainstream investors.

What is socially responsible investment?

SRI funds typically are screened to reflect environmental, social or other non-financial values. Socially responsible investors may focus on a range of different issues, but the area of highest interest in Australia is the environment. Some socially responsible investors engage in shareholder advocacy, exercising their voting rights to encourage improvement in a company's environmental or social performance.

Companies that want to appeal to as wide a spectrum of investors as possible need to become familiar with the way socially responsible investors select their investments. A number of criteria beyond financial performance may be used. Typical SRI approaches used in selection of potential investments include:

Researchers provide socially responsible investors with analyses of companies in different forms: some develop company profiles, merely setting out the information about companies; others produce ratings of companies based on their performance in SRI areas; others provide detailed analyses, but do not rank companies. Information about overseas activities of Australian companies is becoming more readily available through the spread of SRI research networks worldwide.

How can companies attract 21st century investors?

Meeting the expectations of investors and other stakeholders means conducting business in an environmentally and socially responsible manner and communicating information about company activities in a form that stakeholders find useful and transparent.

Elements of good environmental and social performance vary among industries. Companies in the resources and large manufacturing areas are already well acquainted with many of the components of good environmental practice. These issues may not be as familiar to industries typically considered less environmentally significant. Many companies are relatively unused to examining their social performance. This guide identifies key environmental and social issues for different types of industries.

All industries can benefit from taking stock of their current environmental and social performance, evaluating strategic directions for improvement, and implementing appropriate changes. Checklists and self-assessment questionnaires identified in this guide can be useful in these activities.