Investment analysts need to
start taking more account of how the environmental performance of a
listed company can have a positive impact on its financial performance,
argues Phil Case
Many factors combine to
determine a company’s financial performance, so it is rare that one
single factor – such as a company’s environmental performance – can be
shown to have been responsible, by itself, for a company’s financial
results or the market’s perception of those results.
It is
therefore perhaps premature to be able to claim scientific proof
linking good environmental performance to improved profitability, but
few people nowadays would deny that environmental factors have an
impact on the commercial success of a business.
It is this
belief that has driven the growth in green funds around the world,
although it is true to say that those funds investing almost
exclusively in environmental technologies, or which are governed by
strong ethical criteria, have had mixed results to date.
Aside from green funds, the market has hitherto only to a limited
degree used environmental factors as a criterion to assess whether a
company is a good investment.
Often only negative, or risk
factors, have been taken into account – for example whether the company
concerned has a poor reputation for environmental management which
could translate into cost and liability, affecting shareholder value.
Gradually, however, the concept of environmental performance as a
success factor has been gaining ground, whether such success is
achieved through eco-efficiency, product differentiation, price
premiums or new market opportunities.
Therefore investment
analysts must look at both sides of the environmental equation – risks
and income – alongside all the other factors that combine to produce a
buy, sell or hold recommendation.
It follows, then, that
environmental factors must be integrated into investment analysts’
research, and that in this respect analysts have the same information
requirements as lenders; both need data on a company’s environmental
policies and performance.
In most respects, environmental
risks are like any others when it comes to evaluation and mitigation.
It is for this reason that environmental issues should be viewed as
part of the normal credit appraisal process, something for all lenders
to become familiar with and to deal with as ‘business as usual’.
Phil Case is environmental director at Barclays plc and author of a new
textbook, Environmental Risk Management and Corporate
Lending (Woodhead Publishing, £85)
