Evaluating Corporate Environmental Performance

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Evaluating Corporate Environmental Performance

Professor Magali Delmas

UCLA ENV 188A Business and the Environment

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Environmental Screening Indicators

• Inclusion 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)

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2. Contributor measures or management indicators

• Measure the internal workings of the organization– such as management systems

• Environmental investment – money invested in technology change

• Training– number of sites with employees trained in environmental health and safety

• Management commitment– number of times a year plant managers address environmental issues with staff

• Employee awareness – percentage of employees aware of environmental issues, tracked by survey

• Systems– existence of a management plan for each underground storage site

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Reporting and Transparency • Based on voluntary information • Example of indicators

– Environmental or sustainability report – Global Reporting Initiative guidelines – Management commitment – Information availability on the web – Goals and improvement targets – Performance numbers – Third party verification

• Similar indicators are used by SRI companies as SAM, KLD: Environmental reports are the main data source for SRI companies

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Environmental report? (Y or N)

Report to GRI standards*? (Y or N)

clicks to environmental Info (2 or less)

Performance targets?

Level of commitment (who signs policy)

Reporting "hard" numbers

third party verification /auditing

7 criteria score summary

Avon Products, Inc. 0 0 0 0 0 0 0 0.0

Clorox Company 0 0 1 0 0 0 0 1.0

Colgate-Palmolive Company 1 0 1 0 1 1 1 5.0

Dial** 1 1 1 0 1 1 0 5.0

Dow Chemical Company 1 1 1 1 1 1 0.5 6.5

DuPont Company 1 1 1 1 1 1 1 7.0

Eastman Chemical Company 1 0 1 0 1 1 4.0

Ecolab Inc. 1 1 1 0 1 1 1 6.0

International Flavors & Fragrances Inc. 0 0 0 0 1 0 0 1.0

Johnson & Johnson 1 1 1 1 1 1 0 6.0

Lilly (Eli) and Company 1 1 1 1 1 1 0 6.0

Merck & Co., Inc. 1 1 1 1 1 1 0 6.0

Pfizer, Inc. 1 0 1 1 1 1 0 5.0

Procter & Gamble Company 1 1 0 1 1 1 0 5.0

Rohm and Haas Company 1 0 1 0 1 1 1 5.0

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Comparing rankings Firm

TRI (total pounds)

RSEI (risk 02)

ECHO (Non-Compliance Quarters)

Reporting (7 criteria)

Avon Products, Inc. 1 1 7 15

Ecolab Inc. 2 6 6 3

Clorox Company 3 7 5 13

Colgate-Palmolive Company 4 3 1 7

International Flavors & Fragrances Inc. 5 2 1 13

Johnson & Johnson 6 4 4 3

Procter & Gamble Company 7 11 8 7

Merck & Co., Inc. 8 5 14 3

Pfizer, Inc. 9 9 11 7

Lilly (Eli) and Company 10 8 15 3

Rohm and Haas Company 11 10 10 7

Eastman Chemical Company 12 13 12 12

Dow Chemical Company 13 12 9 2

DuPont Company 14 14 13 1

Dial Corporation N/A N/A 1 7

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KLD: Environmental Strengths and Concerns

• Beneficial Products & Services

• Pollution Prevention• Recycling• Alternative Fuels• Communications (added

in 1996)• Property, Plant, and

Equipment (through 1995)

• Other Strength• Total Number of

Environment Strengths

• Hazardous Waste• Regulatory Problems• Ozone Depleting

Chemicals• Substantial Emissions• Agricultural Chemicals• Climate Change (added

in 1999)• Other Concern• Total Number of

Environment Concerns

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Beneficial Products & Services

Pollution Prevention

Recycling Alternative Fuels

Communications (added in

1996)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Cum

ulat

ive

Sum

1

6

0 0 0

Env Strength

Hazardous Waste

Regulatory Problems

Ozone Depleting Chemicals

Substantial Emissions

Agricultural Chemicals

0.00

1.00

2.00

3.00

4.00

5.00

Cum

ulat

ive

Sum

5

4

1

4

2

Env ConcernsKLD 2002

9

25

8

15

28

8

1

0

3

13

62

56

0

0

0

0

3

12

1

9

0

8

0

7

0

13

19

0

0

6

0

0 10 20 30 40 50 60 70

Rohm and Haas Company

Procter & Gamble Company

Pfizer, Inc.

Merck & Co., Inc.

Lilly, Eli and Company

Johnson & Johnson

International Flavors & Fragrances Inc.

Ecolab Inc.

Eastman Chemical Company

DuPont Company

Dow Chemical Company

Dial Corporation

Colgate-Palmolive Company

Clorox Company

Avon Products, Inc.

Environmental Concerns Environmental Strengths

KLD 1991-2002

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EcoVALUE ‘21 analyzes 60+ key variables using over 20 data sources:

Historical Contingent Liabilities:- Superfund- State and hazardous waste sites- RCRA- Toxic torts

Historical Contingent Liabilities:- Superfund- State and hazardous waste sites- RCRA- Toxic torts

Operating Risk Exposure:- Toxic emissions- Product risk liabilities- Hazardous waste disposal- Waste discharges- Supply chain management risk

Operating Risk Exposure:- Toxic emissions- Product risk liabilities- Hazardous waste disposal- Waste discharges- 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

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 ‘21RATING

Managerial Efficiency Capacity- Strategic corporate governance capability- Environmental management systems strength- Environmental audit/accounting capacity- Supply chain management- Training capacity and intensity- Generic environmental management protocols- Relationships with stakeholders- Industry-specific protocols

Managerial Efficiency Capacity- Strategic corporate governance capability- Environmental management systems strength- Environmental audit/accounting capacity- Supply chain management- Training capacity and intensity- Generic environmental management protocols- Relationships with stakeholders- Industry-specific protocols

Strategic Profit Opportunities- ability to profit from environmentally-driven industry and market trends

Strategic Profit Opportunities- ability to profit from environmentally-driven industry and market trends

Financial Risk Efficiency Capacity- Balance sheet strength - Insurance cover adequacy

Financial Risk Efficiency Capacity- Balance sheet strength - Insurance cover adequacy

EcoValue’21™: Quantifying Eco-Value:

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SAM- Environment

Environment Environmental Policy /

Management

3

Environmental

Performance

4.2

Environmental

Reporting*

1.8

Industry Specific Criteria Depends on

Industry

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SAM- Economic

Dimension Criteria Weighting

(% )

Economic Codes of Conduct /

Compliance / Corruption &

Bribery

3

Corporate Governance 5.4

Customer Relationship

Management

3

Financial Robustness* 3.6

Investor Relations 2.4

Risk & Crisis Management 3.6

Scorecards / Measurement

Systems

4.2

Strategic Planning 5.4

Industry Specific Criteria Depends on

Industry

*Criteria assessed based on publicly available information only

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SAM- Social

Social Corporate Citizenship/

Philanthropy

2.4

Stakeholders Engagement 4.2

Labor Practice Indicators 3

Human Capital

Development

1.8

Knowledge Management/

Organizational Learning

3

Social Reporting* 1.8

Talent Attraction &

Retention

2.4

Standards for Suppliers 1.8

Industry Specific Criteria Depends on

Industry

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SAM• 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.

• Verification – 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.

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Sierra Club Mutual Funds

Method:–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

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CriteriaAgricultural Practices No concentrated animal feeding ops; no gmos

Animal Treatment No animal testing unless mandated; cruelty-free practices only

CSR Full disclosure and transparency; no companies involved in malfeasance

Disadvantaged Communities

No predatory lending

Fossil fuels Exclusion of companies that significantly contribute to climate change

Labor Relations No labor relations issues

Land Management No companies involved in irresponsible development

Nuclear Power No companies generating nuclear power generation

Pollution No companies that fail to recognize and minimize environmental costs

Tobacco No companies primarily involved in tobacco business

Weapons No companies that manufacture weapons

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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.

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CRITERIA7 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

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ICValue’s 15 Criteria1. Adoption of environmental management system2. Engagement of a company-wide environmentally sensitive Environment, Health and

Safety Culture3. Operational expectation that raw material and services “Supply Chain” assures

environmental and resource use standards equivalent to company EH&S standards4. Consideration of Long-term, Life-Cycle Assessments of Products during Design,

Production or Modification5. Demonstration of significant Third-Party awards and recognitions for environmental

protection, conservation or product innovation6. Frequency and cost of environmental incidents or sanctions in relation to sector averages7. Transparency in environmental management, evidenced in annual website reporting of

Resource Use Intensity, Waste Disposal, Emissions, and Recycling Capacity8. Water conservation and support of runoff or flood control, groundwater recharge and

surface water planning9. Minimizes unnecessary land conversion to high runoff-inducing land use or unstable land

cover and related diminishment of ecosystem functioning10. Nutrient and toxics control11. 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 management13. Conservation of green layer production, facilitating agriculture, timber, biological energy

fixation, and carbon storage14. Physical and biological diversity conservation support, including fish, wildlife, food chain

and aesthetics15. Human health benefits and services through reduced ozone precursors, reduced PM 2.5

aerosol precursors, and associated mitigation of illness and mortality

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Data Sources

- Company Sustainability Reports and Website

- Company Annual Report to shareholders

- EPA public records

- OSHA records

- LexisNexis searches

- Other NGO and Trade Association data

-http://www.icvalue.com/htdocs/pub/pilotcase.pdf

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Main Screening Challenges

1. 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)2. Reliable and consistent data is limited3. How do you assign weights to specific criteria?4. Static versus dynamic comparisons5. How do you select the screening cut?

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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

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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

– (EMS)• Increase productivity

– Recruit and retain high level employees with personal environmental convictions

• Managing environmental risks– insurance policy to avoid sour community

relations & related costs shocks (Exxon)

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What does the score mean?

• Be clear on what the goal is:– Comprehensiveness– Toxicity– Trends, improvements– Etc…

• The score needs to be easy to communicate to investors or stakeholders in general

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Weights?

FirmRSEI Risk

(2002)

1/3 TRI, ECHO, Report

90% reporting

DS400 (2002)

Avon Products, Inc. 1 7 14 1

International Flavors & Fragrances Inc. 2 4 11 0

Colgate-Palmolive Company 3 2 7 1

Johnson & Johnson 4 3 3 1

Merck & Co., Inc. 5 9 5 1

Ecolab Inc. 6 1 4 1

Clorox Company 7 5 13 1

Lilly (Eli) and Company 8 12 6 0

Pfizer, Inc. 9 10 9 0

Rohm and Haas Company 10 12 9 1

Procter & Gamble Company 11 6 8 1

Dow Chemical Company 12 8 2 0

Eastman Chemical Company 13 14 12 0

DuPont Company 14 11 1 0

Dial Corporation (The) N/A N/A N/A 0

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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

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How are firm’s distributed based on the ranking

• Which part of the population is targeted for the ranking?

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Environmental Management System

FirmEMS

(Yes/No)ISO14001/ RC 14001

# certified facilities

Avon Products, Inc. yes yes N/A

Clorox Company N/A N/A N/A

Colgate-Palmolive Company yes no N/A

Dial Corporation (The) yes yes 10

Dow Chemical Company yes yes 12

DuPont Company yes yes 10

Eastman Chemical Company yes yes 13

Ecolab Inc. yes yes 14

International Flavors & Fragrances Inc. N/A N/A N/A (96%)

Johnson & Johnson yes yes N/A

Lilly (Eli) and Company yes yes 3- not in the USA

Merck & Co., Inc. yes yes 1

Pfizer, Inc. yes yes 7

Procter & Gamble Company yes yes N/A (66%)

Rohm and Haas Company yes yes 1

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Issues with normalization

• # facilities– Average per facility, used to control for size– However, some facilities may produce more than

others– May not vary much over time

• Revenues– In order to control for differences in company size– Takes into account changes in demand per year

• Profit – Does not control for difference in size– A measure of how dirty or clean are the profit– Same idea for stock price

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Trends

• Provides information on evolution over time

• When to start?

• How long should be the time period?

• Make sure it will be comparable

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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?

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Implications

• Choices of metrics and weights matter• Current lack of transparency• Institutions creating these rankings may

not have the incentives to disclose their methodology

• Establish minimum mandatory reporting requirements

• Educate firms on what to measure and what they are being measured on

• Data verification is required

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The challenge of alignment

• In theory we can find win-win solutions

• Information disclosure can help toward alignment

• However, the design and implementation of such solutions is challenging, as the SRI example showed

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Next Week LCA

• Alpha Motors Case: – What should Barns’ final recommendation be

for material choice for the hood assembly?– Excel file on ENV 188 Website