evaluating corporate environmental performance
TRANSCRIPT
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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