November 30, 2007
Sustainability Issues All Over the Map at Large Cap Companies
by Anne Moore Odell
An extensive study from RiskMetrics shows sustainability governance among companies varies widely
from country to country, and from sector to sector.
Not only do large cap companies' environmental and ethic policies differ considerably from sector
to sector, they also vary widely within sectors as well finds a new study from the RiskMetrics Group. The Washington DC-based
research group spent a year studying over 1,700 companies, drawing from companies found in the S&P 500, the Toronto Stock Exchange
300, and the Morgan Stanley EAFE index (excluding Japan.)
RiskMetrics looked at over 200 different
policy and performance indicators concerning climate change, the environment, ethics, human rights,
and labor. Corporate performance was viewed "using a governance risk lens" including board
oversight, management policy, and public disclosure.
"Our research model depends heavily
on corporate disclosure in sustainability reports, websites, and securities filings, although we
also examine additional sources of information," said Heidi Welsh, Sustainability Research Unit for
RiskMetrics. "Even if a company is doing wonderful things, we and other investment researchers
can't discern this by osmosis; we need to have public disclosure of their policies and performance
to make assessments."
Companies that have more specific policies and disclose more
detailed performance information on their progress (such as reducing water use or emissions) scored
better in the RiskMetrics study. Firms that do not disclose information and cannot document their
progress fared poorly.
Institutional investors and investment managers can use the
RiskMetrics Sustainability Risk Reports to determine which companies have comparative best practice
for their industry in sustainability governance oversight, management, disclosure, accounting and
strategy in each of the four pillars of RiskMetrics' research model. The four pillars examined are
climate change, other environmental issues, labor/human rights and ethics.
governance was measured on a 100-point scale in the study. The overall average scores were fairly
low, less than 50%of the ideals RiskMetrics defined in each of the four pillars. However, Welsh
pointed out that this doesn't necessarily mean that all companies are doing poorly, since so much
of the measurements depend on disclosure and companies often do things they don't talk about.
"Our aim is to take a hard look at the level of substance in corporate policies and
reported performance, looking beyond what can be overheated rhetoric and nicely produced reports,"
Welsh told SocialFunds.com. "There are always examples of extra-financial factors that can emerge
to ambush a company, hurting its bottom line and its stockholders. This project is about trying to
quantify those risks so they can be taken into account in investment decisions."
found in different areas of the globe had different sustainability strengths and weakness. The
companies found in the EAFE index outperformed the S&P companies on the environment and climate
change according to the RiskMetrics report. The EAFE index measures companies found in developed
countries outside the US while the S&P 500 Index follows the top large cap US companies.
European companies are operating with more regulations that insist on a relatively high
standard of environmental performance so these results shouldn't come as any surprise Welsh said.
However, US companies had more ethics policies in place than their non-US peers. "The
increased emphasis on better U.S. financial and ethical accounting practices post-Enron may have
something to do with the results for S&P500 firms in our ethics pillar," Welsh added.
Companies traded in the Toronto Stock Exchange 300 lead over US and European companies when it
comes to labor and human rights.
The study places the utilities sector at the top of other
economic sectors for having created policies to deal with climate change. Information Technology
firms fared the lowest on climate change policies. The study notes: "Performance on climate-related
metrics tracks with non-climate environmental indicators for the most part, with eight out of ten
sectors coming out at or better on climate than on other environmental factors. This may be further
evidence that climate change is a tipping point issue for corporations that aim to position
themselves best for the regulatory and physical risks of a carbon constrained economy."
Interestingly, it is the sectors that have the potential negative impact on the climate and
environment that have the highest sustainability governance scores. For example, the automobile
industry and the chemical industry receive the highest scores. RiskMetrics chalks this up to the
public and governmental concern of these sectors' impact on the environment.
explained, "The variety in scores also probably reflects the degree to which management within each
sector believes it is exposed to reputational or regulatory risk within each pillar of our model.
For example, utilities that face significant regulatory risk regarding climate change have the best
sustainability governance performance in our model, which makes intuitive sense given the tangible
risks they are facing."
"Companies with big coal-fired power portfolios are not going to
fare well in an economy that penalizes big carbon emitters, "she added.
sectors that employ unionized workers, i.e. the materials sector, have more policies regarding
labor and human rights. The financial sector, on the other hand, scored very low in human policies.
All the companies across the sectors and countries performed more consistently in the area
"What's really interesting is drilling down to a more detailed level to see
which industries and companies perform in a manner that is different than the image they project in
a public policy context," Welsh concluded. "This can be hard to ferret out, and it's still a work
in progress. But those might be the companies with the biggest sustainability risk from an
RiskMetrics gets its ESG staff expertise from the formerly separate
companies of ISS and IRRC which have become RiskMetrics. They have a combined team of about 50
people working on environmental and social screening and analysis in its new Financial Research &
Analysis Unit. RiskMetrics creates a "risk wheel" that allows investors to look at many different
aspects of risk and opportunity in an integrated way.
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