Report encourages overcoming the barriers to integrating the value of environmental strategies into financial analyses.
Social investors and environmental advocates have long argued that sound environmental performance is part of responsible business practice and can add to a company’s profitability. A recent report from the U.S. Environmental Protection Agency (EPA) confirms this positive relationship, and could help the concept gain wider acceptance in the business and financial community.
"Green Dividends? The Relationship Between Firms’ Environmental Performance and Financial Performance" is a product of EPA’s Environmental Capital Markets Committee, which is mandated to study this relationship. The Committee, composed of experts from publicly traded firms, financial firms, business schools, financial regulators, and environmental organizations, produced the report after soliciting diverse views from the financial services community.
"The report synthesizes the findings of a broad range of research on the relationship between firms’ environmental performance and financial performance," said Mark Joyce, EPA Senior Policy Advisor for Environment, Finance & Trade. As EPA’s official representative on the Committee, Joyce was responsible for management of the project.
The EPA report concludes that there is indeed a moderate positive relationship between the two, but that the strength of this correlative relationship varies widely by firm and by sector and exact causation has yet to be determined. According to the report, analysts still don’t have methodologies to accurately value firms’ environmental strategies, and the general correlation may be of little direct value to inform specific investment decisions.
"Green Dividends?" delves deeply into the barriers that have prevented investors from incorporating environmental information into their investment selection processes. Chief among these barriers is the lack of clear and consistent definition for environmental performance, and the inability of many companies to demonstrate links between environmental strategies and future financial returns.
"Traditionally, both financial analysts and corporate managers have by-and-large thought of environment strategies in terms of liabilities and risks rather than upside potential," said Joyce. "Environmental professionals and financial analysts also have different professional lexicons and different points of reference that have impeded translating environmental issues into financial terms."
The report concludes with key recommendations to the EPA which could help remove some of these barriers, such as promoting industry-specific environmental performance benchmarks and corporate environmental accounting. These suggestions would represent a drastic change in strategy by the EPA, recognizing the importance of financial services to the environmental management of corporations.
"EPA gathers, processes, and disseminates vast quantities of data and information, but it doesn’t currently view the financial services industry as a key constituent," said Joyce. "EPA can benefit investors, progressive companies, and ultimately the environment by enhancing the utility of the information that it provides."
The EPA report shows that environmental performance is material to financial performance, confirming the findings of research by Innovest Strategic Value Advisors, Sustainability Asset Management (SAM), and the World Resources Institute (WRI). As this message reaches a wider range of investors, perhaps with the EPAs help, identifying and capitalizing on environmental trends will grow in importance for the financial services industry.