Ethical Performance
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why it pays to look on the bright side of life

November 1999

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)




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