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July 09, 2003
Sustainability Leaders in Food Sector Produce Healthy Returns
by William Baue
Innovest finds that global food products companies with higher sustainability ratings perform
better financially than companies with weaker environmental performance.
SocialFunds.com --
Whereas many sustainability rating agencies assess corporate social and environmental performance,
Innovest Strategic Value Advisors takes
the next step of correlating its environmental sustainability ratings to corporate financial
performance. In its latest report, which covers the global food products industry this time,
Innovest yet again found that sustainability leaders, or the companies with more sustainable
environmental practices, outperform sustainability laggards. This finding corroborates with
previous results, as sustainability leaders financially outperform sustainability laggards in a
majority of the more than 50 industry sectors Innovest has studied.
 "The outperformance correlates to the amount
of impact the sector has on the environment, with high impact sectors such as chemicals, petroleum,
and autos at the top of the list," said Marc Brammer, a senior analyst with Innovest who
co-authored the report covering 60 different aspects of environmental performance at 25 companies.
"The outperformance in the food sector is because it has a pretty big agricultural impact."
The sustainability leaders, or those companies with above-average Innovest ratings,
outperformed the environmental laggards, or companies with below-average ratings as a group, by
approximately 32.8 percent over three years from April 2000 to June 2003. The sustainability
leaders outperformed the laggards by 20.2 percent of the past two-year period, and by 9.4 percent
over the past one-year period.
"With increasingly stringent international regulations
and growing concern about food safety and health among consumers, companies with superior
sustainability performance are likely to outperform their competitors by even larger margins going
forward", said Katharine Preston, a senior analyst at Innovest and the lead author of the report.
The report also finds outperformance looking at other indicators over the three year
period. The sustainability leaders outperformed the laggards in operating profit margin by 11.9
percent versus 8.7 percent, in net profit margin by 6.3 percent versus 4.2 percent, and in return
on equity by 28.0 percent versus 20.6 percent.
Innovest's EcoValue'21 rating framework
employs a system similar to bond ratings. AAA is the best rating, with AA and A following, BBB is
the average rating, with BB and B following, and CCC is the worst rating.
"It is similar
in style and methodology to bond ratings, because we were trying to take information that is not
traditionally understood by the financial markets and make it easily accessible to them," Mr.
Brammer sold SocialFunds.com. "It becomes much more tangible to them because it reduces the
information down to a single unit that's already a familiar format that they've been dealing with
for decades."
The top three companies, Cadbury Schweppes (ticker: CBRY.L),
Danone (BSNP),
and Unilever
(UN), each received the highest EcoValue'21 rating of AAA, while the bottom three companies, Kraft (KFT), ADM (ADM), and Barry
Callebaut, each received CCC ratings.
The report noted that the relatively high
commitment to foods free of genetic engineering at Danone and Unilever may create a competitive
advantage for them. These two companies are also leaders in sustainable agriculture, according to
the report.
The top performers did not necessarily have stellar practices in all of the
areas assessed. For example, looking at human rights in emerging markets, the issue of child labor
in cocoa plantations has affected the reputation of Cadbury Schweppes. Conversely, bottom
performers are not doing everything wrong. For example, Kraft has committed research and
development funding to addressing the issue of obesity as a global health issue, according to the
report. Since the research for the report was completed, Kraft committed to cut portion sizes,
reduce fat and sugar in its foods, and stop marketing in schools.
Mr. Brammer clarified
that Innovest calculates its outperformance results across all of the companies it examines in a
sector, and thus does not necessarily apply to individual companies.
"Our ratings are not
meant to predict the performance of a single stock, or even a few stocks," said Mr. Brammer. "We
definitely follow a portfolio approach, because there's all sorts of other market forces out there
other than the ones we're looking at."
"All our clients overlay our ratings onto their own
standard financial analysis," Mr. Brammer stated.
©
SRI World Group, Inc. All Rights Reserved.
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