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March 09, 2000
WRI Pioneers Method for Assessing Company Environmental Risks
Report from the World Resources Institute illustrates new method with financial measures of future
environmental issues for pulp and paper companies.
SocialFunds.com --
Social investment managers have struggled for many years over assessing the future environmental
performance of companies based on present policies, commonly relying on checklists or qualitative
screens. A new methodology developed by World Resources Institute (WRI) allows investors to
translate environmental issues into the predictive financial terms that they need to make sound
investment choices.
 In "Pure Profit: the Financial
Implications of Environmental Performance," released today, WRI economists Dr. Robert Repetto and
Duncan Austin suggest that knowing which companies are better positioned to deal with imminent
environmental issues can lead to better investments. They illustrate their method by analyzing the
response of 13 leading U.S. pulp and paper companies to projected future environmental
developments.
"In many different ways, the environment is directly affecting the bottom
line, often with very different consequences for companies even within the same sector," wrote WRI
President Jonathan Lash in the Forward of the report. "This evidence directly challenges the notion
that environmental issues are too small to merit Wall Street's attention."
WRI is a
Washington, DC-based research organization providing information and practical solutions for
environmentally sound and sustainable development around the world. "Pure Profit" is the latest in
a series of recent publications from WRI aimed at improving the management of environmental issues
by corporations.
A 1999 study by the United Nations Environmental Programme, "UNEP
Financial Institutions Initiative Survey," pointed out that the most significant obstacle to
integrating environmental issues into investment decisions is translating environmental impacts
into financial implications. "Pure Profit" addresses that need directly, proposing an exacting
method of assessing a given company's prospective financial exposure to environmental risks.
"Forthcoming environmental issues can carry significant financial implications for companies,
and these effects can vary substantially among companies," said Duncan Austin, Associate for the
WRI's Program in Economics and Population and co-author of the report. The other author, Dr. Robert
Repetto, is a Senior Fellow, and a former Vice President, at WRI.
"If investors knew
which companies were better positioned with regard to environmental issues, they would be able to
make better investment decisions, and earn higher returns," added Austin.
The WRI
report applies a scenario-based approach, dealing explicitly with uncertainties regarding future
environmental policies and other environmental pressures, recognizing that financial markets are
concerned more with future than past performance. After identifying environmental issues that may
impact on the industry, the authors build scenarios around each and assess the financial exposure
of specific companies to the relevant issues.
The result is an estimate of the financial
impact of impending or probable scenarios, in terms of a percentage of current market value. This
allows a quantitative comparison of companies within an industry.
The authors apply their
method to 13 U.S. pulp and paper companies, one of the most energy-intensive of all industries with
a wide range of pollutants and other environmental impacts. Scenarios were developed reflecting
impending air and water quality regulations, fiber supply issues, and climate change issues, to
reach an objective assessment of each company's projected performance.
The outcome in this
test case showed much more than the fact that pending environmental issues will financially affect
companies in the pulp and paper industry. Results went on to show that financial exposure to these
environmental issues vary widely between companies, with one company likely to see shareholder
value enhanced and three others facing a probable loss in market value of at least 10 percent.
In addition to showing that future environmental issues are likely to have quite different
impacts across companies in the same industry, the WRI study illustrated that the availability of
company information about environmental performance was often lacking. The authors recommended
further efforts by the Securities Exchange Commission (SEC) and the Environmental Protection Agency
(EPA) to encourage disclosure of company environmental performance could help in this regard.
"Pure Profit" represents a vivid reminder that environmental issues generate both business
risks and opportunities that can influence their financial performance, a valuable tool for
responsible investors, as well as corporations.
"Companies of the future are already
taking the lead in this area without waiting for the impetus of legislation or regulation," said
Austin. "Some companies see new market opportunities develop as a growing number of consumers begin
to demand environmentally friendly products and services, while other companies are cleaning, or
'greening', their production processes."
But the WRI report goes on to fill in a gaping
hole in socially responsible investing methodology, providing a quantitative technique for
assessing the future environmental performance of companies. Investors will be watching closely to
see how this quantitative method is applied by social investment managers.
©
SRI World Group, Inc. All Rights Reserved.
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