Pollution Prevention and Finance

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Pollution Prevention and Finance

• Burton Hamner
• President,
• Cleaner Production International LLC
• Seattle, Washington

Presentation for the Western Region Pollution
Prevention Network Fall Conference, September
29, 2005
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Summary

• P2 is the pro-active environmental component of
  Corporate Social Responsibility (CSR)
• The P2 component of CSR is the ONLY part that has
  historical correlation with added value
• Socially Responsible Investment (SRI) is a major
  and growing force in markets and is driving more
  CSR
• We may be able to promote more P2 through
  creating investor and CSR awareness that P2 is
  the most important element to manage.
• In Banking, P2 now has most potential in finance
  of green buildings

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• Selected Findings       Recent empirical
  research that has found that superior
  environmental performance leads to positive
  financial results
• company environmental performance correlates
  with intangible asset value, and reductions in
  toxic chemical releases result in increases in
  firm market value 
• firms that improve their environmental
  performance by adopting 'beyond compliance'
  environmental management systems realize stock
  price gains 
• firms whose international environmental
  standards are more stringent than local law have
  higher market values than firms whose standards
  are at or below the local legal mandate 
• pollution prevention and emissions reduction
  initiatives lead to improvements in company ROE,
  ROA and ROS ratios, while ROA improves as
  environmental performance improves 
• 'industry-balanced' portfolios of "low
  pollution" SP 500 companies earn greater stock
  returns than portfolios of "high pollution"
  companies.

http//www.lightgreen.com/research.htm
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What is CSR and How Does It Include P2?

• There are LOTS of people running around defining
  CSR
• But in the market, corporations want to attract
  investors and stock buyers
• It is the opinion of finance people about CSR
  that determines whether it adds value to a public
  company
• So, we asked, How does The Market define CSR
  and P2?

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What is Socially Responsible Investment?

• Socially Responsible Investment (SRI) is the
  fastest growing area of investment over 2
  Trillion invested
• Over 500 investment funds use social,
  environmental and other sustainability criteria
• The biggest investment funds in the world
  pension and institutional funds are
  increasingly required to be socially
  responsible investors
• There are over 35 indexes of socially responsible
  companies
• Socially responsible companies attract investors

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What Do SRI Managers Want?
Various combinations of

• Avoid undesirable sectors (tobacco, nuclear,
  weapons, etc.)
• Leadership in policies, practices and results
• Financial
• Social
• Environmental
• Reports that meet global standards for content
  and clarity
• Products and services that support sustainable
  development

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Survey of SRI Criteria from Europe
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Snapshots of SRI Market Indexes

• Global 9 Indexes
• Regional 12 Indexes
• National 16 Indexes

• Examples
• Dow Jones Sustainability Indexes
• Financial Times Stock Exchange 4GOOD Indexes

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Regional or National Index Locations
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Example Dow Jones Sustainability Index Criteria
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DJSI USA Members
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Snapshots of SRI Private Equity Funds

• 500 mutual funds use SRI practices
• Europe 313. North America 200 as of Oct
  2003
• At least 50 SRI mutual funds invest globally
• They are NOT so focused on compliance
• The largest SRI fund companies each manage 1
  billion or more in assets
• Significant operations revenues support market
  research on CSR and SRI, and expansion globally
• All SRI funds publish some information about
  their SRI criteria and investment strategies
• Market Performance of SRI sector is competitive
  with major indexes of funds

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Snapshots of SRI Institutional Funds

• Public Pension Funds
• Public pension funds in several European
  countries and some US states are required to have
  SRI policies. Voluntary SRI is increasing.
• SRI is increasingly linked to governance and
  public policy for pension fund management
• Private Institutional Funds
• SRI is perceived as good risk management
• Recognition that SRI a) does not impose a cost
  and b) can increase the returns

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Performance Indicators for Corporate Social
Responsibility

• All SRI funds, indexes and research firms use
  specific indicators to identify responsible
  companies
• Indicators categories include
• Triple Bottom Line Economic, environmental,
  social
• Products and services
• Actual operational performance
• Management systems
• Indicators from public standards

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The Research Challenge

• How to organize all these criteria?
• No one can cope with so many (258 criteria from
  the indexes alone)
• How to explain them in a framework for actual
  implementation?
• Indicators alone are not enough
• They must be linked to business value
• They need support systems for implementation such
  as Environmental Management Accounting

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Research Summary

• The criteria used by all the market indexes of
  responsible companies were collected
• Semantic analysis organized them by concepts
• Frequency analysis organized them by popularity
• The core criteria for CSR from the indexes were
  compared to the criteria used by SRI mutual funds
  (real investors)
• We found out what the financial markets want in
  CSR what how do professional investors now
  define a responsible company

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Analysis Approach
Investment advisors are talking about
sustainability
200 Sustainability Concepts from SRI Indexes
What are they talking about?
Semantic Clusters
How often do they talk about it?
Frequency Analysis
Do they really represent the market?
Market Comparison
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Data Sources

• 13 separate indexes of responsible companies
• Examples
• Dow Jones Sustainability Index
• FTSE 4Good
• KLD, Calvert, Ethibel, Ethical Index, etc.
• Includes indexes from South Africa, Canada, Japan
• 258 total criteria that they publicize for
  selecting companies for their indexes
• Over 100 mutual funds that publish their criteria
  for responsibility

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Database of Criteria
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Research Findings
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CSR Indicators in a Balanced Scorecard Framework
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CSR Indicators in a Baldridge Award Framework
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How Do Corporations Talk About This Stuff?

• There are now international guidelines and
  standards for CSR reporting, and even for
  auditing of CSR reports
• The Global Reporting Initiative is the leading
  standard setter
• Increasing numbers of organizations now evaluate
  and rate CSR reports

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GRI Criteriafor CSR
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Breaking News (sort of)!

• The ISO is launching a new standard for CSR
• In March 2005, work formally began to create ISO
  26000, to be published in 2008

Provide practical guidance related to
operationalizing social responsibility,
identifying and engaging with stakeholders, and
enhancing credibility of reports and claims made
about social responsibility.
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SRI and the Pacific NW

• Several SRI funds located in region
• Numerous SRI advisors
• Lots of attention to CSR, especially in resource
  conservation and pollution reduction
• 4 corporations using GRI guidelines for CSR
  reports
• Microsoft, Intel, Weyerhauser, Shorebank
• Recent attempt to require state pension funds to
  disclose their approach to evaluating CSR in
  investments
• Big push in Canada / BC to evaluate capital
  markets and sustainable development

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Do NW Corporations Report CSR?

• Our sample population The Seattle Times NW 100
  leading corporations
• Random sample of 30
• Inspected websites for CSR info
• Health and safety / employee welfare, Governance,
  CSR reporting, pollution prevention
• Rated CSR disclosure and sorted the sample

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Sampled Corporations
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NW Corporation Results

• Sample 30 random corporations out of 174 (17)
  from the NW 100 index of the Seattle Times
• Only 7 of the 30 had anything to say about CSR on
  their websites
• Only 1 (Nike) covered the range of CSR topics of
  concern to responsible investors
• Not a good sign no reason for responsible
  investors to consider our region

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So What?

• Investment managers are slowly but steadily
  starting to value CSR
• Standards for communicating to investors about
  CSR are now in use
• Corporations that do not communicate CSR
  successfully will be cut from consideration by
  increasing numbers of investors
• P2 and EHS is the most important value component
  of CSR
• There is a global network of organizations ready
  to help with CSR development

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What Can Be Done?

• Advocacy by P2 organizations show corporations
  how investors are recognizing responsible
  behavior and P2
• Media Tell the people that it is now best
  practice for corporations to be demonstrate they
  understand P2
• Research Need case studies on companies that
  got better financing results because of CSR
  and/or P2

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Change focus to Credit
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P2 and Banking - Summary

• Special programs for P2 financing from banks have
  gone nowhere give it up
• But, best practices in CSR and P2 for bank
  operations are now published maybe a path to
  dialogue
• Try partnerships with banks to help their clients
  the European TA/business model
• Green mortgages look promising green building
  and facilities need financing

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Loans for P2 Projects

• Special programs have been tried since early
  1990s
• Most have very little activity compared to any
  commercial bank
• Regular banks still dont get it
• P2 does not credit-worthiness make collateral
  and cash flow matter more
• Its better to ensure P2 projects are eligible
  for financing under broader programs

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Banks and CSR

• Some banks, especially in W. Europe, are very
  serious about CSR and P2
• They have produced technical guides for banks on
  P2 in their operations and lending
• The focus is on performance metrics, with public
  reporting on results
• Metrics for banks cover both environmental and
  social performance

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• We will only provide loans directly to projects
  when the EA report has addressed q) pollution
  prevention and waste minimization,.

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Good Banking Sources

• UN Environment Programme Finance Initiative -
  www.unepfi.org
• Equator Principles www.equator-principles.co
  m/
• CleanerProduction.Com/sectors

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Is This Relevant to Local P2?

• Not yet. But, best practices will slowly spread
  out to smaller banks
• Educating local banks about what the big guys are
  doing could open eyes to P2 at the local level
  banker to banker
• The best models may be from Europe banks
  support P2 TA visits because they find lots of
  marketing leads
• Could your local banks sponsor P2 workshops for
  their clients and loan officers, to reduce risk
  and improve cash flow?

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P2 and Mortgage Lending

• Green building is P2, along many dimensions
• Good P2 in buildings saves operating costs,
  making more money available to pay the mortgage
• Good P2 in buildings reduces risks, making the
  mortgage cheaper
• Banks could and should be educated to promote P2
  and green building to mortgage customers
• Large financiers of home-building companies
  should be targeted in particular

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Wrap-Up

• For large companies CSR and performance
  reporting is becoming more important to
  investors, and P2 is a big part of their interest
• For small companies Present P2 for financing as
  part of the whole package of strengthening the
  business
• For banks Follow best practices, and use P2 TA
  to find more clients

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More Info?

• Visit Www.CleanerProduction.Com
• / Tools / Reporting
• / Sectors / Finance
• Burt Hamner,
• wbhamner_at_cleanerproduction.com