UK study: "‘Green companies sell themselves short in the city"

Listed companies that are leading the way with their environmental and social policies are selling themselves and their shareholders short by failing to make the case to the City, according to research published by Business in the Environment (BiE). When asked to name spontaneously the most important factors to take into account when judging companies, 13% of companies’ own investor relations managers (IRMs) deemed environmental and social issues important – but only 3% of analysts, 4% of institutional investors and 3% of financial journalists.

Despite these figures, the report, ‘Investing in the Future’ suggests there has been a move in the right direction in terms of sell-side analysts’ focus on environmental and social issues since earlier research by BiE. In 1994, when asked directly about the importance of environmental factors, only 20% of analysts said it was ‘quite or very important’ in their evaluation of companies. Today, that has risen to 33%. The figures for social issues have increased by an even wider margin, from 12% to 34%. However, the views of analysts are still clearly behind those of the other groups in the City.

The report pin-points the emerging gap between the thinking of analysts on these issues and that of their institutional investor clients and other City audiences, and asks whether ‘this lack of interest could seriously affect their ability to offer third-party analysis’. When asked to consider specifically non-financial indicators, 20% of investors, 23% of journalists and 30% of IRMs identified environmental and social factors as important, but just 9% of analysts.

Derek Higgs, Chairman of BiE comments: ‘The low priority given to these issues in the City contrasts with the increased priority within listed companies – evidenced by the growth of participation in BiE’s Index of Corporate Environmental Engagement from 76 in 1996 to 184 in the this year’s Index.’
There is, however, scope for companies which do give high priority to environmental and social responsibility to win greater recognition in the City. Most respondents agreed that an emphasis on environmental and social performance indicates active management of corporate reputation and forward-looking management. In particular, the integration of environmental, social and financial strategies is highly rated in assessing companies. Those recognised as impressive performers on environmental and social issues are most commonly noted for their commitment, openness of information, keeping their word and clarity of reporting. BiE recommends that they should:
· Improve the quality of information provided, through better internal liaison and reporting mechanisms,
· Integrate the financial outcome of environmental and social policies with other financial data, and overall management issues
· Support the development of environmental and social performance indicators specific to the company’s sector
· Gain third-party endorsement of the information provided.

The research indicated that the financial implications of government action and public pressure are thought most likely to raise social and environmental issues higher up the corporate and City agenda. This was borne out by responses to questions on the Pensions Act regulation on pension funds’ investment policies, which showed that 44% of investors and 35% of analysts have changed their approach to companies following the introduction of the new legislation.

The research covered over 200 analysts, investors, investor relations managers and City and business journalists, in industry groups ranging from those where environmental and social issues are well understood to others were they are still emerging. The research was undertaken by MORI in February and March. It was supported by The Association of Chartered Certified Accountants (ACCA), CGNU and the Environment Agency.

Derek Higgs comments: ‘Investment is first and foremost for financial gain, but investment decisions and policies play a major part in creating our future. This survey shows that appreciation of corporate environmental and social responsibility has grown in the City, and that the integration of economic, social and environmental strategies is valued.

‘BiE’s parent organisation, Business in the Community, is helping to carry this change forward by looking at the expansion of the BiE Index to include social issues and is working on performance indicators for these. ACCA and the Environment Agency also have a number of projects designed to provide the framework within which companies and the City can learn to speak the same language on these issues.

‘Of course the City should take more of the initiative in developing its own methods of assessing companies in these areas. But companies that have proved to themselves that environmental and social responsibility makes good business sense must now show this clearly in their reporting in a way that makes sense to the City.’

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