A recent article in The Economist poses the question whether DuPont, the world’s biggest chemical firm, can embrace “greenery” and thrive at the same time. There are plenty of profound questions to be asked when confronting the future of the planet, and surely this is one of them. This is because in the minds of many people it is precisely the DuPonts of the world who have caused our environmental problems. Can they now be the solution to them?
From the creation of the Environmental Protection Agency in 1970 through the 1980s, the main orientation of business toward the environment was an adversarial one, of being forced to limit pollution through compliance with government regulations. And compliance was synonymous with added cost. Today, the focus is much more on avoiding pollution and waste in an effort to be more efficient, competitive and profitable.
Industry is moving toward a commitment to industrial ecology, where products and processes are designed to minimize waste by-products, or where waste by-products are further processed to make them into saleable inputs for other industries. As a result, overall costs (production plus compliance) are reduced and/or new revenue streams are created.
The Economist story is replete with references to Wall Street’s skepticism about chairman Chad Holliday’s recent announcement of his plans for DuPont’s greener and more profitable future. After an initial ramp-up, DuPont’s share price softened in the wake of Holliday’s vision, which more or less followed the S & P; 500 over the same time frame, but we’re left with the impression from the article that it’s because no one believes being green can also be profitable.
In July, Chemical Week’s cover story was devoted to a discussion of the premium stock performance of chemicals firms with outstanding environmental performance.
Based on rankings developed by Innovest Strategic Value Advisors of New York, share prices in the top half of the industry defined by environmental performance were shown to be 20% higher than the bottom half from March 1998 to February 1999, and nearly 72% higher from January 1996 to December 1998. Share prices of Innovest’s top 25% of specialty chemicals firms were nearly 12% higher than the S & P; specialty chemicals index from January 1992 to December 1998.
At the very top of Innovest’s list of best environmental performers are DuPont, Dow Chemical and Ecolab.
Of course, it may be that big firms with blue-chip cachet, such as DuPont and Dow, can afford to focus on the environment. But that theory doesn’t explain Ecolab, a small-cap stock which has Innovest’s highest environmental performance rating. Whatever the right causal explanation is, Innovest’s findings are impressive.
Another interesting insight from the Innovest rankings is that firms associated with major environmental disasters in the past have apparently become experts in managing environmental risk (hence cost). Exxon and Union Carbide, for instance, now receive top marks for environmental performance based on the 60 variables tracked.
Assets invested in “socially responsible” mutual funds reached $1.2 trillion in 1997, approximately doubling from the $639 billion they attracted in 1995, according to the Social Investment Forum. Such funds avoid industries such as arms manufacturing, nuclear energy, alcohol and tobacco.
Meir Statman, a finance professor at Santa Clara University, found that over the period 1990-98 the performance of the Domini Social Index, an index of 400 socially responsible companies (250 of which are in the S & P; 500), did slightly better than the S & P; 500 over the period (17.31% average returns compared to 16.95%).
When properly matched according to asset size, the 31 distinct, socially responsible mutual funds of the 64 listed by Morningstar as of September 1998 had slightly lower expense ratios, front-end loadings, and deferred loadings, and slightly higher returns than conventional mutual funds over the same period.
These findings may be a bit surprising, since many of the socially conscious mutual funds in existence are very idiosyncratic. For example, Amana’s Growth and Income Funds reflect Islamic principles. American Trust Allegiance’s portfolio selections are based on Christian Science beliefs, while the Meyers Pride Value Fund screens in companies that support gay rights.
Of course, once the screens are applied each fund manager is attempting to balance risk and return in an optimal way. According to Statman’s research, they seem to be doing that quite well.
If socially responsible mutual funds perform at least as well as their conventional counterparts, “doing well by doing good” may become the marching cry of more and more investors in the future.
For companies that demonstrate high “eco-efficiency” according to the Innovest rankings, which out-performed their industry competitors by 17% in the stock market last year, the reasons are already apparent. Practicing industrial ecology goes right to the bottom line. Innovation and new product development growing out of compliance requirements move environmental issues squarely into the center of business strategy.
And, finally, managerial prowess honed by almost 30 years of internalizing the costs of dealing with environmental pollution has brought forth a new breed of corporate leaders in some of America’s most powerful companies who have the vision and resolve to make business the solution to many of the world’s most critical environmental problems.
Aigner is professor of management and economics at UCI’s Graduate School of Management and is associate dean for business management at the Bren School of Environmental Science & Management at UC Santa Barbara.
