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Green light

Environmental and social out perform ance by companies is inc reasingly becoming a strong indicator of potential financial outperformance. Simply put, taking a res pon sible attitude to environmental management, emp lo yee development and local com munity involvement makes good business sense.

As environmental problems become more severe and legislation, taxation and cus to mer expectation become tou gher, so the opportunities grow for companies to differen tiate themselves by res pon ding pro actively to issues ran ging from genetically modified foods to fair trade, energy conservation and red ucing packaging.

Although it may seem obv ious that companies add re ssing these issues stand to ben efit from reduced costs and new revenue opportunities, there are still discernible leaders and laggards in all sectors.

Jupiter&#39s environmental res earch unit aims to differentiate between the two and assist our specialist SRI fund mana gers in identifying those forward-thinking companies that are ensuring their businesses will be able to adapt to and profit from the growing environmen tal challenges our society faces.

We have identified three principal ways in which companies can benefit from imp roved environmental and social performance – reducing costs, minimising risks and growing revenues.

Reducing costs

Governments around the world are increasingly prepared to penalise companies for wasteful use of resources. In the UK, the climate change levy and landfill tax are gradually driv ing up the cost of energy usage and waste disposal. Therefore, those companies that reduce their energy inputs or waste outputs will not only benefit the environment but also their own bottom lines.

For example, construction company Carillion decided to double the roof insulation for a hospital it is constructing. Although this cost the company an extra £21,000, it saved £27,000 on the cost of radiators. It will also save the hospital £213,000 in energy costs during the building&#39s lifetime.

Minimising risks

Fund management is as much about avoiding the losers as it is about picking the winners, making it essential to identify the potential environmental pitfalls that companies face and to understand how they are dealing with them.

Potential risks which companies should anticipate inc lude the effects of the storms seen in recent weeks or the reputational risks of sourcing pro ducts manufactured using child labour or using timber from unsustainably managed forests.

Companies which fail to manage their environmental risks can suffer significant financial damage, as Mon santo did over GM crops, have projects delayed by extensive public enquiries or even lose their licence to operate.

Growing revenues

While environmental issues pose significant risks to the reputations of some companies, others use their environmental performance to build their brands and win customers.

In the 1980s, the Body Shop built itself a brand around its environmental and social res pon sibility. Recently, Iceland&#39s commitment to avoid GM products and increase its range of organic produce has pro ved popular with cust om ers.

For other companies, environmental issues are used more to protect and enhance an existing brand, which exp lains why companies such as British Gas, BT and Boots have all developed sector-leading environmental programmes.

Railtrack, Anglian Water, United Utilities and other major purchasers, including almost all car manufacturers, differen tiate between suppliers based on their environmental cred entials. Suppliers wanting to win new orders have a clear business imperative to improve environmental performance.

Fund managers that have already positioned themselves as specialists in this market are well pla ced to profit from the growing interest of other inv estment managers in this area.

Identifying the winners and the losers is a time-consuming process and involves specialist understanding of the issues involved. Hence, the move by a number of SRI fund manage ment houses to appoint teams of environmental and social analysts to work with fund managers to separate the leading companies from the laggards.

Environmental perform ance is only one of many potential ind icators of man agement strength within companies. We still apply Jup iter&#39s strict fund management criteria to all companies before we invest. In this way, we are app lying a double level of scr utiny to all investments in our funds. The conscience of the investor is kept clean in the process.


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