Chaves_Jose_2010_oikos-PRI

8/8/2019 Chaves_Jose_2010_oikos-PRI

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Work in Progress please do not cite without permission of the author

oikos PRI Young Scholars Academy 2010 Mainstreaming Responsible Investment

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The researcher expects to encounter tangible and intangible linkages between high

level of stock value growth and high level of corporate environmental governance; and

low level of stock value growth and low level of corporate environmental governance.

As a consequence, it is expected to attribute to these linkages a set of specific key-

drivers, indicators, parameters and metrics that would be, further, adopted as analytics

tools in the process of investment decision-making.

3.1.1 Testing Hypothesis

Graphic 3 presents four possible fields for investigating companies environmental gov-

ernance and shareholder value delivering correlation. This research will investigate two

hypotheses:

i. Does Shareholders delivered High Value can be connected to the High Level of

Corporate Environmental Governance?

ii. Does Shareholders delivered Low Value can be connected to the Low Level of


This research is expected to confirm that there is a clear, very intense causal relation-

ship between the adoption of the good practices of Corporate Environmental Govern-

ance by companies and their performance in the capital markets.

3.2 Research Methods and Tools

To define key-environmental drivers and key-financial performance parameters andto understand its relationship is the first path in the process of research methods choos-

ing. Overcoming the difficulty of frameworking a reliable connection between them

would brings the strictness amalgam to this work successfulness. Two previously-

elected methodologies come to provide the means by tangible and intangible factors

modeling can address a driver-performance matrix .

General Morphological Analysis comes first. It has been successfully applied in situa-

tions when non-quantified modeling is required. The three-dimensional configuration

spaces (Figure 1) called Zwicky box 6 provides a strong understanding of how to integrate


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Role of Corporate Environmental Governance and Strategy


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tangible and intangible drivers and parameters. It has proved an excellent decision-

oriented methodological tool, particularly by frameworking the process of intangible,

non-quantified stakeholder analysis.

Fuzzy Logic will provide the whole analysis framework. It has been a proved tool for

handling with Intangible Key-Drivers and other environmental-related subjective infor-

mation, as transparency and reputation, for instance. The fuzzy logic aggregates effi-

ciency and intelligence in the inference analysis over ambiguous systems. The Fuzzy

Hierarchy COPPE/Cosenza Model 7 will be used in this work under specific co-advisory of

its creator, Doctor Carlos Alberto Nunez Cosenza, Professor Emeritus of the Federal Uni-

versity of Rio de Janeiro.

Figure 1 - Three-dimensional Configuration Spaces 8

3.3 The Environmental Analytics Framework

This research work adopts a convergence of key-environmental drivers guidelines

sourced from the previously mentioned voluntary initiatives. These guidelines bringTangible Key-Drivers: corporate environmental policies, strategies, value-chain com-

petitiveness, clean product and services, compliance & legal, etc.; and Intangible Key-

Drivers : reputation; stakeholder dialog; institutional rewarding; risk-avoidance ac-

knowledgment: risk-management external confidence.

Tangible Key-Drivers

i. Environmental Policies: Vision, Mission, Values and Principles.


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ii. Corporate Environmental Strategies: Environmental value-chain competitiveness;

clean product and services; community environmental value creation.

iii. Corporate Environmental Management: Objectives, targets and metrics; envi-

ronmental systems; learning and training; accounting and valuating; reporting.iv. Environmental Compliance: Law and regulatory framework; risk management;

auditing; commitment to reduce pollution and emission; corporate liabilities.

v. Corporate Environmental Performance Evaluation: Climate changing: emissions reduction projects & trading efforts; Biodiversity protection; Current energy efficiency efforts; Alternative energy, forestry and biomass projects;

Clean technology development; Pollution prevention and control; Extended value-chain producer environmental responsibility practice; Risk avoidance initiatives, emergency preparedness and response; Water Resources Management: water conservation; effluent treatment and

reuse.

Intangible Key-Drivers

i. Reputation: Industry environmental benchmarking.

ii. Community Involvement: Community environmental projects; stakeholder com-

munication and dialog.

iii. Institutional Rewarding: Government and NGO environmental acknowledgement.

iv. Risk-avoidance Acknowledgment: Risk-management external confidence.

3.4 The Financial Performance Analytics Framework

Frameworking and delivering trustable on-time available management information

opens the channels to the investor-based finance 9 approach. According to the authors

Kevin P. Coyne and Jonathan W. Witter, McKinseys partners, institutional investors and

asset managers benefit from business transparency as a regular, expectable corporate

practice.


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Corporate & Financial Key-Performance Originators

i. Financial reporting quality and availability.

ii. Investor-based finance approach & investor relations structure.iii. Risk management & business continuity processes.

iv. Investment grade rating.

v. Business industry benchmarking.

Key-Fundamental Analysis

i. Operating cost benchmarking.

ii. Shareholder value evolution.

iii. Market value/Book value relation.

iv. Traditional indicators: EBIT, EBITDA, EVA, ROA, ROIC, ROE, TSR.

4. The Case Studies

The Standard & Poors S&P 500 Index appears to be the most adequate low-step edge

of analysis benchmarking due to its long-standing list of comprehensive group of compa-nies and industries.

4.1 Targeted Industries

Environmental high-risk-susceptible industries targeting is expected to add value to this

research comprehensiveness, strictness and corporate relevance by studying the com-

panys performance. This research investigates the following environmental-intensive

industries: Iron and Steel, Metal and Mining, Electric Utilities, Chemical Manufacturing,and Oil and Gas Integrated.

From each of these industries it were selected the Leaders in Stock Price Growth % (su-

perior quartile) and the Laggards in Stock Price Growth % (inferior quartile). Then, hy-

pothesis will be tested:

i. Does Shareholders delivered High Value can be connected to the High Level of



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ii. Does Shareholders delivered Low Value can be connected to the Low Level of


4.2 Leaders and Laggards by Selected Industry

I ron & Stee l Indust ryL e a d e r s S t o c k P r i c e G r o w t h ( % )

Source: FreeStockCha rts. com interactive platform

S&P 500

Cia SidNacional

Mechel

Simec

Posco

Gerdau

Iron & Stee l Industry

L a g g a r d s - S t o c k P r i c e G r o w t h ( % )

Source: FreeStockCharts .com interactive platform

S&P 500

Carpenter

Arc Mittal

Haynes

Worthington

China Steel


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Source: FreeStockCharts .com i nteract ive platform

Metal & Mining IndustryL e a d e r s S to c k P r i c e G r o w t h ( % )

SP-500

Vale

Southern

BHP Billiton

Alum China

Cameco

Source: FreeStockCharts .com interact ive platform

Metal & Mining Indus t ryLaggards S tock Pr ice Growth (%)

Denison

Alumina

SP-5OO

Alcoa

HorseHead

Palladium

Source: FreeStockCha rts.c om interacti ve platform

Elect r ic Ut i l i t ies Indust ryL e a d e r s S to c k P r i c e G r o w t h ( % )

S&P 500

CPFL

Sempra

Eletricidad

Cemig

Enersis


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Electr ic Ut i l i t ies Indust ryL a g g a r d s S t o c k P r i c e G r o w t h ( % )

S&P 500

Progress

American

DTE

Southern

Edison

Source: FreeStockCharts.com interactive platform

Chemical Manufactur ing IndustryL e a d e r s S t o c k P r i c e G r o w t h ( % )

S&P 500

Dow

I Flavors

Braskem

Du Pont

PPG Ind

S&P 500

SQM

Syngenta

Monsanto

Mosaic

Agrium


Chemical Manufactur ing IndustryL a g g a r d s S t oc k P r i c e G r o w t h ( % )

S&P 500

Dow

I Flavors

Braskem

Du Pont

PPG Ind


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Oil & Gas Integrat ed IndustryL e a d e r s S t o c k P r i c e G r o w t h ( % )

S&P 500

Petrobras

PetroChina

Hess

SuncorChina P&C


Oil & Gas Integrated IndustryL a g g a r d s S to c k P r i c e G r o w t h ( % )

YPF

Eni SPA

Conoco

S&P 500

Shell

BP


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References

1

America's Green Strategy. 1991. Porter, M. E. Scientific American. 1991.2 Toward a New Conception of the Environment-Competitiveness Relationship. 1995. Porter, M.E. & van der Linde, C. Journal of Economic Perspectives.

3 Dow Jones Sustainability Group Index: A Global Benchmark for Corporate Sustainability. 2001.Ivo Knoepfel, Head of Rating and Index Research at SAM Sustainability Group Zollikon, Switzer-land. Elsevier Science Inc.

4 The role of asset consulting in transforming investment decision-making: The integrations of environmental, social and governance considerations into corporate valuation. Eric R. W. Knight

and Adam Dixon. November 2009. SSRN:

5 http://www.unpri.org

6 Zwicky, F. (1969) - Discovery, Invention, Research - Through the Morphological Approach, To-ronto: The Macmillan Company.

7 http://www.producao.ufrj.br/cosenza.htm

8 Modeling Complex Socio-Technical Systems Using Morphological Analysis Tom Ritchey, 2003-2006.

9 Taking the Mystery out of Investor Behavior, Kevin P. Coyne and Jonathan W. Witter HarvardBusiness Review, 2002.

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Chaves_Jose_2010_oikos-PRI