Study: Intangible values linked to sustainability
The 2002 study of corporate environmental positioning in the global oil and gas sector by Innovest Strategic Value Advisors Inc. indicates that leading firms posted superior results across a number of financial metrics including price-to-earnings ratio, price-to-cash flow, and operating per share, as well as in aggregate share price movement.
The report examines the extent to which environmental, social and political factors influence the generation and protection of shareholder value within the oil and gas industry and provides strong evidence of the financial merits of sustainability leadership, Innovest says in a press release.
According to Sir Mark Moody-Stuart, former Chairman of Royal Dutch/Shell, "Evidence is growing that companies that pursue such a [sustainable] path can create wealth not only for society as a whole, but also for their employees and their shareholders. Indeed, leadership in sustainability can translate directly into leadership in innovation, in operating efficiency, in customer satisfaction and in brand value.
By bringing the relationship between environmental performance and business competitiveness into sharper focus, this report makes a serious and valuable contribution to the current debate on the value of sustainability leadership within the global energy business."
In total, 17 integrated oil and gas firms were analyzed using Innovest's EcoValue'21® rating methodology, which benchmarks companies in various aspects of environmental risk, business opportunity and management strategy. Key themes of this year's report included global climate change, involvement in renewable energy technologies, resource usage, development of clean fuels, exposure to sensitive sites, and environmental management capacity and energy efficiency.
In this study, companies receiving above average ratings - including Royal Dutch/Shell, BP, Suncor and Norsk Hydro - outperformed companies with below average ratings by approximately 17.3% (1,730 basis points) over 5 years from June 1997 to June 2002. Over 3 years and 1 year, respectively, top firms outperformed laggards by 11.8% and 2.6%, respectively.
Top performing stocks also posted superior results in other business performance and market valuation ratios, including:
- Operating Profit Per Share; leaders outperformed laggards by 44% ($8.85 versus $6.13)
- Price to Book Ratio (5 yr average); 33% (2.65 versus 2.00)
- Price to Cash Flow (5 yr average); 49% (8.64 versus 5.81)
- P/E Ratio (average highs over 5 yrs); 50% (21.8 versus 14.5)
According to Dr. Martin Whittaker, the study's primary author, the most successful companies in this sector over the long term will be those able to provide greater value added for customers - via a range of new and higher margin products and services - and to serve shareholders by reducing operating risks and optimizing efficiency.
"We have moved one step closer to the smoking gun" says Whittaker. "In a business like the oil and gas industry, where margins are already razor thin, companies can generate genuine advantages by reducing costs, servicing customers more efficiently, and creating brand value and customer loyalty. These are areas where sustainability-related activities can demonstrably and directly influence earnings and returns".
"Important for us"
"Hydro is pleased with the study's results, says Information manager Kama Holte Strand. "It addresses a number of issues we consider important to work with, including greenhouse gas emissions, spills from drilling activities, handling toxic waste, efficient energy use and alternative fuels. It's of course encouraging that companies making progress on the environmental front also appear to be improving from an economic perspective. Studies that rate Hydro so high show we're not losing ground, and are working seriously with Health, Environment and Safety, Holte Strand comments.
Innovest Strategic Value Advisors is an internationally recognized independent investment research firm specializing in environmental finance and investment opportunities. Innovest is headquartered in New York, with offices in London and Toronto.