Pax World views a company’s handling of the potential impact of its operations on the environment as an indicator of its overall financial and management strength. Environmental policies and programs that aim to lighten a company’s environmental footprint can potentially reduce its regulatory, reputational and litigation risks. In addition, companies’ efforts in this area can contribute to positive relations with stakeholders, including employees, communities and customers.
Studies of the effects of environmental management on financial performance suggest that companies with exemplary environmental performance are more likely to exhibit higher financial performance. A 2005 study published in the Financial Analysts Journal found that companies that manage their environmental impact well produce superior collective portfolio returns, and that the incremental benefits of environmental performance could be substantial (see chart below comparing environmentally best-in-class and worst-in-class portfolios).1 A 2009 study by AT Kearney showed that companies identified as “greener” outperformed industry peers during the economic slowdown of 2008 and 2009 in 16 of 18 industries.2 And a 2008 study by a researcher from the University of Arkansas found that a company’s stock market performance typically suffers when the U.S. Environmental Protection Agency imposes sanctions against it for environmental non-compliance.3
Source: Jeroen Derwall, Nadja Guenster, Rob Bauer, and Kees Koedijk,
“The Eco-Efficiency Premium Puzzle,” Financial Analysts Journal 61(2), 2005.
Past performance does not guarantee future results.
Pax seeks to invest in companies that understand and work to reduce waste and emissions to air, water and soil; prevent pollution; practice recycling and energy efficiency; understand and work to reduce their impact on climate change; and accurately disclose their environmental performance and policies to investors. Pax evaluates forward-looking factors such as the impact of a company’s operations on the environment, including emissions of pollutants and greenhouse gases, consumption or modification of habitat, consumption and efficiency of the use of materials and energy, recycling and disposition of waste products. Pax also seeks to invest in companies that expect similar environmental criteria from their vendors and suppliers, and that understand and work to reduce the environmental impact of the use of their products. Pax seeks companies that understand product lifecycles and that take steps to assure that their products can be disposed of without harm to the planet. We also seek companies that disclose their public policy positions on significant environmental issues, and those that do not oppose needed environmental regulation. Finally, we seek companies that disclose their environmental policies, programs and performance through sustainability, Ceres or GRI reporting, issue-based environmental reporting such as the Carbon Disclosure Project, or that are members in industry-specific initiatives such as the Equator Principles and Responsible Care. Pax recognizes that even companies with excellent environmental management programs may have the occasional accident or suffer from a lack of oversight. Pax does not necessarily avoid investing in all companies with environmental problems; rather, it considers companies’ management of environmental problems evidence of their management quality. Pax may avoid companies in industries with disproportionate environmental impacts if, in addition to other problems, they also lack or do not disclose their environmental policies and programs. Finally, Pax generally avoids investing in companies with poor or deteriorating environmental performance, especially when they also lack environmental policies and disclosure.
The issues highlighted above are illustrative and do not necessarily reflect the full range of environmental issues Pax World may consider in analyzing a particular security for investment.
1Jeroen Derwall, Nadja Guenster, Rob Bauer, and Kees Koedijk, “The Eco-Efficiency Premium Puzzle,” Financial Analysts Journal 61(2), 2005. The best-in-class and worst-in-class portfolios were established by first assigning companies to one of 12 industries. The companies were then ranked by their Eco-Efficiency Scores.Then, a value-weighted portfolio of high-ranked stocks and low-ranked stocks was constructed within each of the industries. Finally, 12 industry weights were computed based on the ratio of total industry capitalization to total market value of all companies in the NYSE/Amex/NASDAQ universe.These weights were then assigned to each subportfolio.
2Daniel Mahler, Jeremy Barker, Louis Belsand, and Otto Schultz, “’Green’ Winners,” AT Kearney, 2009.
3Andrea M. Romi, “Determinants of Environmental Sanction Disclosure: Firm Fears of Impairment to Reputation and Legitimacy,” University of Arkansas, December 2008.