Financial Market Incentives for EMS

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Financial Market Incentives for EMS

• Shana Harbour
• EPAs National Center for Environmental
  Innovation
• Grand Rapids, MI
• June 20, 2005

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Agenda

• EPA Financial Incentives Project
• Market Structure Dynamics
• Literature Findings
• Financial Markets and EMS
• Next Steps

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EPAs Financial Incentives Project

• Can the financial sector (insurance, bond and
  equity) offer incentives to organizations that
  improve their environmental performance and
  reduce risk using tools like EMSs?
• Can EPA help identify and facilitate these
  incentives?

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Market Structure Dynamics

• Equity, bond and insurance sectors differ
• Insurance the company is the customer
• Equity and bond market participants are the
  issuers customer
• Bond and equity markets can be classified into
  two major groups
• Socially Responsible Investors
• Mainstream market

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Market Structure Dynamics

• Insurance underwriting
• Detailed and site-specific
• Environmental Risks covered by tailored products
  (e.g. Pollution Legal Liability)
• Small market with a few insurers providing
  coverage
• Underwriters have knowledge of environmental
  issues

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Market Structure Dynamics

• Socially Responsible Investing
• Reflects personal values
• Accounts for 1 in 8 dollars invested in US
• Investments made by set criteria or best in
  class approach
• Environmental and social factors included along
  with rigorous financial analysis

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Market Structure Dynamics

• SRI Equity Investors-General
• Shift from negative/exclusionary to
  positive/engagement orientation
• Increasing sophistication in methods
• Still heavily reliant on company-supplied
  information
• Shift toward emphasis on (investment) risk rather
  than responsibility/social obligation
• Increasing use of best in class rather than
  (traditional) set criteria/screens

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Market Structure Dynamics

• Mainstream Investing
• Not much awareness of environmental issues
• Environment likely considered a negative (e.g.
  risk of accident, fines and penalties)
• Portfolio managers have a strong interest in
  information that can affect a firms future cash
  flow
• Corporate governance and sustainability getting
  more attention

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Literature Findings

• There is no penalty for investing in companies
  with better environmental performance
• Unmanaged environmental liabilities can hurt
  profitability and bond ratings
• Some SRI portfolios outperform similar portfolios

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Intangibles Drive Equity Market

• Intangibles now account for more than 80 of
  stock prices on average
• Supply Chain and Alliances
• Innovation, Intellectual Capital Formation and
  Branding
• External Reporting and Transparency

• Value and Image
• Strategy and Tactics
• Risk Management
• Quality and Responsiveness
• Stakeholder Relations
• Performance Measurement
• Organizational Development/ Strengthening

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Work to date

• Purpose Methods
• Performed to improve understanding of
• Financial community evaluation decision making
• Evaluation/decision points where environment/EMS
  are/may be considered
• Determine which methods are used for what
• Assess presence, role importance of EMS
• Identify limitations concerns
• Not much available on fixed income, mainstream
  investing

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How do Investors View EMS?

• Raters
• Innovest (EcoValue 21), GRI, DJSI, FTSE4Good
  Examined
• Substantial increase in sophistication in methods
  over time
• Expanding envelope (environment ?
  sustainability/CSR)
• EMS or major elements typically evaluated/scored
• Results often used by analysts portfolio
  managers

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SRI Equity Investors -EMS

• Paper EMS (ISO, EMAS) of limited value
• EMS as big picture
• Board-level engagement, authority reporting
• Verification auditing
• Performance sometimes used as proxy for
  EMS/management quality

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Insurers EMS

• EMS viewed favorably
• Written procedures, documentation
• Training
• Compliance monitoring/updating
• Emergency preparedness
• Corrective action
• Internal auditing
• Management reviews
• Key Dimensions
• Scope
• Resources
• Multi-disciplinary implementation
• Integration with business
• Registration not very meaningful

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Insurers EMS (contd)

• Industry/Site-Specific Considerations Dominate
• Industrial/chemical operations
• Compliance, release litigation history
• Community relationships
• Waste management practices
• Surrounding land use
• Receptors
• EMS does offer
• Only way to capture desired cultural shift
• Greater comfort level ? flexibility (policy TC)

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Summary of Findings

• Investors tend to be macro, insurers micro
  in focus
• Yet, substantial convergence in desired EMS
  attributes
• Support for EMS, but design must be strategic
  implementation real
• Measurable performance improvements must result

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Next Steps

• Case study development
• Environmental Finance Advisory Board (EFAB)
  endorsement
• Identification of potential partner organizations
  individuals
• Phase II -- more expansive outreach and dialog

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www.epa.gov/ems

• Shana Harbour
• Harbour.Shana_at_epa.gov
• 202-566-2959