How green is my money? 22nd August 2001

John Synnott - Sun Herald

The rules of a clean and fair planet also put a shine on shares, writes John Collett.

Companies that are good corporate citizens tend to perform better in the long run and do their investors proud. That's what the United States consultant McKinsey found when it did a survey of stock selection of US fund managers. On average a good corporate citizen could be expected to earn a premium of 11 per cent on its share price through responsible practices.

The report found that 66 per cent of fund managers would pay more for shares in a well-governed company.

In Australia Michael Walsh, executive director of Corporate Monitor and co-owner of Ethical Investor magazine, has ranked 170 of the country's largest listed companies and 50 smaller companies based on their records in corporate governance and environmental and social responsibility. The highest ranking companies (or most responsible) include miners such as MIM Holdings, Pasminco and WMC. Walsh says that is not surprising because the mining industry has come in for the closest scrutiny, prompting some to be especially responsible on environmental and social issues (see table).

But while some of our largest miners deserve bouquets others have a long way to go. Companies awarded high scores by Walsh for good performance across all three measures include chemical company Orica, construction company Leighton Holdings and Southcorp, Australia's largest winemaker.

Walsh says the governance score is the most critical for investors because a low score means the company may not be fully disclosing information to investors. Investors should regard a one-star governance rating as a warning sign, he says.

However, scoring well in the environmental and social categories is no substitute for a company having a solid business and sound management. Walsh says both One.Tel and HIH Insurance had been given a one-star corporate governance rating before their collapses, but both scored well in the environmental and social categories.

Peter Thornhill, principal of Motivated Money, says good corporate citizenship demands more than just good corporate governance and well-regarded boards. It is about the ``triple bottom line'', he says, the idea that along with the usual financial responsibilities companies also have social and environmental ones.

Of course, smart companies have always known the value of good corporate citizenship and the positive effects it can have on a company's value and the performance of its share price. While the Corporations Law spells out the legal responsibilities of company directors regarding a company's finance, social responsibilities are defined by community standards and opinions. That is what makes it so hard for investors to know how well companies are doing in the corporate citizenship stakes.

In their annual reports companies include statements on corporate governance, and more of the larger listed companies are releasing environmental reports, but many of those are limited, only stating they are complying with the law. But some do more than pay lip service to the triple bottom line idea. Thornhill says the share price of a company is largely based on perception and ``most people would not have a clue as to what the balance sheet of a company looked like''. So when assessing the ``investibility'' of a company, ethical considerations should be just a part of the mix, he says.

Duncan Paterson, a researcher of corporate ethics at fund manager Australian Ethical, says if a company is good at corporate governance it is also likely to be greener in its approach to the environment and more likely to look after its employees because it is in the long-term sustainability of profits to do so. He says the three elements of the triple bottom line tend to go hand in hand, and the measure ``is something that permeates a company's culture''.

John Hall, chief executive of the Australian Institute of Company Directors, says ``the reality'' is that companies are subject to a wide range of other laws apart from the Corporations Law, such as the environmental protection acts and occupational health and safety legislation, which require directors to have regard to a company's impact on the environment and to the safety and welfare of its employees. That is why, he says, investors will see directors of companies and their managements continue to move on from just single bottom line responsibilities to the triple bottom line approach.

Company rankings are published each month in Ethical Investor along with the performance of ethical managed funds and their shareholdings.


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