The body of statistical evidence correlating higher corporate environmental performance with higher stock performance has just grown. Late last month, Innovest Strategic Value Advisors released a report that compares the eco-efficiency of 29 pharmaceutical companies in U.S., Europe, and Japan to the companies’ stock performance. The study covers the period between May 1, 2001 and April 30, 2002. Innovest found that companies with superior eco-efficiency had a higher share value than that of companies that lagged behind in environmental performance. However, the statistical significance of these findings is only applicable at the sector level and does not extend reliably to a company-level analysis. Several companies that received excellent environmental ratings from Innovest performed very poorly in the stock market over the past year.
New York City-based Innovest, a leader in intangible value analysis, developed the EcoValue’21 environmental performance rating tool to quantify corporate eco-efficiency. The tool employs 60 criteria for analyzing a company’s environmental risk exposure, environmental management strategies, and strategic profit opportunities. Companies earn ratings ranging from “AAA” for superior eco-efficiency to “CCC” for poor environmental performance. These ratings allow Innovest to distinguish the top eco-efficient companies from the poor environmental performers in any given sector.
“Our theory is that the companies obtaining superior Eco Value’21 ratings will tend to outperform the market going forward,” said report author Pierre Trevet, a senior analyst at Innovest. “However, we don’t look at the stock performance prior to doing the environmental rating; we do it after, so as not to be influenced by it.”
The pharmaceutical sector in particular has performed poorly in over the past year. The Innovest report, entitled The Global Pharmaceutical Industry: Uncovering Hidden Value Potential for Strategic Investors, attributed this poor performance to the expiration of existing patents as well as to the low rate of approval for new drugs. Despite these sector-wide declines, the top half of eco-efficient companies researched by Innovest still outperformed the poor environmental performers by 17 percent. Since May 2001, the aggregate stock price of the top half fell by 8 percent, while stock prices for the bottom half plummeted 25 percent.
Bristol-Myers Squibb (ticker: BMY) earned an “AAA,” the pharmaceutical sector’s highest EcoValue’21 rating. If EcoValue’21 ratings correlated directly with stock performance on a company level, Bristol-Myers stock should have outperformed its peers. In actuality, Bristol-Myers stock value plummeted more than 60 percent over the study period.
“We would never say that an EcoValue’21 rating replaces the need for financial analysis,” said Mr. Trevet. “If you take one stock individually, chances are it won’t work all the time. It’s impossible–especially in the pharmaceutical sector, which is firmly driven by the drug approval of the FDA [U.S. Food and Drug Administration] and patent expiry.”
Innovest attributed Bristol-Myers’ decline in part to the FDA’s December 2001 decision not to approve a colon cancer drug in which the company had invested $2 billion. However, Bristol-Myers’ poor market performance helps illustrate the stock performance of the remaining companies in the top half.
“As the stock of Bristol-Myers declined by 60 percent, it means that the others in the top half have had to really outperform,” said Mr. Trevet.
Innovest predicts an imminent rebound for Bristol-Myers, for several reasons. One reason is that the company’s environmental management system covers its entire value chain. Another reason is that it has achieved ISO 14001 certification at 22 sites, and more sites are working toward certification. Innovest also points out rising stock prices of other companies with high EcoValue’21 ratings. Johnson & Johnson (JNJ–“AAA”), Novartis (NVS–“AA”), and Roche (HLRZG–“AA”) have all rebounded since the beginning of the year.
Innovest ranked Elan Corporation (ELN) as the worst environmental performer with a “CCC” rating. The company has no corporate environmental officer and no environmental policy, although shareowners are increasingly demanding that these deficiencies be redressed. The company’s stock price plummeted more than 76 percent over the past year.