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July 09, 2003
Sustainability Leaders in Food Sector Produce Healthy Returns
    by William Baue

Innovest finds that global food products companies with higher sustainability ratings perform better financially than companies with weaker environmental performance.

Whereas many sustainability rating agencies assess corporate social and environmental performance, Innovest Strategic Value Advisors takes the next step of correlating its environmental sustainability ratings to corporate financial performance. In its latest report, which covers the global food products industry this time, Innovest yet again found that sustainability leaders, or the companies with more sustainable environmental practices, outperform sustainability laggards. This finding corroborates with previous results, as sustainability leaders financially outperform sustainability laggards in a majority of the more than 50 industry sectors Innovest has studied.

"The outperformance correlates to the amount of impact the sector has on the environment, with high impact sectors such as chemicals, petroleum, and autos at the top of the list," said Marc Brammer, a senior analyst with Innovest who co-authored the report covering 60 different aspects of environmental performance at 25 companies. "The outperformance in the food sector is because it has a pretty big agricultural impact."

The sustainability leaders, or those companies with above-average Innovest ratings, outperformed the environmental laggards, or companies with below-average ratings as a group, by approximately 32.8 percent over three years from April 2000 to June 2003. The sustainability leaders outperformed the laggards by 20.2 percent of the past two-year period, and by 9.4 percent over the past one-year period.

"With increasingly stringent international regulations and growing concern about food safety and health among consumers, companies with superior sustainability performance are likely to outperform their competitors by even larger margins going forward", said Katharine Preston, a senior analyst at Innovest and the lead author of the report.

The report also finds outperformance looking at other indicators over the three year period. The sustainability leaders outperformed the laggards in operating profit margin by 11.9 percent versus 8.7 percent, in net profit margin by 6.3 percent versus 4.2 percent, and in return on equity by 28.0 percent versus 20.6 percent.

Innovest's EcoValue'21 rating framework employs a system similar to bond ratings. AAA is the best rating, with AA and A following, BBB is the average rating, with BB and B following, and CCC is the worst rating.

"It is similar in style and methodology to bond ratings, because we were trying to take information that is not traditionally understood by the financial markets and make it easily accessible to them," Mr. Brammer sold "It becomes much more tangible to them because it reduces the information down to a single unit that's already a familiar format that they've been dealing with for decades."

The top three companies, Cadbury Schweppes (ticker: CBRY.L), Danone (BSNP), and Unilever (UN), each received the highest EcoValue'21 rating of AAA, while the bottom three companies, Kraft (KFT), ADM (ADM), and Barry Callebaut, each received CCC ratings.

The report noted that the relatively high commitment to foods free of genetic engineering at Danone and Unilever may create a competitive advantage for them. These two companies are also leaders in sustainable agriculture, according to the report.

The top performers did not necessarily have stellar practices in all of the areas assessed. For example, looking at human rights in emerging markets, the issue of child labor in cocoa plantations has affected the reputation of Cadbury Schweppes. Conversely, bottom performers are not doing everything wrong. For example, Kraft has committed research and development funding to addressing the issue of obesity as a global health issue, according to the report. Since the research for the report was completed, Kraft committed to cut portion sizes, reduce fat and sugar in its foods, and stop marketing in schools.

Mr. Brammer clarified that Innovest calculates its outperformance results across all of the companies it examines in a sector, and thus does not necessarily apply to individual companies.

"Our ratings are not meant to predict the performance of a single stock, or even a few stocks," said Mr. Brammer. "We definitely follow a portfolio approach, because there's all sorts of other market forces out there other than the ones we're looking at."

"All our clients overlay our ratings onto their own standard financial analysis," Mr. Brammer stated.


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