September 03, 2003
Environmental Best Practice Tied to Financial Outperformance in Food Retail Industry
by William Baue
Innovest's latest report shows that environmental leaders in the global food and drug sector
financially outperform the sector's environmental laggards.
Recently, Innovest Strategic Value
Advisors released a report assessing the environmental and social performance of 27 companies
in the global food and drug retail industry. As many other Innovest sector reports have found,
companies with best environmental practice outperformed environmental laggards in terms of
financial indicators as well. Two months ago, Innovest released a report researched in tandem with
this one that found financial outperformance by companies in the food products industry with
environmental best practice.
Over the last three years ending June 2003, global
food and drug retail companies with above-average environmental ratings from Innovest financially
outperformed companies with below-average ratings as a group by approximately 22.3 percent.
Innovest's EcoValue'21 analytical platform assesses environmental performance on 60 indicators,
including energy and waste management as well as proactive involvement organic foods and avoidance
of genetically modified organisms (GMOs). Innovest's Intangible Value Asset (IVA) tool assesses
social performance on 80 indicators, including labor relations, commitment to fair trade, and use
of minority and female suppliers.
Topping the list of EcoValue'21 rankings were UK-based
J. Sainsbury's (ticker: SBRX.L) and Boots plc (BOOT.L), which both
earned the highest rating of AAA (which loosely corresponds to bond ratings that run from AAA
through CCC). The report enumerates specific ways in which Sainsbury's exemplary environmental
performance translates into financial savings.
"In 2001/2, Sainsbury cut energy costs by
$2.5 million; reduced CO2 emissions by 8,000 tons; saved 1,200 tons of packaging equivalent to over
$3.7 million; increased recycling initiatives resulting in savings of $207,000 for landfill tax;
and saved $13.5 million due to improvements in transport efficiency," wrote Isabel Pilkington, an
analyst at Innovest and the lead author of the new report. "[US subsidiary] Shaws is working to
obtain 10 percent of its energy from renewable sources by 2010."
"You can't find better
environmental reporting than J. Sainsbury," added Marc Brammer, a senior analyst with Innovest who
co-authored the report.
Sainsbury and Boots also earned IVA social ratings of AAA,
placing second and third after Finland-based Kesko (KESK). Wild Oats (OATS), which also
received an AAA rating, ranked fourth in IVA ratings. The US-based company earned an AA
EcoValue'21 rating. Wild Oats' primary US competitor, Whole Foods (WFMI), earned BBB ratings for both
EcoValue'21 and IVA.
Both Wild Oats and Whole Foods have been involved in labor disputes
over unionization. The disputes affected their IVA ratings.
"Whole Foods had a number
of labor issues--they're very anti-union--but also we had lack of disclosure from Whole Foods as
well," Ms. Pilkington told SocialFunds.com.
In at least some cases, Whole Foods lack of
disclosure translates to simply not measuring certain performance metrics. For example, Whole
Foods states that it recycles and attempts to reduce waste, but it was unable to disclose any
statistics or cost benefits. In contrast, Wild Oats was "one of the few companies in this sector
to respond to requests from investor representatives to disclose details of employee turnover," the
However, Mr. Brammer pointed out that the global food retail sector
performed particularly well in both environmental and social arenas. Wild Oats and Whole Foods'
performance would have placed them at the top of many other sectors.
"There are ways in
which both Wild Oats and Whole Foods are leaders, even though in some cases they may not be at the
very top," Mr. Brammer told SocialFunds.com.
"The US Department of Agriculture (USDA)
estimates that in the last decade, US organic food retail sales have increased 23 percent annually,
five-times faster than food sales in general," the report states. "Currently, Whole Foods is the
world's largest retailer of natural and organic foods, and given the rapid growth of organic food
relative to the food sector, is clearly well positioned to benefit from such growth."
While the EcoValue'21 platform maintains a long track record of this kind of comparison between
environmental and financial performance, its history of tracking social issues runs shorter, and it
has only recently begun to compare social and financial performance. Mr. Brammer disclosed
Innovest's plans to combine its EcoValue'21 and IVA ratings into a single methodology.
"I think there's enough correlation between the environmental and social indicators to make
that fusion--the market is asking for something that will encapsulate all of those factors in a
single score," said Mr. Brammer. "We'll still be to decouple the two."
"As an analyst, I
would expect to see outperformance because the social factors that we're looking at relate in so
many ways to profitability," concluded Mr. Brammer.