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September 25, 2003
Sustainable Computer Producers Perform Better than Less Sustainable Counterparts
    by William Baue

Innovest adds social considerations to its environmental assessment in its recent computer industry report, and sustainability still outperforms business-as-usual.

Earlier this month, Innovest Strategic Value Advisors added to its canon of research documenting the correlation between proactive sustainability performance and positive financial performance with its Computers and Peripherals Industry Global Report. The report found that companies that ranked above-average on Innovest's sustainability ratings financially outperformed companies with below-average ratings by 19.1 percent over the three years from April 2000 to June 2003. Over the past two-year period, top rated firms outperformed laggards by 35.6 percent, and over the past year, by 26.7 percent.

Whereas previous reports focused on environmental performance using Innovest's EcoValue21 rating system, this is one of the first reports to use Innovest's Intangible Value Assessment (IVA) rating to compare to financial performance. IVA ratings include social as well as environmental issues.

"We're developing the Intangible Value Assessment, and that's going to be our integrated product going forward, so that subsumes the environmental rating within it," said Devin Crago, the Innovest analyst who authored the report.

Hewlett-Packard (ticker: HPQ) ranked first on the IVA scale with an AAA rating, the highest score. IBM (IBM) placed second on the IVA list with an AA rating, and first on the EcoValue21 list with an AAA rating.

HP's top ranking on the IVA scale is particularly impressive in light of its recent merger with Compaq, which resulted in significant restructuring and massive layoffs. According to the Executive Excess 2003 report by United for a Fair Economy (UFE), a nonprofit focused on the underpinnings of the gap between rich and poor, HP laid off 25,700 workers in 2001. UFE criticized HP for concurrently increasing its CEO pay 231 percent, from $1.2 million in 2001 to $4.1 million in 2002.

Although Innovest's IVA analysis acknowledged the layoff problem at HP, it rated the company above average on labor relations. The IVA was silent on the issue of CEO pay, and rated HP above average on traditional governance.

"There's a lot of layoffs across the whole tech sector, so our focus is to look at how the companies handled the layoffs, and HP was positioned fairly well," Mr. Crago told "CEO pay and layoffs are merely two of the many governance and labor issues assessed."

Although IBM ranked high on both IVA and EcoValue21, it scored significantly below average in the health and safety category of the IVA analysis. IBM faces lawsuits from some 220 current, former, and deceased employees over exposure to toxic chemicals that may lead to cancer, miscarriages, and birth defects. Studies suggest that some sets of IBM employees have developed these conditions at a greater rate than the national average. IBM publicly maintains that the lawsuits' claims are without merit.

"These lawsuits put some downward pressure on the IVA rating for IBM, but we've also put it on our stock watch list, and we're going to continue to monitor it and revise the rating as we see how materiality this is going to have for the company," said Mr. Crago. "IBM is in the spotlight because the legal actions are focused on it, but in a larger sense, it's an issue across the entire semiconductor industry."

"I don't think anybody should go out and short IBM tomorrow over this," he added.

IBM has come under fire since the publication of the report for eleventh hour lobbying to shift California Senate Bill 20 from requiring manufacturers to foot the bill for electronics recycling to placing the financial onus on the consumer. The Computer TakeBack Campaign (CTBC), which advocates for computer manufacturers to take responsibility for recycling their products, also criticizes the bill for covering only cathode ray tubes (CRTs), and not all electronic equipment.

"SB20 doesn't distinguish between historic and future electronic waste, which lets companies like IBM off the hook," reads a CTBC position statement on the bill. "IBM is responsible for a major portion of the historic waste, however, they will not pay their fair share, since their current sales of CRTs is very minimal."

Innovest's report notes that the entire computer industry is behind the eight-ball in its preparedness for extended producer responsibility (EPR) legislation. The report, however, commends companies such as IBM for addressing the issue with more foresight than many of its competitors.

"There are some companies that are seemingly unaware that this issue is going to affect them at all," said Mr. Crago. Neither EMC (EMC), which placed seventh on IVA list with a B rating, nor NCR (NCR), which placed last on this list with a CCC rating, appears to have any strategies in place to deal with EPR legislation.


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