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March 17, 2005
EPA Expands Program Recognizing Corporate Environmental Performance
    by William Baue

Environmental Protection Agency Performance Track Program certifies a new crop of company facilities, honors company-wide performance, and serves as an indicator for SRI research.


Hearing the terms "Environmental Protection Agency" and "corporation" together may conjure images of orange-jacketed regulators surveying sites of toxic pollution and calculating six-figure fines. However, the EPA also collaborates with companies to minimize their ecological impact. One of the ways it does that is with its Performance Track (PT) Program, which rewards and supports companies that voluntarily exceed environmental regulatory requirements at specific facilities.

Last month, the EPA unveiled a new category to broaden the scope of the program, which launched in June 2000.

"Until this year, Performance Track was a facility-based program, but the high participation rate from several firms led us to create a 'Corporate Leader' designation for companies with a large number of facilities and with corporate policies and practices that demonstrate environmental excellence," said Dan Fiorino, director and creator of the PT program.

Johnson & Johnson's (ticker: JNJ), Rockwell Collins (COL), Baxter (BAX) are the first companies to be named Corporate Leaders in the PT program.

Last week, the agency also announced the addition of 54 facilities from 25 states and Puerto Rico as new Performance Track members. Unsurprisingly, the three new Corporate Leaders were among those adding facilities.

Other companies adding facilities include Coca-Cola (KO), 3M (MMM), Georgia-Pacific (GP), Hewlett-Packard (HPQ), Interface Fabrics (IFSIA), International Paper (IP), and Pfizer (PFE).

One strength of the PT program is that it quantifies environmental benefits. For example, Coke's syrup plant in Ontario, California has committed to reducing its water use by more than 2.2 million gallons over the next three years. Collectively, PT members have reduced water use by 1.3 billion gallons and greenhouse gas emissions by the equivalent of 67,000 tons of carbon dioxide.

Although participation in the standard PT program is based on facility-level environmental performance, the program does not ignore corporate-wide environmental performance.

"Facility applicants are evaluated on the basis of their specific compliance record, not of others in the company . . . but a pattern of problems in a company or any corporate criminal convictions in the last five years could exclude them," Mr. Fiorino explained to SocialFunds.com.

The PT program thus draws on the strength of the EPA's regulatory force while also shifting from a more retroactive to a more proactive focus.

"[The Performance Track Program] does not preclude regulation, but it helps the leading companies to move beyond a compliance mindset, thereby freeing up public and private resources to create mutually beneficial and innovative results while enabling the regulators to focus their efforts on the corporate laggards," write Jane Nelson and Ira Jackson in their recent book Profits with Principles: Seven Strategies for Delivering Value with Values.

Paul Hilton, socially responsible investing (SRI) portfolio manager for Dreyfus mutual funds, agrees.

"If EPA wants to shift from regulatory focus to encouraging voluntary improvement, it seems like giving more accurate data to analysts and the general public would be a good use of resources," he told SocialFunds.com.

Although Dreyfus does not use PT data in its research on corporate environmental performance, three SRI research organizations do: KLD Research & Analytics, Innovest Strategic Value Advisors, and the Calvert Group Social Research Department. These researchers use PT information as one of multiple indicators to assess how facility-level PT performance fits into the company-wide context.

"We pay particular attention to companies that have enrolled two or more facilities in Performance Track, but we definitely support corporate-wide disclosure, and appreciate the program's requirements to set goals for continuous improvement and to report annually on progress," Calvert Social Research Analyst Lily Donge told SocialFunds.com.

However, PT Corporate Leaders do not earn automatic endorsement, according to Ms. Donge, but still undergo rigorous evaluation. So too for KLD, which pioneered the use of PT as an indicator in SRI research in 2001 and has honed its analysis of PT data to a sharp point.

"KLD uses select data from PT to gauge companies' efforts at pollution prevention and waste minimization in detail," said Andrew Brengl, a senior research analyst at KLD. "With such detail, KLD can discern whether the pollution prevention is genuine and not pollution control or waste shifting."

"Thus, instead of just knowing that the company reduced X emissions by Y over 3 years, PT lets us know how that the company accomplished this," he told SocialFunds.com. "For pollution prevention purposes, reductions through materials substitution, process changes, or product modifications (methods that involve toxics reduction or resource conservation) are better than pollution controls, such as scrubbers or 'thermal treatment,' a euphemism for incineration."

"Are there financial rewards for Performance Track companies?" Innovest President Hewson Baltzell asked in a presentation given at the 2004 PT conference.

"[There is] substantial evidence of indirect benefits of eco-efficiency as seen by stock price performance," said Mr. Baltzell, citing the performance of Innovest clients, an Innovest portfolio simulation, and an October 2003 study by the Universities of Erasmus and Maastract. "Other than indirect savings that might accrue, we do not know of any direct financial reward currently."

However, Mr. Baltzell projected that direct financial rewards for PT companies could include lower interest rates on debt if PT participation were seen by forward-thinking lenders to lower risk, and lower equity premiums again due to risk reduction of PT participation.

 

 
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