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January 25, 2007
Global 100 List Raises the Profile of Sustainability at the World Economic Forum (and Beyond)
    by Bill Baue

Competition to make the third annual list of the 100 most sustainable companies--based on ratings by Innovest--continues to spur strong corporate social and environmental performance.


Sustainability has climbed to the top of the agenda at the World Economic Forum (WEF) currently under way in Davos, Switzerland. This shift in consciousness of the global business community has raised the relevance of the Global 100 Most Sustainable Companies (G100) list announced at the WEF for the third year.

"The relationship between economics and environmental issues, particularly climate change, are hot this year in Davos," said Toby Heaps, editor of Corporate Knights, a Canadian publication on corporate social responsibility (CSR) that sponsors the G100 list.

Compared to the minimal fanfare of the G100's inaugural launch, this year's unveiling of the list was trumpeted in a BusinessWeek cover story and heralded at a launch event by speakers ranging from Nobel laureate Joseph Stiglitz to executives from Goldman Sachs (ticker: GS) and Swiss Re (TUKN.SW).

"Rather than just public awareness about climate change, increasingly and more importantly, the next few years promise to reach a tipping point with respect to society's willingness to act on that awareness," said Matthew Kiernan, CEO of Innovest Strategic Value Advisors. Innovest research underpins the G100. "Innovest has long argued that the most critical overlooked piece of the climate change puzzle is the potential role large institutional investors can play in expanding and accelerating major companies' crucial role in the global transition to an inevitably carbon-constrained world."

"The $30 trillion-plus in Carbon Disclosure Project signatories behind its 2006 iteration are a significant leading indicator that this particular 'sleeping giant' is now truly awakening," Dr. Kiernan told SocialFunds.com. "The next step, of course, is to translate even a fraction of that awareness and concern into concrete action where it actually counts: in choosing specific stocks and bonds, and building and managing real-world investment portfolios as if climate change actually mattered financially."

In essence, the G100 represents just such a portfolio, and Innovest research provides institutional investors with solid incentive to invest in G100 companies. The portfolio, which weighted each company equally and rebalanced quarterly, outperformed the MSCI World Index (its benchmark) by 80 percent cumulatively over the period from January 2000 to December 2005.

Global 100

The G100 includes only companies that receive "AAA" ratings (on a bond-like scale ranging from "AAA" to "C") on environmental, social, and governance (ESG) performance from Innovest. Furthermore, the G100 includes companies according to their sector weighting in the MSCI World.

"So if the pharma sector is two percent of the MSCI, then the cut-off point for the pharma sector for the Global 100 list is the top two rated companies," explained Dr. Kiernan. "This should help explain why some companies, thought still rated highly by Innovest, did not make the Global 100 this year."

Indeed, this year's attrition included three pharmaceutical companies: GlaxoSmithKline (GSK), Johnson & Johnson (JNJ), and Novartis (NVS). All three continue to garner AAA Innovest ratings, but fall short of being the top two pharma companies.

Companies joining the G100 include AIG (AIG), Google (GOOG), and Walt Disney (DIS).

"Disney increasingly incorporates social and environmental sustainability management strategies into its core business model, and furthermore it demonstrates a proactive approach to product and service offerings," said Dr. Kiernan. "The company is well positioned to capitalize on new market opportunities and mitigate potential risks going forward."

This year Shell (RD) bumped BP (BP), a G100 constituent for the last two years, off the list.

"As the Baker report stated, BP has attracted some negative attention due to its health and safety," said Dr. Kiernan, referring to a mammoth study conducted by an independent safety review panel headed by former US Secretary of State James Baker. "BP and Shell have been neck to neck in the past and essentially, in the last year, despite the fact that BP is addressing the health and safety problems, its top-rated spot has been taken by Shell."

Bank of America (BAC) also fell off the list, not so much due to poor ESG performance on its part but rather due to the fact that it has fallen behind the improving performance on these issues by its sector peers--namely new G100 constituents Goldman Sachs and JPMorgan Chase (JPM).

"Goldman and JPMorgan Chase are having greater involvement in and focus on environmental products as well as carbon finance," said Dr. Kiernan.

Instead of waiting around for the market in ESG-related investments to mature, these companies are helping grow the marketplace. In September, for example, Goldman paid $23 million to acquire a 10.1 percent stake in Climate Exchange plc, the holding company that owns both the European and Chicago climate exchanges.

"The genuine enthusiasm grounded in the increasing relevance of ESG to economic drivers is tempered by executive frustration at the lack of opportunities," Mr. Heaps of Corporate Knights told SocialFunds. "The head of Blackstone told me last night he likes the story but isn't investing in clean-tech because nothing is big enough."

"What is interesting this year in Davos is the ready recognition at the highest rungs of Wall Street that something has to be done to improve the rules of the game--that it is not viable for the winners to go to market if the losers are aggressively going to Washington to present one-sided views of industry," Mr. Heaps said.

 

 
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