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October 24, 2002
Eco-Efficient Real Estate and Retail Food Stocks Outperform Environmental Laggards
    by William Baue

Two recent Innovest reports correlate strong energy management, particularly participation in the EPA ENERGY STAR program, with superior stock performance.

Next Monday, the New York-based financial research firm Innovest Strategic Value Advisors will release results from two reports. The results correlate the management of energy use with the financial performance of companies. The studies found that companies with the strong energy management in the commercial real estate and retail food sectors outperformed companies with poor energy management. The reports also correlate participation in the U.S. Environmental Protection Agency (EPA) ENERGY STAR program with superior financial performance. The ENERGY STAR Program helps businesses work toward more eco-efficiency, and the program labels products and buildings to distinguish them from less energy-efficient competitors.

"Our research study shows that leadership in energy management contributes to enhanced shareholder value," said Innovest Managing Director Frank Dixon. "By making energy efficiency a top priority, companies can reduce costs, increase productivity, improve customer satisfaction, increase property values, and enhance their reputation as a responsible corporate citizen." Both reports found that superior energy management makes companies understandably more attractive to socially responsible investors. Readers interested in obtaining the full reports should contact Mr. Dixon.

The first report, entitled Energy Management & Investor Returns: The Real Estate Sector, analyzed 12 Real Estate Investment Trusts and Operating Companies (REITs). After rating each company’s energy management performance, Innovest divided the group in half, with the better environmental performers in the top group and the worse environmental performers in the bottom group. The report found that the six companies with above-average energy management records outperformed the six below-average companies by 3,400 basis points over the last two years. The two top-rated companies were Arden Realty (ticker: ARI) and Equity Office Properties (EOP). The bottom two companies were Highwoods Properties (HIW) and Duke Realty (DRE).

The second report, entitled Energy Efficiency & Investor Returns: The Retail Food Sector, analyzed the energy management of 12 retail-food-chain companies. This report found that the six companies with better energy management records outperformed below-average companies by 1,700 basis points over the past two years. The two top-rated companies were J. Sainsbury PLC (SBRY.L) and Ahold NV-ADR (AHLN), and the bottom two companies were Kroger (KR) and Ruddick (RDK).

Innovest’s sector studies generally use the proprietary EcoValue ’21 rating methodology and analyze 60 different social and environmental metrics. However, these two studies focused specifically on energy management and analyzed 30 quantitative and qualitative metrics.

"Energy management has always been a part of our EcoValue ’21 rating system,” Mr. Dixon told “These reports offer an in-depth analysis of one EcoValue ’21 sub-indicator.”

The two reports also comment on companies that qualify for the ENERGY STAR label. The studies analyzed how these companies perform financially and in the stock market. The real estate study separated 36 companies into 3 categories: active ENERGY STAR partners, less active ENERGY STAR partners, and companies that are not involved in the ENERGY STAR program. The degree of activity was determined by the percentage of buildings the company operated that qualify for the ENERGY STAR label. Over the past two years, the active partners outperformed the less active partners by 600 basis points in the stock market and outperformed the nonpartners by 1,200 basis points. Unsurprisingly, Arden and Equity were active partners, while Highwoods and Duke were less active partners.

The retail food report compared the stock performance of 20 ENERGY STAR partner companies in the retail sector to the performance of the Dow Jones Broad Line Retail Index, the appropriate benchmark. This report did not divide the ENERGY STAR partners into more active and less active categories. The ENERGY STAR partners outperformed the index by 2,000 basis points. Shaw’s, a subsidiary of J. Sainsbury, won the ENERGY STAR Partner of the Year Award for its estimated net savings of $6 million in energy-related costs since the inception of the program in 1992.

The reports generalize that strong energy management can act as an indicator of overall management quality. The reports also highlight the role of strong energy management in confronting climate change.

“Assessing energy efficiency performance for certain sectors is the number one way of gauging how companies are doing on climate change,” said Mr. Dixon. “Because for many firms, improving energy efficiency is the primary means for mitigating climate change.”

Innovest will continue to conduct sector reports on energy management.

"Upcoming reports will look at the retail merchandising, electric utility, and chemical industry sectors," said Mr. Dixon.


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