How can we justify to shareholders that investing in non-material assets, such as environmental management, is good business, and yet not see it reflected in
share prices?

Response from Pierre Trevet, Innovest Strategic Value Advisors, France:

Although non-material assets such as visionary management, social responsibility and environmental performance are not directly visible in the balance sheet of companies, recent academic studies indicate that 80% of equity market capitalisation is made of intangible value. Innovest research focusing on sustainability demonstrates that ‘eco-value’, human capital, stakeholder capital and sustainable governance are strong proxies for the intangible value of companies. The ‘EcoValue’ is the intangible value driver with the strongest documented ability to generate positive ‘alpha’ or portfolio out-performance.

It is now increasingly widely recognised by leading-edge financial analysts and investors that there is a strong, positive, and growing correlation between industrial companies’  sustainability’and their competitiveness and financial performance, whether measured as ROI, ROE or total stock market return. Our own research on the pharmaceutical sector, analysing 29 of the world’s largest pharmaceutical companies found that companies with better environmental performance (eco-efficiency) outperformed laggards by 17% (1,700 basis points) in the stock market since May 2001.

The results of the study suggest that investor returns can be substantially improved by investing in companies with superior eco-efficiency. Mainstream Wall Street analysts typically overlook this increasingly important source of value creation. Novo Nordisk received an ’AAA’ rating by Innovest, the best EcoValue’21 rating.

Pierre Trevet is managing director of Innovest Strategic Value Advisors, Paris, and authored the benchmark report The Global Pharmaceutical Industry – Uncovering Hidden Value Potential for Strategic Investors, published in July 2002. Innovest specialises in analysing companies’ environmental and social performance and their impact on competitiveness, profitability and share price performance.