The Prevailing View of Mainstream Investors on Sustainability in the Chemical Industry

While it is fairly hard to generalize, it is safe to say that most mainstream investors in the United States have not focused on these issues as being significant drivers of value overall. While there are a few examples to the contrary around specific legislative initiatives, they tend to confirm the general impression.

Most financial analysts generally accept that environmental regulations may matter a great deal at specific times in some industries, but that is fairly different from the notion that companies typically have some value at stake on social and environmental issues.

Part of the issue is one of communication from the companies themselves. Analysts and investors depend a great deal on communications from the company to know what issues are financially material. In a public forum hosted by the New York Society of Security Analysts, a chemical industry sell-side analyst said, "We rely on the company to tell us when these issues are material."

The other attitude found frequently among financial analysts is the belief that voluntary programs have effectively reduced many of the risks associated with social and environmental issues in the chemical industry. There are obviously ways in which this is true of programs such as Responsible Care®, but it is by no means true of all the risks and opportunities of all chemical companies at all times.

The overall financial context of the chemical industry gives investors plenty of other issues upon which to focus. The chemical industry is a capital intensive, cyclical business with mature products typically sold into commodity markets. It often does not earn its cost of capital (Lev, 2001a). This has led to a number of sales of mature assets in the industry to financial buyers (Firn, 2004). Overall, cost cutting reigns as the principle financial strategy while the capacity for innovation and growth is modest.

There are early signs that mainstream financial analysts are beginning to develop their own understanding of how to approach social and environmental issues. A number of mainstream investment banks have published investment research for their institutional clients on the implications of climate change. UBS and Dresdner

Klienwort Wasserstein both published reports on climate change and the Pan-European utility sector. WestLB has published a report on the scope of financial value at risk in the economy overall and by specific industries. UBS, Credit Suisse First Boston, and Citigroup have published reports on the implications of carbon trading. Goldman Sachs has published an environmental and social index for the global oil and gas industry.31

There are also indications of growing demand in the United States for institutional asset management services that integrate social and environmental issues into asset management. Several prominent leaders of major public pension funds in the United States have publicly expressed concern that global warming posed long-term economic risks that threatened the value of retirement funds. These state officials have formed the Investors Network on Climate Risk around an action plan calling for action by the Securities and Exchange Commission and companies on disclosure of climate change risks and of investors to consider climate change in their decision-making and proxy voting.32 Early actions on this agenda include:

• CalPERS making initial allocations to invest $200 million in cleantech venture capital and $500 million in publicly traded equities that use environmental criteria in the asset management;

• These investors and others sponsored and supported a number of proxy resolutions on disclosure of climate change risk, some of which resulted in direct votes of shareholders while others led to negotiated agreements to meet the general terms of the resolution.

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