As environmental strategy consultants we believe in leveraging market forces to solve our environmental crisis. If financial analysis integrated externalities -- such as pollution, contribution to climate change or biodiversity loss -- then company valuations would reflect their true impact on our economy, net of their impact on our environment.
Financial markets are slowly moving in this direction. More and more data providers, from niche player RiskMetrics to giants Bloomberg and Thomson Reuters, are reporting on environmental, social and governance issues from greenhouse gas emissions to human rights and everything in between. And with good reason -- ESG-based investments are expected to reach $26.5 trillion by 2015 (pdf).
One thing that strikes me though is how much emphasis there is on quantifying risks, and not evaluating growth opportunities.
There is a paradox here. In financial valuation, the rate of growth typically matters more than other dimensions. That’s why an Internet darling with greater growth potential and an unclear path to profitability may be valued higher than a company with solid, consistent dividends but limited upside. But conversely, when it comes to sustainability, analysts seem to place greater stock in managing risks than developing new markets.
Of course the cleantech sector is all about growth. But what about old-economy large industrial or chemical companies that get environmental innovation, and that position themselves to capitalize on the opportunities created by new energy challenges? Is Wall Street valuing the growth potential from their proactive sustainability strategies and differentiating between a leader and a slow follower? Do we think that the stock price of GE or Dow properly reflects their position at the forefront of this new growth opportunity?
Unfortunately, it’s easier to gather data on greenhouse gas emissions or employee diversity than develop metrics on how much a company’s products are geared to meet the needs of a resource-constrained world. But unless financial markets start valuing companies’ efforts to seize green growth opportunities, and not just their risk exposure, we will insufficiently value, and incent, decisions that will benefit our economy and our environment, and this will remain an example of market inefficiency.
Image CC licensed by Flickr user bifishadow.