Does EHS Performance Affect Shareholder Value?

According to Cap Gemini Ernst & Young somewhere between 50 and 90 percent of a company’s market value is created by “intangible assets” such as environmental, health, and safety (EHS) performance.  A 2004 report from the Global Environmental Management Initiative (GEMI), member-based organization of 40 major companies that promotes EHS and corporate social responsibility (CSR) excellence, cites this statistic in linking strong EHS performance with shareowner value.

The report, entitled Clear Advantage: Building Shareholder Value, also cites a “substantial body of evidence” from the academic, nongovernmental organization (NGO), and socially responsible investment (SRI) communities establishing this correlation. The report then advises how best to design, implement, evaluate, and disclose EHS initiatives that can add value.

The second section of the report, “Making the Case,” presents evidence linking EHS and shareowner value (the first section of the report is its executive summary).  For example, the report reprints a chart prepared by Innovest   Strategic Value Advisors   displaying how stocks of pharmaceutical companies with superior EHS financially  outperformed EHS laggards by 17 percent over a one-year period starting in May 2001.

“There is considerable evidence that EHS contributes to shareholder value in a variety of ways–not only through ‘tangible’ contributions such as risk reduction and profitability improvements, but also through ‘intangibles’ such as brand equity, human capital, and strategy execution,” the report states.

The report’s third section identifies 10 intangible value drivers and suggests performance indicators that can be used to quantify their EHS aspects. These indicators are illustrated with real examples from GEMI member companies.

The fourth section of the report provides the 6-step Clear Advantage process for identifying, assessing, planning, executing, evaluating, communicating, and continually improving EHS performance to stakeholders in ways that can increase value. The report provides resources, such as the “Invisible Advantage” diagnostic tool to help companies assess the relative strength of their intangible assets.

While the SRI, NGO, and academic communities have long recognized the link between social and environmental performance and shareowner value, the business community has been slower in acknowledging this link publicly.

This reports does an excellent job creating a nexus between EHS performance and shareholder value.  It   presents the information in terms senior management can understand. To get a copy of this report email                                          James Charles, PE


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