Investors look at environmental ratings for link to stock performance.
While socially responsible investors have been interested in environmental performance for some time, mainstream utilities investors are looking at the issue for a different reason - environmental leaders consistently achieve better financial and stock market performance than their less eco-efficient competitors.
Of the S&P 500's 26 electric utilities, the 13 utilities with the highest environmental ratings achieved stock market returns more than 600 basis points greater than the bottom environmental performers during 1998. The findings were reported in "The Electric Utilities Industry, Hidden Risks and Value Potential for Strategic Investors," a study by environmental rating agency Innovest Strategic Value Advisors.
The correlation exists largely because environmental performance is a strong proxy for management quality, the primary determinate of financial performance. The difference in financial performance between top and bottom environmental companies is increasing for several reasons, including expanding environmental regulations.
An article in the Jan. 12 Wall Street Journal criticized the environmental record of Edison International, in part for failing to install scrubbers on its coal-fired Mohave station. However, Edison received one of the higher environmental ratings in the Innovest study, indicating the company financially will outperform the electric utility sector going forward.