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Issue Brief: Environment
Introduction
The field of socially responsible investing (SRI) is constantly evolving to keep pace with the growing complexities and challenges we face as global citizens. We at Calvert are continually sharpening the focus and assessing the relevance of the environmental criteria we use to evaluate companies for our socially responsible portfolios. Pollution and habitat loss from industrial processes, agriculture, and energy production have damaged many ecosystems, at times beyond the capacity for repair. Such damage can affect businesses and, in turn, investors. Environmental factors create both risks and opportunities for corporations.
Calvert assesses the full range of environmental impacts, both positive and negative. By urging companies to continually improve, Calvert can encourage cleaner production processes and greener products. Calvert believes that companies with sound environmental management and innovation will perform well financially over the long run, and present fewer risks of accidents or unforeseen problems.
Calvert's Approach
Calvert's environmental analysis is multi-faceted and adapts to changing conditions in the marketplace and the world at large. The current focus is on climate change; corporate sustainability and performance; environmental governance and management; life cycle impacts; and resource impacts. Each of these areas is discussed below, except for climate change, which is discussed in a separate issue brief.
Performance and compliance: Calvert examines the overall operating context in which a company can advance its long-term sustainability, and evaluates quantitative and qualitative environmental data on corporate impacts to the environment including emissions to all environmental media (air, water, and soil). We benchmark companies to their industry average and determine companies' environmental efficiency in emissions and waste management. We believe that companies that are efficient and effective in their use of materials and disposal of wastes are clearly better positioned to cut costs and compete in the marketplace.
Environmental governance and management: Calvert has found that companies that incorporate environmental management into corporate governance and make robust disclosures of their environmental performance often have strong environmental management systems as well, enhancing their ability to improve their performance. Therefore, we look at a company's level of disclosure and transparency, including overall reporting, financial filings, and participation in external environmental programs. We examine management's responsiveness to incidents and accidents, and evaluate environmental policies and management programs that incorporate training, audits, and environmental stakeholder consultation.
Life cycle impacts: Calvert believes that substantial opportunities accrue to companies that incorporate environmental considerations into manufacturing and product design. Calvert evaluates the environmental impact a company's product has during use and at the end of its useful life. Calvert carefully looks for companies taking steps toward operating in a closed loop system, through product planning, lifecycle analysis, end-of-life management, and design for environment.
Resource impacts: land, energy, water, material use - Calvert prefers companies that are attentive to their dependence on energy, materials, and water, and that take steps to reduce the risk of disruption. Calvert evaluates both companies' resource use and responsiveness to the resource base. We examine companies' ecosystem and land-use management, efforts to preserve biodiversity and habitat, and responsiveness through clean up, remediation, green buildings, and smart growth plans.
Criteria in Practice
Manufacturing companies face particular challenges regarding the environment, but as industry leader Motorola (MOT) shows, these challenges can be met. Motorola is the number two manufacturer of wireless handsets, focusing on cell phones and two-way radios. Motorola set company environmental performance goals with a 2010 timeline and achieved those goals by 2004. Between 2004 and 2005, Motorola's volume of recycled product increased from 1182 metric tons to 3777 metric tons. The company also has excellent environmental reporting and disclosure. Motorola discloses information pertaining to the environment through its annual Global Corporate Citizenship Report (GCR) and on its website. All of Motorola's facilities conform to ISO14001, and have audits carried out and certified by Lloyd's of London. From 2004 to 2005, Motorola reduced its water use by 13% and its energy use by 9%, normalized for production. At the same time, the company has been identifying processes that can be improved to minimize the environmental, health and safety impacts throughout a product's life cycle, through product design, supplier management, manufacturing, distribution, sale, product use, and end-of-life management. Suppliers must also meet stringent sustainability criteria as a condition of doing business with Motorola.
Know What You Own®
Calvert's Know What You Own® screening tool for the environment includes securities drawn from a universe of the largest 1000 US companies. The companies that fail Calvert's environmental criteria do so because they:
- are less eco-efficient than their industry peers, producing more pollution per dollar of revenue,
- exhibit a pattern of violating environmental laws and regulations, or
- are involved in activities that destroy fragile ecosystems and habitat.
Advocacy
Calvert will continue to play a key role in the work of the United Nations Environment Programme Finance Initiative (UNEP FI) working groups, which are working to assess the financial and investment implications of a range of environmental, social, and governance (ESG) issues. For example, UNEP FI's Asset Management Working Group recently released its report Show Me The Money, in which a dozen mainstream sell-side financial analysis firms examined the impact of ESG issues in a variety of sectors. Calvert is also an associate member of the Enhanced Analytics Initiative, which encourages sell-side analysis incorporating ESG through brokerage, and has been one of the key factors behind the rapid growth of sustainability analysis on the financial sell side.
Calvert actively fought efforts by the Environmental Protection Agency (EPA) to relax the disclosure standards for companies reporting under the Toxic Release Inventory (TRI). The proposed changes to TRI standards would have allowed companies to report every other year instead of annually, release of up to 10 times more toxic chemicals without disclosure, and conceal releases of up to 500 pounds annually of particularly dangerous chemicals such as PCBs. Calvert's aggressive stance in protesting these changes helped encourage the EPA to reconsider its proposal, which it dropped in the fall of 2006.
Through dialogue and resolution filing, Calvert has also promoted adoption of Forest Stewardship Council (FSC) certification for forest lands and forest products. We support the protection of critical ecosystems, such as the Boreal Forest of northern Canada, which is one of the largest intact forest areas in the world. We also support the rights of Indigenous Peoples living in the vicinity of timber harvesting operations. Calvert has also dialogued successfully with a number of technology companies, such as Dell (DELL) in promoting improvements in the recycling of e-waste.
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