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Environmental Management
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Project Findings from Phase I
U.S. Environmental Protection Agency
Financial Market Incentives for EMS Steering Group

December 2006

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Acknowledgements
The Financial Market Incentives for Environmental Management Systems (EMS) Steering Group,
comprised of staff from various Environmental Protection Agency offices, developed this report.
The Steering Group spent more than a year learning about the financial sector—the insurance,
bond, and equity markets in particular—and the potential for these markets to place greater value on
organizations that reduce risk and improve environmental performance using EMSs. This report
captures the Steering Group's learning from Phase I of the project.
This report would not have been possible without the contributions of the following workgroup
members: Shana Harbour, Chair (Office of Policy, Economics and Innovation), Bill Hanson (Office of
Policy, Economics and Innovation), Vanessa Bowie (Office of the Chief Financial Officer), Robert Lee
(Office of Pollution Prevention and Toxic Substances), Jon Silberman (Office of Enforcement and
Compliance Assurance), James Home (Office of Water), Jack Simmons (Office of Research and
Development), Sol Salinas (Office of International Affairs), George Faison (Office of Solid Waste),
Kathleen Bailey (Office of Policy, Economics and Innovation), Chad Carbone (Office of Policy,
Economics and Innovation), Dale Ruhter (Office of Solid Waste), Kevin Easley (Office of Policy,
Economics and Innovation), Charles Sutfin (Office of Solid Waste and Emergency Response), Larry
Zaragoza (Office of Solid Waste and Emergency Response), Michael Kane (Office of Policy, Economics
and Innovation), Walt Tunnessen (Office of Air and Radiation), Rich lovanna (Office of Research and
Development), Jeffrey Kohn (Office of Policy, Economics and Innovation), Linda Fiedler (Office of Solid
Waste and Emergency Response), and Timothy McProuty (Office of the Chief Financial Officer).
The Steering Group was supported by Casals & Associates under the provisions of GSA MOBIS Federal
Supply Schedule No 874-1 Contract No. GS-10F-0411M Requisition No PR-DC 05-00474/U41506.

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Executive Summary
This report describes the methodology and findings of a study completed by Environmental
Protection Agency's (EPA) Financial Market Incentives for Environmental Management Systems
(EMS) Steering Group. The study, which lasted 10 months (March-November, 2005), focused
on whether or not the financial sector places greater value on organizations that use EMSs. More
specifically, the Steering Group:
•	Reviewed existing literature for connections between EMS (or environmental management and
performance) and financial value;
•	Examined methods used by insurance, equity, and fixed income investing experts to determine
if EMS and environmental performance is included in their analyses; and
•	Searched for examples where EMS implementation resulted in tangible financial benefits.
We began this project by conducting a literature review to find connections between EMS (or
environmental management and performance) and market valuation. We then initiated dialogue with
insurance underwriters and brokers, equity analysts and portfolio managers (both mainstream and
Socially Responsible Investment), corporate investor relations and environmental executives, bond
raters, and financial industry experts to determine how EMSs are currently considered in the
marketplace. We also searched for specific examples of financial value creation through EMS
implementation. Our findings are based on interviews with key players in the financial sector and
corporations, informal dialogues with and presentations by guest speakers, and insight gained via
conferences and other forums.
Literature Review Results
The Steering Group identified several relevant results during its literature review. The most significant
are described below.
•	Environmental and Financial Performance Are Positively Associated—Studies yield
findings ranging from no negative impact to a substantial positive impact. Unmanaged
environmental liabilities can decrease profitability, increase volatility, and corrode equity and
bond valuations, independent of sector, size, and investment style.
•	Intangibles Are Increasingly Seen as Significant Value Drivers—Intangible assets (e.g.,
brand strength, reputation) now account, on average, for more than 80 percent of stock prices
and are increasingly important in investor valuation of company risk and opportunity. Evidence
in the literature suggests that environmental management quality might be one such valuable
intangible asset.
•	Equity Markets React to Environmental Events—Environmental issues can affect stock
market and company valuations. Studies have documented short- to medium-term stock
market value effects from positive and negative environmental events.
•	Investor Awareness and Interest Are Limited, But Growing—While consideration of
environmental issues and EMS, is limited in U.S. capital markets, environmental performance

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has received increasing interest from both investors and corporate chief financial officers,
generally under the broader category of sustainability or corporate social responsibility (CSR).
Despite an extensive review, we found little published literature addressing environmental
management, risk, or performance in the context of fixed income investing or insurance underwriting
Findings from Primary Research
We present our findings in two categories: how the financial sector currently views EMS, and the data-
related or other issues that affect the financial sector's consideration of EMSs.
Current Use of and Views Regarding EMS in the Financial Sector
Most of our contacts expressed strong interest in EMS as a concept, believing it has potential to
manage environmental issues with financial implications more effectively and consistently than would
be possible otherwise. Many identified several EMS features as worthwhile. Investors and insurers
support a clear description of organizations' environmental risks and long-range objectives and
strategies, as well as management structure and accountability. Investors and insurers agree that
defining specific targets, performance metrics, and monitoring and reporting activities are crucial.
They also value evidence of tight management controls, ranging from written procedures,
documentation, and training to corrective/preventive action processes and independent internal
auditing. Most also believe that an EMS should be defined at the highest levels of an organization and
address significant business and financial objectives and activities. An EMS can address both legal
compliance and other environmental issues that might create business risks and opportunities.
Financial market representatives did differ, however, on the importance of specific EMS elements and
how those elements might meet their needs. Investors value the presence and effectiveness of
mechanisms that show senior management engagement (e.g., environmental management/
governance structure, management review). They also require data that represent a company's
performance (e.g., performance measurement activities, internal auditing, and external reporting
processes). In contrast, insurers are most concerned about whether the organization has identified
and is actively managing environmental issues from a liability control standpoint. They emphasize
extensive written procedures, evidence of adequate training and staffing resources, and
corrective/preventive action processes.
Data-Related or Other Issues that Affect Financial Sector Consideration of
EMSs
Insurers and investors identified several barriers to using EMSs in their evaluation processes. There is
wide variation in how EMSs are implemented. This situation produces problems for analysts, because
they conduct evaluations using standardized methodologies, which require consistent, comparable
data. Our contacts expressed concerns that evidence of EMS results was often absent, unclear,
inconsistent, and/or insignificant to their evaluations.

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Environmental insurers believe that those who might advocate more favorable underwriting policies
and/or insurance rates for organizations implementing EMS must demonstrate that the specific EMS at
a particular location has produced tangible, risk-reduction benefits (i.e., lower underwriting risks).
While most SRI practitioners view EMS as a plus, the information it yields is not comparable among
different companies, making it hard to quantify benefits. EMSs are not yet viewed as reliable,
consistent predictors of environmental performance.
Mainstream investors typically do not make investment decisions based on the presence or attributes
of EMSs, and we found little information related to fixed income investors' interest in environmental
management or performance.
Emerging Trends
While we were pursuing our research on the interface between EMSs and financial value, several
interesting and relevant trends emerged.
•	Interest in environmental issues and performance is perceived by many to be increasing both in
investment firms and in the companies in which they invest.
•	Disclosure requirements for pubic corporations have been strengthened significantly during the
past two years. As a result, corporations have disclosed more information on environmental
issues
•	Institutional shareholders are increasingly asking for management action to define
environmental/sustainability policies, actions, measurement, and reporting.
•	Major insurance companies are bringing renewed attention to environmental and sustainability
issues.
•	A number of companies—including some of the largest companies in the world—are seeking
to turn environmental issues to their business advantage.
These trends will likely shape the interests and behaviors of financial sector participants relative to
EMS and environmental issues in the coming years.
During the second phase of this project, the Steering Group plans to initiate a dialogue that will
provide insight on the types of EMS data that might be of value to the financial markets. The Steering
Group is also considering several small research projects that might inform this dialogue. Additionally,
EPA's Environmental Finance Advisory Board has accepted a "charge" to advise the Agency on this
project.
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Contents
Acknowledgements	i
Executive Summary	ii
Contents	v
I.	Introduction	1
II.	Methodology	3
III.	Findings	4
IV.	Conclusions	16
References	18
Appendix A: Major Literature Findings	20
Appendix B: Principal Financial Market Contacts	27
Appendix C: Environmental Management Systems Overview	29
Appendix D: Glossary	32
Exhibit 1.	Major Literature Findings - An Accounting Perspective	21
Exhibit 2.	Major Literature Findings - Intangible Asset Value	22
Exhibit 3.	Major Literature Findings - Performance of Environmentally Screened Investment
Portfolios	23
Exhibit 4.	Major Literature Findings - Stock Price Impacts of Environmental Events	23
Exhibit 5.	Major Literature Findings - Environmental Impacts on Cost of Capital	25
Exhibit 6.	Major Literature Findings - Surveys of Investor Attitudes and Beliefs	26
V

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I. Introduction
This report describes the methodology and findings of Environmental Protection Agency's (EPA)
Financial Market Incentives for Environmental Management Systems (EMS) project. This
project was performed by a Steering Group comprised of staff from various EPA offices, and
focused on whether and to what extent the financial sector provides incentives to organizations that
use EMSs. When implemented effectively, an EMS can result in both environmental and business
benefits. Incentives provided by the financial sector, however, might offer additional motivation for
organizations to reduce environmental impacts and risk through the use of EMSs.
The Steering Group spent more than a year learning about the financial sector—the insurance, bond,
and equity markets in particular—and the potential for the financial sector to provide incentives to
organizations that reduce risk and improve environmental performance using EMSs.
More specifically, we:
•	Reviewed existing literature for connections
between EMS (or environmental management and
performance) and market value;
•	Initiated dialogue with representatives from
insurance and equity and fixed income investing,
about whether and/or how they evaluate an
organization's environmental management to
determine how EMSs are currently considered in
the marketplace; and
•	Searched for examples where EMS implementation
resulted in tangible financial benefits.
Throughout these activities, the Steering Group focused on
two objectives:
EMS — a continual cycle of
planning, implementing,
reviewing, and improving the
processes and actions that an
organization undertakes to meet
its business and environmental
goals.
To read EPA's position statement
on EMS or learn more about
EPA's related policies, technical
assistance and outreach
programs, and other initiatives,
visit www.epa.gov/EMS.
1. Determine whether and to what extent EMS is considered in investment analysis, portfolio
development, insurance underwriting, and other activities within certain financial markets; and
2. Gain a better understanding of:
a.	Financial community evaluation and decision making;
b.	Situations in which an organization's environmental management is or might be
considered;
c.	Methodologies currently used by the financial sector;
d.	The presence, role, and importance of EMS in evaluation;
e.	Financial benefits for EMS implementation; and
f.	Limitations and concerns that inhibit EMS use.
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The remainder of this report is comprised of three sections. Section II describes methodology.
Section III presents our findings, and Section IV presents our conclusions and discusses the next
phase of this project. Appendix A provides more detailed information on major literature findings.
Appendix B contains a list of our primary financial sector contacts. A brief overview of environmental
management systems can be found in Appendix C, and a glossary is provided in Appendix D.
2

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II. MethndDlDgy
First, the Steering Group conducted a literature review to determine the relationship between
environmental management and/or performance and market behavior.
We considered two basic sets of questions during this review:
•	Are environmental and financial performance related? If so, is there evidence of this
relationship?
•	Are financial market participants paying attention to environmental issues? Is there evidence of
attitudinal and behavioral change in capital markets?
We chose literature (e.g., academic and professional journals, association reports, government
sources, business press) for review based on its source/sponsor, type of incentive considered, and
scope. We focused on research that was produced independently of the organizations and/or
industries being studied, and, therefore, attempted to limit obvious or potential bias. We looked for
literature that was broad in scope—i.e., market or industry-wide. In evaluating the research, we
assigned more weight to works that offered a clear research hypothesis, valid methods, rigorous data
development, and fully supported conclusions. In all, we examined more than 50 studies, reports, and
articles, and discuss here specific findings from about 20 studies (see Appendix A). The literature
review was completed in March 2005, meaning that our literature review findings might not be
completely current. However, ongoing developments reported in the broader literature and mass
media are briefly summarized in the final portion of Section III.
Following the literature review, we focused on researching how insurers and investors make
underwriting and investing decisions as well as under what circumstances environmental management
and EMSs are considered during the decision-making process. We also searched for financial sector
limitations or concerns about including environmental considerations in evaluation and decision-
making processes, and any examples of financial benefits conferred through EMS implementation.
To get firsthand knowledge of whether and how EMSs are considered in financial sector decision
making we spoke with several key players in the insurance, bond, and equity markets, as well as
responsible individuals in major public companies. We also held several informal dialogues with
financial sector representatives from bond rating agencies, insurance companies, brokerage firms, law
firms, academic institutions, and interested non-governmental entities. For a complete list of our
financial sector contacts, see Appendix B.
After collecting information via these methods, the Steering Group analyzed and consolidated data
where appropriate and drew comparisons across groups. Major findings are described in Section III.
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III. Findings
This section begins with insight gained from the literature review. The Steering Group then
presents its findings based on our dialogues with representatives from the financial community,
and from additional learning via conferences, workshops, training, and other activities. The
section concludes with a brief summary of emerging trends.
Literature Review Findings
We developed several relevant findings during the environmental finance literature review. The most
significant are described below. The literature review was completed in March 2005, meaning that our
literature review findings might not be completely current. For more detail, see Appendix A.
Despite an extensive review, we found little published literature addressing the relationship of
environmental management, business risk, and financial performance in the context of fixed income
investing or insurance underwriting. Most studies focused on internal corporate financial results or
investor behavior in equity markets.
Environmental and Financial Performance Are Positively Associated
We found that the literature contains empirical data and analysis that shows a positive relationship
between environmental and financial performance.1 Numerous studies yield findings ranging from no
overall negative impact to a substantial positive impact. We also found that unmanaged
environmental liabilities can decrease profitability, increase stock volatility, and corrode equity and
bond valuations. These financial effects are independent of sector, size, and investment style.
•	Two studies (Cohen, Fenn, and Naimon,1995; Stone, Guerard, et a/.,2003) demonstrated that
there is no "performance penalty" for investing in environmentally screened firms or funds.2
•	Three studies (Hart and Ahuja, 1996; Russo and Fouts, 1997; and Stanwick and Stanwick,
1998) showed return on assets/net margin is improved by pollution prevention and emissions
reductions, meaning that well-chosen pollution prevention initiatives more than pay for
themselves at the level of the firm, as well as at the project level.
•	Two studies (Feldman, Soyka and Ameer, 1997; Garber and Hammitt, 1998) reported that
environmental management / environmental performance improvements reduce stock price
volatility while greater environmental liabilities increase stock price volatility. Lower volatility
typically results in higher stock prices because volatility is a major component of investment
risk, and investors require compensation (a higher investment return) to accept higher risk.
1	It is important to remember, however, that empirical studies of this type routinely rely upon statistical correlation and
other quantitative methods to prove or disprove a research hypothesis. While such studies can lend strong support to a
postulated causal relationship, neither they nor other methods can conclusively demonstrate causality.
2	These studies provide support for overcoming the traditional view that fiduciary responsibility precludes consideration
of environmental factors in pension or mutual fund investing.
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Intangibles Are Increasingly Seen as Significant Value Drivers
The literature showed that intangible assets (e.g., brand strength, reputation) now account, on
average, for more than 80 percent of stock prices and are increasingly important in investor valuation
of company risk and opportunity. No longer are companies valued primarily on the basis of how many
factories they own, or how much cash they have on hand. Today, investors care much more about the
attributes that will make a company successful in the future than about what it owns. These "soft"
assets have become much more important as the economy has become more services-oriented,
global, and competitive. We found evidence in the literature that suggests environmental
management quality might be one such valuable intangible asset.
•	Studies (DowelI, Hart, and Yeung, 2000; Konar and Cohen, 2001) showed that intangible
asset value is higher for multinational corporations going beyond the bare compliance
minimum, and lower for firms/industries with higher pollutant (TRI) emissions.
•	Empirical research performed by several organizations has demonstrated that the following
issues are both highly relevant to investors and, to some degree, insurers, and have linkages to
management of environmental issues:
Example of
~	Values and Image
~	Strategy and Tactics
~	Risk Management
~	Quality and Responsiveness
~	Supply Chains and Alliances
~	Organizational Development
le Assets
~	Innovation, Intellectual Capital
Formation, and Branding
~	Stakeholder (including customer)
Relations
~	Performance Measurement
(environmental and financial)
~	External Reporting and Transparency
Equity Markets React to Environmental Events
The literature review showed that environmental issues can affect stock market and company
valuations. Several studies have documented short- to medium-term stock market value effects from
positive and negative environmental events. For example, media coverage based on actual and
potential environmental legislation can significantly decrease share price of affected companies. In
addition, EPA announcements about enforcement priorities and negative news releases had similar
effects. In contrast, positive publicity on environmental performance (e.g., awards, recognition)
increased share prices.
•	One study (Hamilton, 1995) found that effective past environmental disclosure helped
chemical companies protect themselves from a market value reduction after a negative
environmental event (e.g., catastrophic chemical release).
•	The literature showed these impacts are often sector-dependent; i.e., companies in some
sectors are affected more by negative/positive information than companies in other sectors.
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Investor Awareness and Interest Are limited, But Growing
The literature review showed that consideration of environmental issues, much less EMS, is limited in
U.S. mainstream capital markets. When included at all, environment is generally viewed from a
negative perspective (e.g., risk of accident, unknown legal liability, damage to reputation).
Individual portfolio managers do have a strong interest in receiving information, including
environmental information that helps them better understand a firm's future value creation and cash
flow generation potential, and risk profile. In recent years, many investors and corporate chief
financial officers have begun to focus greater attention on environmental performance, generally under
the broader category of sustainability or corporate social responsibility (CSR).
•	An earlier (1990s) study (Soyka and Feldman, 1998) found that while virtually no investors
routinely asked for how environmental, health, and safety programs affect company value, all
expected companies to offer such information without prompting.
•	A more recent study (UNEP-FI, 2004), in which 11 stock brokerage firms were surveyed,
concluded that investors agree that environmental, social, and corporate governance issues
can affect long-term shareholder value.
Findings from Primary Research
With the literature review as a foundation, the Steering Group sought to gain a fuller understanding as
to whether and how participants in the financial markets consider EMS and other environmental
management improvements in their decision-making processes. More specifically, we initiated
dialogue with insurance underwriters and brokers, equity analysts and portfolio managers (both the
mainstream and socially responsible investment communities), corporate investor relations and
environmental executives, bond raters, and financial industry experts to determine how EMSs are
currently considered in the marketplace (see Appendix B). We also searched for specific examples of
financial value creation through EMS implementation. Our findings are based on interviews with key
players in the financial sector and corporations, informal dialogues with and presentations by guest
speakers, and insight gained via conferences and other forums.
This section is divided into three subsections. We first briefly describe the major financial market
components that were the focus of our research. We then present information and perspectives
offered by representatives of these market components, regarding how they currently use and view
EMSs. Finally, we discuss some of the limitations and factors influencing interest in EMS, as reported
by financial community representatives.
Financial Market Sectors: Who They Are and What They Care About
While the equity, bond, and insurance sectors are all important parts of the overall financial market in
the United States, they differ from one another in some important ways. In the insurance relationship,
the company is the customer. The insurer seeks to write policies with companies that are cost-
effective and ongoing (multiyear). In contrast, equity and bond market participants are the company's
customers. Companies seek financing through issuance of stock or fixed income securities. And for
stock shares already issued, companies actively engage the equity market and its analysts.
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Insurance underwriting includes actuarial analysis, which tends to be detailed and site-specific. Since
the 1980s, insurance companies have generally excluded coverage for environmental issues from their
general liability policies, and instead issue specific policies to address a variety of environmental risks.
Environmental insurance is a very small part of the overall insurance market, representing about one
percent of the total insurance market in the United States. The limited number of insurers that provide
environmental insurance are quite knowledgeable of environmental issues. Many are also very familiar
with EMS and understand its potential for stimulating environmental performance improvement and
risk reduction. In performing our primary research, we initiated dialogue with senior insurance
executives and underwriters at four companies that, together, underwrite the majority of environmental
insurance products in the United States.3
Bond and equity market participants and their posture toward environmental issues can be classified
into two major groups: mainstream investors and socially responsible investors (SRI). . Socially
responsible investing (SRI) reflects a desire by investors to own stocks that represent their values and
preclude stocks that may be in conflict with their personal values. In the past, SRI functioned
primarily by screening out companies in particular target sectors such as tobacco, alcohol, gambling,
defense, nuclear power, etc. During the past 10 years, however, SRI investment decision making has
become more sophisticated with the use of screening devices that include dozens of variables and/or
multi-factor models. SRI investors typically examine environmental issues in detail using screening
criteria methods, which in many cases include consideration of EMS. Importantly, SRI now accounts
for about one in ten dollars invested in the United States (Social Investment Forum, 2006).
Mainstream investors comprise the majority of those buying and selling equity and fixed income
securities in U.S. markets. They have limited awareness of and reaction to environmental issues,
much less EMS. To the extent that the environment is considered at all by mainstream investors, it is
more than likely viewed from a negative perspective (e.g., risk of accident, fines and penalties,
unknown legal liability, damage to reputation), a finding that parallels those of our literature review. As
discussed above, however, published studies and surveys indicate that mainstream markets as a
whole do react to significant environmental news, whether positive or negative, and individual portfolio
managers do have a strong interest in receiving information of any kind (including environmental) that
helps them better understand a firm's value and future prospects.
In the subsections that follow, the Steering Group discusses what we learned through our dialogue
with senior representatives of each of these financial market sectors, regarding the value of EMS to
them and EMS's current and possible future utility for investing and underwriting decision making in
U.S. capital markets.
3 Many environmental insurance industry personnel (at all levels) have previous experience as employees in the
environmental services industry or in corporate environmental management. As a result, the general level of knowledge of
EMS and related concepts is higher in this sector than in most other financial market sectors.
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Current Use of and Views Regarding EMS in the Financial Sector
Across the three financial market sectors, participants held a number of views on EMS and its utility for
analyzing company risk and reward potential. Given that the business, objectives, risk exposure, and
evaluation methods vary somewhat across the financial sectors, this section first discusses common
themes and areas of agreement and then presents individual market sector perspectives and
differences.
Most financial sector representatives with whom we spoke expressed strong interest in EMS as a
concept, believing it has potential to manage environmental issues with financial implications more
effectively and consistently than would be possible otherwise. In fact, many identified several EMS
features as particularly worthwhile. Investors and insurers support a clear description of organizations'
environmental risks and long-range objectives and strategies, as well as management structure and
accountability. Investors and insurers agree that defining specific targets, performance metrics, and
monitoring and reporting activities are crucial to characterize future risk and financial performance
potential. They also value evidence of tight management controls, ranging from written procedures,
documentation, and training to corrective/preventive action processes and independent internal
auditing.
Most investors and insurers believe that an EMS should be defined at the highest levels of an
organization. They believe that EMS should also address significant business and financial objectives
and activities. And contacts stated that EMS can effectively address legal compliance and other
organizational obligations, while further addressing other environmental issues that might create
business risks and opportunities.
EMS is valued, at least informally, by many in the financial market for its:
¦S Explicit environmental policy, scope, and management structure;
¦S Specific targets and metrics;
¦S Defined structure and responsibilities;
¦S Written procedures and documentation;
¦S Training
¦S Corrective action;
¦S Performance measurement and data;
¦S Internal auditing
¦S Internal and external reporting; and
¦S Management review capabilities.
Financial market representatives did differ, however, on the importance of specific EMS elements and
how those elements might meet their needs. Investors value the presence and effectiveness of
mechanisms that show senior management engagement (e.g., environmental
management/governance structure, management review). They value data that represent a company's
performance (e.g., performance measurement activities, internal auditing, and external reporting
processes). In contrast, insurers are most concerned about liability control: Has the organization
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identified and actively managed their insured environmental aspects and risks? They emphasize
extensive written procedures, evidence of adequate training and staffing resources, and
corrective/preventive action processes.
SRI Investors
Several investors from socially responsible investing (SRI) funds noted that EMSs can improve
environmental performance and reduce future environmental risks when implemented effectively. SRI
investors specifically look for firms that have the environmental management function directed by the
board of directors and chief executive officer (or equivalent). They also expect senior management to
directly oversee internal and external communications and reporting mechanisms, as well as auditing
processes. Within reporting structures, they look for target setting and reporting against targets.
These issues demonstrate the intersection of environmental management and corporate governance.
At a minimum, SRI investors expect EMS to provide data for documenting improved environmental
performance (e.g., a reduced environmental footprint) over time. Because they invest in a company—
not in a specific facility—investors also look for company-wide policies, procedures, and systems that
will potentially affect their investment.
Mainstream Investors
We found little evidence that mainstream investors formally use the presence or absence of an EMS or
operational environmental performance in their evaluation methods. One representative of a major
brokerage stated that although environmental issues may be taken into account while evaluating a
company, environmental considerations generally are not significant enough to affect the stock price.
Discussions with other mainstream investors yielded similar views.
Insurers
Insurance underwriters cited two particular EMS benefits. The first is related to the desired cultural
shift that occurs when organizations develop an environmentally/safety-conscious culture in which
improved environmental and worker safety performance is viewed as everyone's responsibility. This
belief then becomes ingrained as an organizational value. One insurance company representative
indicated that EMS is useful, because it provides a means to promote, capture, and measure this
shift. The second benefit is that while EMS adoption perse might not produce lower premiums, it
might create a greater comfort level in the underwriter, resulting in greater underwriting flexibility. This
flexibility might mean fewer exclusions, lower deductibles, and/or additional endorsements. In other
words, the insured might receive a better policy for the same cost.
Corporate Investor Relations and Environmental Representatives
Our conversations with senior corporate investor relations and environmental representatives revealed
a number of different views on the financial benefits of EMS and the degree of interest in EMS shown
by financial community stakeholders. Most strongly believe that formal EMSs and environmental
programs contribute to the overall financial performance of their organization. Benefits attributed by
both environmental and investor relations executives included reduced costs, pollutant emissions, and
waste generation; greater responsiveness to customer desires; and enhanced ability to attract,
motivate, and retain employees, maintain their "social license to operate," and achieve greater
operational flexibility. However, several also stated that they have not quantified these benefits, and
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doing so would be virtually impossible. Therefore, how environmental/EMS considerations should be
defined and related to company financial value remains an area for additional research4.
Corporate representatives also provided valuable perspective on the ways in which EMS might fit into
larger-scale corporate management and governance activities. Within some firms, environmental
management is viewed more broadly than EMS and driven by a strong internal ethic. In these cases,
EMS might be part of a higher-level corporate governance structure that addresses environmental and
other issues.
Our dialogues with company representatives yielded some interesting examples of how different firms
address the environmental component of their overall governance responsibilities. Companies like
Starbucks are very proactive on environmental management issues, but do not have a formal EMS.
Other companies, such as Intel, also focus on environmental management, but have not adopted a
formal EMS as part of their efforts. In addition to its EMS, Intel builds and maintains stakeholder
relationships, in part, through environmental reporting and disclosure.
Data -Related or Other Issues that Affect Financial Sector Consideration of EMS
Despite a general interest in EMS within financial markets, our conversations with a wide array of
financial representatives indicate that EMSs are not typically included in environmental insurers' or
investors' evaluation processes (either socially responsible investment or mainstream). While some
insurers and investors are uninterested in environmental issues, many others would like to introduce
and/or integrate environmental issues into their processes. How best to accomplish this effort in a
formal and structured way, however, remains an area for further development in most insurance
companies and investment firms.
Insurers and investors have identified several barriers to using EMSs in their evaluation processes.
Even with a global EMS standard, ISO 14001—which describes a complete, well-functioning EMS and
how it works—there is wide variation in how EMSs are implemented and their performance reported.
These inconsistencies among corporate and facility EMSs produce problems for analysts, because they
conduct evaluations using standardized methodologies. Standardized methods require consistent,
comparable data. In addition, because EMSs are most often implemented at the facility level, they
might not produce environmental performance or other data that are useful for investors' corporate-
wide analyses. This problem is compounded by firms' use of different EMS implementation
approaches—even within the same industry. Inconsistent EMS implementation also limits insurers'
ability to consider products, packages, and pricing structures for industries that adopt EMS as a goal
or requirement.
Representatives from the different financial sectors with whom we spoke validated these general
findings and expressed concerns that evidence of EMS results was often absent, unclear, inconsistent,
and/or insignificant to their evaluations. More detailed information on the specific concerns voiced
4
Two well-known examples of how organizations are beginning to consider environmental quality as an intangible value
driver are Innovest Value Advisors, which characterizes the environmental variable as "strategic environmental management,"
and the Global Environmental Management Initiative, which uses "environmental and social reputation." For example
Innovest sells its research reports to both mainstream and SRI investors.
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within each of these financial sectors—insurance, social responsibility investment equity, and
mainstream equity investing—follows.
Insurers
Environmental insurers do not view EMSs - by themselves -- as a reliable indicator of future
environmental risks because they do not provide actionable information in most cases. Several
insurance company executives with whom we spoke indicated, however, that those who seek benefits
for an EMS should demonstrate that the specific EMS at a particular location has produced tangible,
risk-reduction benefits (i.e., lower underwriting risks). If this burden of proof is met, insurance industry
representatives might be willing to entertain possible future premium and/or term improvements.
Because industry- and site-specific considerations dominate the environmental insurance underwriting
process, an EMS should show how it resolves or improves:
•	Industrial/chemical operations—presence of hazardous or otherwise regulated chemicals,
hazardous waste generation/management, fuel tanks, etc.;
•	Compliance, release, and litigation history—ongoing compliance, release reductions, and
absence of litigation;
•	Community relationships—an indication of the approach to and effectiveness of stakeholder
management and overall environmental management quality; and
•	Waste management practices—approach for managing non-product outputs (e.g.,
evaluation of off-site disposition), which might be viewed as an indicator of overall
environmental management quality and risk potential.
SRI Equity Investors
Most socially responsible investing (SRI) practitioners contacted for this report, believe that
environmental certifications (e.g., ISO 14001 EMS), while useful, cannot be used as threshold or
determinate criteria because EMS in practice are not seen as consistent indicators of environmental
performance. While most SRI firms view EMS as a plus, the information derived from an EMS usually
is not comparable among different companies, making it hard to quantify how much of a benefit EMS
conveys. SRI firms instead rely more on documented environmental performance for assessing overall
environmental management quality. In some cases, environmental performance data is also used to
evaluate the quality of environmental programs, including EMS.
Mainstream Equity Investors
Our research suggests that mainstream investors do not make investment decisions based on the
presence of EMS. One reason is short-term orientation, which limits interest in programs (such as
EMS) that provide subtle, medium- to long-term benefits. Another reason is that many mainstream
investors use quantitative approaches to investment management. These approaches look not only for
a strong statistical correlation between financial performance and environmental data, but also for a
significant impact on financial performance. If the correlation is outweighed by other factors that can
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be readily measured or predicted, environment considerations will not likely be included in the
analyst's evaluation process5.
Our research also confirmed that while mainstream investors and corporate investor relations
personnel recognize that effective environmental practices contribute to shareholder value, they
believe that specific effects are difficult or impossible to measure. Despite literature suggesting these
connections, our research suggests that most mainstream investors have not challenged or expanded
existing equity evaluation methods to include this perspective.
Fixed Income Investors
Other than anecdotal examples, we found little information related to fixed income investors' interest
in environmental management or performance. However, investment theory and the limited number of
conversations that we did have with fixed income investors suggest that they share many of the same
needs and concerns as mainstream equity investors. Bond investors are interested in liquidity and
cash flow, as well as many other factors used by equity analysts. In fact, bond investors actively
examine profitability, growth, capital structure, and industry sector measures, to name a few.
EMSs are currently given little to no weight in the formal, financial market evaluation of a
company due to the following concerns:
S Unclear, inconsistent terminology—a general "language problem;"
S Inconsistencies across organizations (e.g., EMS scope, goals/targets,
measurement methods, etc.);
S No clear links to existing financial evaluation methods;
S No robust indicators that combine both environmental and financial dimensions;
S No standardized methods for measuring and reporting performance (aside from
the Global Reporting Initiative and industry-specific codes of conduct);
S Limited environmental knowledge within the analyst community;
S Financial institutions' resistance to new analytical incentives or methods; and
S Lack of consistency and comparability (from period to period, and across
organizations).
Emerging Trends
While we were pursuing our research on the interface between EMSs and financial value, a number of
interesting and relevant trends emerged. This area is dynamic, and since the beginning of this project,
5 One member of a major quantitative investment company said his firm established a positive correlation between
environmental performance and financial performance, but the significance of corporate environmental data did not warrant
inclusion in their quantitative investment model. This individual also said, however, that a fiduciary could reasonably base an
investment decision on the environmental data, because a positive correlation exists. A frequent criticism from pension fund
representatives is that they cannot make investment decisions based on anything other than pure financial evaluation,
because their fiduciary duty is to maximize return for their pensioners.
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the rate of change has continued to increase. As we became aware of these new trends and ideas,
our thinking about the financial markets evolved from a focus on EMS to a more broad perspective.
Some of the more important trends include the following:
•	Both investment firms and the companies they invest in are showing greater interest in
environmental issues and performance. Recent surveys of corporate executives and money
managers suggest that a majority of these financial market participants believe that, within a
few years, environmental (as well as social and governance) issues will become more
prominent, have the potential to meaningfully influence a firm's financial success and market
value, and be more widely evaluated by investors. In addition, an increasing number of large,
mainstream financial institutions have issued policies and commitments to sustainability and
environmentally sound investing. For example, Goldman Sachs issued a far-reaching
Environmental Policy Framework late in 2005. Also, Citigroup, Bank of America, JP Morgan
Chase, and many other major commercial banks have endorsed the Equator Principles, which
dictate a series of conditions for environmentally sound and socially equitable lending activities
in the developing world.
•	Disclosure requirements for pubic corporations have been strengthened significantly
during the past two years. As a result, corporations have disclosed more information on
environmental issues. All publicly traded companies are required to file financial statements
(e.g., Form 10Q, 10K) at regular intervals with the U.S. Securities and Exchange Commission.
These statements must identify material financial liabilities from environmental risks and
existing problems. The Sarbanes-Oxley law (S-OX) was passed to help improve corporate
governance and to ensure full disclosure of a company's actual and potential liabilities - both
tangible and intangible. While there are no additional environmental disclosure requirements
under SO-X, the statute does require certification of effective financial controls and the
accuracy of financial reports. Company senior management will need to establish or verify
adequate controls to ensure that mandatory environmental disclosure are complete and
accurate.
In addition, the accounting profession has issued (March 2005) a major revision to reporting
rules clarifying how contaminated site liabilities must be assessed, recorded, and disclosed.
Under Financial Accounting Standards Board (FASB) 143 and accompanying Interpretation 47,
companies must now estimate the costs of cleaning up all of their properties that might be
contaminated, and report these costs if, in total, they are significant. This requirement is
expected to lead to a more accurate appraisal of liabilities and book value. Companies might
become more aggressive in investigating and cleaning up their real estate assets. This
situation might also accelerate the pace of urban revitalization, which is consistent with EPA's
stated objectives.
•	Institutional investors are becoming more active in shaping the direction and practices
of the companies they invest in. About one-half of the total value of shares of stock in U.S.
markets are owned by institutions such as pension funds, mutual funds, and insurance
companies. These investors, as a class, tend to be diversified "universal" investors; i.e., they
own shares of virtually all publicly traded companies. As a result, they tend to have a long time
horizon, and prefer engagement to divestment if they perceive problems in the way a company
is being managed.
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Historically, these long-term institutional investors have given wide latitude to the management
of the companies in which they have invested funds. There are many clear signs, however,
that institutional investors are more active in shaping the direction and practices of their
investment companies. Institutional shareholders are now increasingly requesting (and often
receiving) management action defining environmental/sustainability policies, actions,
measurement, and reporting. Currently, the most prominent examples are in the arena of
climate change risk and carbon emissions. The Carbon Disclosure Project and the activities of
the Investor Network on Climate Risk represent major efforts by institutional investors to bring
about fundamental change in how corporations assess, control, and disclose their business
and financial risks from climate change. These initiatives involve more than 100 major
financial institutions that control more than $3 trillion in investment assets. In other words,
this activism is at a level that cannot be ignored. In another example, the California Public
Employees Retirement System (CalPERS), has launched a major effort to "green" its real
estate holdings, which are extensive. This effort involves making buildings more energy
efficient, constructing them with recycled and low-impact materials, and installing features that
use or minimize storm water runoff, among other features.
•	Similar trends are taking shape in Europe, in the form of European Union directives and
country-level statutes. Following release of a 2001 recommendation on the treatment of
environmental issues in company financial reports, several more specific directives have been
issued. The EU Directive on Accounts Modernization requires companies to report on "non-
financial" matters—including environmental and social aspects—in company "directors
reports."6 The 2004 Transparency Directive requires companies seeking a stock market listing
to disclose risks associated with their capital assets, including environmental risks. Finally, the
2004 Environmental Liability Directive establishes, for the first time, a framework for national-
level statutes that impose site assessment and cleanup responsibilities for contaminated
property.
•	Major insurance companies that offer property and casualty, business continuity, and
other commercial products are also bringing renewed attention to environmental and
sustainability issues. The insurance industry, in part, is concerned that the pattern of
natural climatic disasters is changing and probably increasing. The insurance industry needs to
provide insurance based on accurate predictions of future losses. If future losses cannot be
accurately predicted, then coverage is not provided or is offered at substantially higher
premiums. Much of the focus is on climate change risk, given the damage and economic loss
experienced during the 2005 hurricane season in the southeastern United States. In addition,
insurers are beginning to discuss emerging risks such as environmental damage to
ecosystems.
•	The definition of fiduciary responsibility has been challenged. Investors who manage
money for others are bound by a concept called fiduciary responsibility, which means that
these money managers have a duty to manage funds in a way that is in the best interests of
those who entrust funds to them. Traditionally, fiduciary responsibility in investing has been
defined by most trustees as maximizing financial returns at a given level of risk. Under this
interpretation other non-financial criteria (e.g., environmental performance) are excluded from
6 Analogous to an annual report in the United States.
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the investment evaluation. This interpretation of fiduciary responsibility has been challenged.7
New interpretations suggest that the fiduciary has no duty to maximize returns, but instead is
required to implement a rational and appropriate investment strategy on behalf of its clients.
In addition, due to their potential impacts on future risk and return, environmental (as well as
social and governance) issues can be considered where relevant to any aspect of an
investment strategy.
• In response to these trends, a number of companies—including some of the largest
companies in the world—are seeking to turn the environmental issue to their business
advantage. For example, in 2005 GE launched its "Ecoimagination" initiative. This initiative
is an integrated, multiyear campaign that involves major investment in environmentally oriented
research and development, marketing and manufacturing across all of the company's major
business lines. GE's goal is to generate $20 billion in new revenues within five years from this
initiative, which certifies products under development for inclusion within the Ecoimagination
brand. Thus far, GE has certified 17 products, ranging from train locomotives to water
desalination systems.
7 Freshfields, Bruckhaus, Deringer (2005), "A Legal Framework for the Integration of Environmental, Social and
Governance Issues into Institutional Investment" study funded by the United Nations Environment Programme Financial
Initiative.
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IV.Conclusions
EPA's Steering Group has conducted extensive literature and primary research examining the
points of intersection between advanced environmental practices such as EMS and the
analysis and decision making performed within three financial market sectors: equity investing,
fixed income investing and insurance. Based on the results of this research, we offer here a number
of conclusions.
The published literature provides empirical support for several important ideas. One is that a firm's
environmental management quality and performance are reflected in its overall financial results, as
indicated by firm-level (i.e., balance sheet and income statement) financial data. In other words,
whether a company does or does not operate a strong environmental program can in many cases
affect its financial performance in ways that can be seen and measured. Another major finding is that
the firm's environmental management and performance can affect its value in equity markets; i.e.,
strong environmental programs and their results have been shown to be positively related to company
stock prices in a number of empirical studies. Finally, at the level of the investment portfolio, research
shows that environmentally screened and appropriately balanced portfolios [i.e., socially responsible
investments (SRI)] perform as well as their non-screened counterparts, so at a general level, there is
no performance penalty for investing in an SRI fund versus an otherwise comparable mainstream fund.
Our conversations with a substantial number and wide array of investors, insurers, analysts, and others
in the financial markets of interest led us to conclude that many financial market participants are
interested in environmental issues and intrigued by EMS. While their specific business and decision-
making perspectives and data needs differ, investors and insurers both believe that EMS and similar,
structured approaches offer several appealing and useful features. Unfortunately, the great variability
in companies' approaches to EMS currently limits the extent to which EMS presence or data are
formally considered by most investors and insurers. Accordingly, although many financial market
participants view EMSs positively, it is difficult to quantify their [EMSs'] value and compare them
across companies.
The Steering Group began its work at an interesting time. During this initial project phase of our work,
we have become aware of a number of important trends that are beginning to influence the ways in
which financial markets and corporations approach environmental issues. Increasing attention in the
popular and business press, new disclosure requirements, shareholder activism, and other factors are
inducing a growing number of companies to more fully evaluate and disclose their environmental
impacts and risks, and in some cases, launch explicit business strategies focused on the
environmental issue. The capital markets also are changing in terms of both their demands on
companies for more complete disclosure, and in new internal commitments to environmentally sound
lending and investment policies and practices. We believe that these trends will develop further and
are likely to exert profound impacts in the coming years.
During the second phase of this project, the Steering Group plans to initiate a dialogue with the
financial sector that will provide insight on the types of EMS data that would be of value to the
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financial markets. The Environmental Finance Advisory Board has accepted a "charge" to advise the
Agency on this project.
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References
Barth, M. and M. McNichols. (1994). Estimation and Market Valuation of Environmental Liabilities
Relating to Superfund Sites. Journal of Accounting Research, 32,177-208.
Cohen, M., Fenn, S. and J. Naimon. (1995). Environmental and Financial Performance: Are they
Related? Investor Responsibility Research Center.
Dowel I, G., Hart, S., and B. Yeung. (2000). Do Corporate Global Environmental Standards Create or
Destroy Market Value. Management Science, 46,1059-74.
Feldman, S., Soyka, P., and P. Ameer. (1997). Does Improving a Firm's Environmental Management
System and Environmental Performance Result in a Higher Stock Price? Journal of Investing,
6(4), 87-97.
Garber, S. and J. Hammitt. (1998). Risk Premiums for Environmental Liabilities: Superfund and the
Cost of Capital. Journal of Environmental Economics and Management, 36, 93-94.
Hamilton, J. (1995). Pollution as News: Media and Stock Market Reactions to the Toxic Release
Inventory Data. J. of Environmental Economics and Management, 28, 98-113.
Hart, S. and G. Ahuja. (1996). Does it Pay to be Green? An Empirical Examination of the
Relationship between Emission Reduction and Firm Performance. Business Strategy and the
Environment, 5, 30-37.
Konar, S. and M. Cohen. (2001). Does the Market Value Environmental Performance. Rev. Econ &
Statistics, 83(2), 281-309.
Repetto, R. and D. Austin. (2000). Coming Clean: Corporate Disclosure of Financially Significant
Environmental Risks. Washington, DC: World Resources Institute.
Russo M. and P. Fouts. (1997). A Resource-based Perspective on Corporate Environmental
Performance and Profitability. Academy of Management Journal, 40(3), 534-59.
Social Investment Forum. (2006). 2005 Report on Socially Responsible Investing Trends in the
United States: 10-Year Review. Washington, DC: Social Investment Forum Industry Research
Program.
Soyka, P. and S. Feldman. (1998). Investor Attitudes Toward Corporate Environmentalism: New
Survey Findings. Environmental Quality Management, 8(1), 1-10.
Stanwick, P. and S. Stanwick. (1998). The Relationship Between Corporate Social Performance and
Size, Financial and Environmental Performance. Journal of Business Ethics, 17(2), 195-204.
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Stone, B., Guerard, J., Gultekin, M., and G. Adams. (2001). Socially Responsible Investment
Screening: Strong Evidence of No Significant Cost for Actively Managed Portfolios.
http://www.socialinvest.org/areas/research/
United Nations Environment Programme Finance Initiative. (2004). The Materiality of Social,
Environmental, and Corporate Governance Issues to Equity Pricing. New York: UNEP Finance
Initiative.
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Appendix A: Major Literature Findings
Major Literature Findings
The Steering Group identified several relevant findings during its environmental-finance literature
review. The most relevant are described below.
Despite an extensive review, the Steering Group found little published literature addressing
environmental management, risk, or performance in the context of fixed income investing or insurance
underwriting. Most studies focused on internal corporate financial results or investor behavior in equity
markets.
The data presented in Exhibit 1 provide information from several studies that examined firm financial
performance or position using accounting-based measures, and how these measures changed due to
environmental risks, liabilities, or performance. Three studies addressed profitability related to
pollutant emissions or their reduction. Results showed a positive correlation between emissions
reductions and profitability. This correlation extends the commonly held view that well-chosen
pollution prevention initiatives more than pay for themselves by showing the same type of impact at
the level of the firm, rather than at the end-project level.
Exhibit 1 also includes results from two studies on prospective environmental liabilities that argue the
authors, should be recorded on affected companies' balance sheets under existing accounting rules.
These liabilities can be large, quantified with some precision, and vary across firms in the same
industry. In other words, these data would be of interest to investors and other members of the
financial community if made available on a widespread, consistent basis.
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Exhibit 1. Major Literature Findings - An Accounting Perspective
Financial
Impact
Category
Author(s)
Title, Source, and Date
Major Findings and Limitations
Profitability/
Return on
Investment
Hart & Ahuja
"Does it Pay to be Green?"
Business Strategy and the
Environment
1996
¦	Pollution prevention and reduced emissions
positively affect returns on assets, sales, and
equity within two years
¦	Effects a re greate r fo r h ighe r-e m itti ng fi rms
— (127 Standard &Poor's manufacturing,
mining, and "production" firms)

Russo &
Fouts
"A Resource-based Perspective
on Corporate Environmental
Performance and Profitability"
Academy of Management Journal
1997
¦ Return on assets improves with better
environmental performance
— (243 firms over 2-year period (no
utilities))

Stanwick &
Stanwick
"The Relationship Between
Corporate Social Performance
and Size, Financial and
Environmental Performance"
Journal of Business Ethics
1998
¦ There is a correlation between low emissions
and high profitability among firms with a
reputation for social responsibility
— (102 tol25 firms listed on Fortune
Corporate Reputation Index with
complete Toxics Release Inventory data
for any of five years)
Balance
Sheet
Liabilities
Barth &
McNichols
"Estimation and Market Valuation
of Environmental Liabilities
Relating to Superfund Sites."
Journal of Accounting Research,
(1994)
¦ Average unrecognized liability associated
with Superfund is 28.6 percent of market
value

Re petto &
Austin
"Coming Clean: Corporate
Disclosure of Financially
Significant Risks."
World Resources Institute,,
2000
¦ Many companies projected to have
significant asset impairment/costs from new
requirements under likely new regulations
— (13 large pulp/paper companies)
Exhibit 2 describes findings from two
studies that examined the impact of
environmental improvements (or lack
thereof) on the value of a firm's
intangible assets. It is increasingly
recognized that traditional, balance
sheet-based measures no longer provide
investors with a complete view of a firm's
strengths and weaknesses, future
prospects, or worth in the marketplace.
Instead, investors turn to intangible
Tangible vs. Intangible Value
"As recently as the mid-1980s, financial statements
captured at least 75 percent on average of the true market
value of major corporations. In the intervening years,
however, that figure has dropped to a paltry 15 percent on
average."
(Baruch Lev, Intangibles: Management, Measurement and
Reporting: Washington, D.C. Brookings Institution, 2001.)


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assets such as brand reputation and patent rights. The studies profiled in Exhibit 2 document the
intangible asset value of environmental management standards and pollutant emissions. In both
cases, the authors found a strong, positive correlation between improved, beyond-compliance
environmental behavior and intangible asset value.
Exhibit 2. Major Literature Findings - Intangible Asset Value
Financial
Impact
Category
Author(s)
Title, Source, and Date
Major Findings and Limitations
Market
Value of
Intangibles
Dowell, Hart
&Yeung
"Do Corporate Global
Environmental Standards
Create or Destroy Market
Value"
Management Science,
2000
¦ Firms with stringent, beyond-compliance
environmental standards have significantly
higher market values (10 percent or $8.4
billion to $10.6 billion), than firms with U.S.
standards only
— (89 Standard & Poor's (S&P) 500
companies with manufacturing or mining
operations in developing countries)

Konar &
Cohen
"Does the Market Value
Environmental
Performance"
Rev. Econ & Statistics,
2001
¦	Average "intangible asset liability" for inferior
environmental performance estimated at
$380 million
¦	Liability greatest for chemical, primary metals,
and paper industries
¦	Ten-percent reduction in Toxics Release
Inventory (TRI) produces $34 million in
intangible asset value
— (321 S&P 500 manufacturing firms)
Within the past 10 to 15 years, several independent organizations began identifying and providing
information on environmental performance. Many of these organizations market their products to the
investment community. The most prominent screening and rating tools are the Eco-Value 21®
method developed by Innovest Strategic Value Advisors, the reporting guidelines issued by Global
Reporting Initiative (GRI), the Dow Jones Sustainability Index (DJSI), and the FTSE4Good Index. These
environmental screening and rating tools and methodologies are among the few that specifically
address environmental management systems (EMSs).
Exhibit 3 presents data from two studies that examined the performance of investment portfolios that
use environmental screening and rating tools and methodologies. Both documented the absence of
"performance penalties." While these findings do not demonstrate that more environmentally
advanced firms outperform otherwise similar firms, they do provide support for overcoming a significant
barrier to environmentally influenced investing—fiduciary duty to the investor.
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Exhibit 3. Major Literature Findings -
Performance of Environmentally Screened Investment Portfolios
Financial
Impact
Category
Author(s)
Title, Source, and Date
Major Findings and Limitations
Environ-
mental
Quality
Ratings and
Screens
Cohen, Fenn &
Naimon
"Environmental and Financial
Performance: Are they
Related?"
Investor Responsibility
Research Center
1995
¦ Environmental leaders in an industry-balanced
portfolio did as well as, and sometimes better
than, environmental laggards

Stone,
Guerard, et al
"Socially Responsible
Investment Screening: Strong
Evidence of No Significant
Cost for Actively Managed
Portfolios."
2003
¦ No cost to social and environmental screening
for actively managed portfolios—even if
controlling for a variety of factors
— (Quarterly returns over 13 years for 1,334
stocks using environmental screens; 20
different portfolios constructed, controlling
for size, Beta, growth, and dividend yield)
Most investors do not regularly seek, review, or consider environmental management or performance
during decision making Nonetheless, environmental issues do affect the stock market and company
valuations. As shown in Exhibit 4, several studies have documented short- to medium-term stock
price/market value effects from positive and negative environmental events. Media coverage based on
actual and potential environmental legislation decreased the share price of affected companies
significantly. EPA announcements about enforcement priorities and negative news releases had
similar effects. In contrast, positive publicity on environmental performance (e.g., awards, recognition)
increased share prices.
Exhibit 4. Major Literature Findings - Stock Price Impacts of Environmental Events
Financial
Impact
Category
Author(s)
Title, Source, and Date
Major Findings and Limitations
Stock Price
Impacts (Event
Methodology
Studies)
Blacconiere
& Patten
"Environmental Disclosures,
Regulatory Costs, and Changes
in Firm Value"
Journal of Accounting &
Economics
1994
¦	Companies dependent on chemical business
suffered significant declines in share price returns,
while those deriving less than 18 percent of their
revenues from chemicals had no effect
¦	Companies with best disclosure were not affected,
while companies with worst had significant
negative returns
— (47 companies obtaining less than 10
percent of their revenue from chemicals;
Form lOKs reviewed, companies put into five
categories relative to extent of environmental
disclosures)
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Financial
Impact
Category
Author(s)
Title, Source, and Date
Major Findings and Limitations

Blacconiere
& Northcut
"Environmental Information
and Market Reactions to
Environmental Legislation"
Auditing and Finance
1997
¦ Chemical companies likely to be negatively
affected by environmental legislation suffered
share price declines
— (72 chemical companies during 8-month
period around Superfund Amendments and
Reauthorization Act (SARA) reauthorization)

Bosch, et al
"Environmental Regulation and
Stockholder Wealth"
Managerial and Decision
Economics
1998
¦ Firms targeted for EPA enforcement had stock
price declines when the action was announced
— (News references from Wall Street Journal
collected over 20-year period; 171 cases, 77
firms)

Hamilton
"Pollution as News: Media and
Stock Market Reactions to the
Toxic Release Inventory Data"
J. of Environmental Economics
and Management
1995
¦ Firms with negative news coverage on Toxics
Release Inventory (TRI) experienced a significant
decline in stock price, losing an average of $4.1
million the first day of news coverage. Stock prices
declined an average of $6.2 million with additional
coverage
— (450 New York Stock Exchange and American
Stock Exchange companies reported under
TRI with complete stock return information)

Klassen &
McLaughlin
"The Impact of Environmental
Management on Firm
Performance"
Management Science
1996
¦	Firms with environmental awards increased in
market value (0.63 percent), while firms with
negative publicity declined in value (-0.82 percent)
¦	Filtering out contemporaneous events by firms
showed more acute impacts (0.82 percent, -1.50
percent), with average annual gain of $80.5
million or loss in market value of $390.5 million
— (Nexis database search 1985-91, yielding
140 award announcements, 22 crisis stories)
Two other noteworthy studies evaluated stock market behavior in response to environmental
characteristics. Exhibit 5 shows these studies' major findings—both focus on the cost of equity capital
as reflected by a firm's Beta, a measure of stock price volatility. One study documents a positive
impact on the Beta (a lowering) due to better environmental management (i.e., environmental
management system implementation) and performance. The other shows a negative impact (higher
Beta) for a large company in the same industry as several other firms with substantial Superfund
liabilities. This type of "guilt by association" is commonly observed in the stock market.
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Exhibit 5. Major Literature Findings - Environmental Impacts on Cost of Capital
Financial
Impact
Category
Author(s)
Title, Source, and Date
Major Findings and Limitations
Beta and
Firm Cost of
Capital
Feldman,
Soyka &
Ameer
"Does Improving a Firm's
Environmental Management
System and Environmental
Performance Result in a
Higher Stock Price"
Journal of Investing
1997
¦ Improved environmental management and
performance (Toxics Release Inventory/fixed
assets) decreased Beta by several percent,
suggesting lower firm cost of capital and higher
stock price
— (330 Standard &Poor's 500 firms examined
across two 7-year periods; analysis controlled
for capital structure, productivity, industry,
and other important variables)
Garber &
Hammitt
"Risk Premiums for
Environmental Liabilities:
Superfund and the Cost of
Capital."
Journal of Environmental
Economics and
Management
1998
¦	Higher Superfund liability for an industry subset
increased the cost of capital for other large
industry firms
¦	The annual capital cost for 23 affected firms was
0.25 to 0.4 percent from 1988-92
— (72 publicly traded chemical industry
potentially responsible parties (PRPs)
identified over 12-year period; 23 large, 54
small firms (less than $500 million in market
value)
Last, Exhibit 6 presents findings on the importance (or lack thereof) of environmental issues in
investment analysis and decision making. A 1998 survey of investors found that most investors,
whether or not they represent environmentally screened investment products, do not routinely request
information on environmental policies, management systems, performance, or other related issues.
However, the survey also found that investors seek value and will pay more for it if there is convincing
evidence. They also expect to receive information on such value creation means from company
management, whether it is requested or not. A 2004 study suggested the investor community is
becoming more aware of environmental and other corporate social responsibility issues. As
demonstrated by the Steering Group's primary research, however, this awareness has not yet
generated significant investment inquiry, analysis, and decision making related to environmental
issues.
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Exhibit 6. Major Literature Findings - Surveys of Investor Attitudes and Beliefs
Financial
Impact
Category
Author(s)
Title, Source, and
Date
Major Findings and Limitations
Surveys -
Investors
Soyka &
Feldman
"Investor Attitudes
Toward Corporate
Environmentalism: New
Survey Findings"
Environmental Quality
Management
1998
¦	Vast majority of portfolio managers would pay more for
strong environmental performance, given convincing
demonstration of value creation
¦	While virtually no investors routinely asked for
environmental health and safety (EH&S) program cash flow
contribution, almost all expected company management to
offer information on EH&S value creation without
prompting
— (45 U.S. bond and equity portfolio managers, both
environmentally screened and mainstream)
United Nations
Environment
Programme
Finance
Initiative
"The Materiality of
Social, Environmental,
and Corporate
Governance Issues to
Equity Pricing"
2004
¦ Investors agree that environmental, social, and corporate
governance issues affect long-term shareholder value;
some impacts can be profound
— (Survey of 11 brokerage houses)
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Appendix B: Principal Financial Market Contacts
Person
Organization/Affiliation
Financial Market
Sector
Brief Rationale for Contact
Kim Hanna
Pat Mount
Kevin Mathews
AIG Environmental, Inc.
Insurance
Chief Underwriting Officer, Manager,
Engineering Program, and Director of
Association and Government
Relations of environmental subsidiary
of world's largest insurance
underwriter
Lawrence Heim
Marsh, Inc.
Insurance
Senior environmental expert in
world's largest insurance brokerage,
which operates major environmental
insurance arm; past participant in
EPA EMS-related dialogues
Karl Russek
ACE Environmental, Inc.
Insurance
President of environmental subsidiary
of $18 billion global insurance carrier
Greg Shields
XL Environmental, Inc.
Insurance
Risk Control Manager of
Environmental subsidiary of XL
Capital, a major global insurance
underwriter
Anonymous*
Anonymous*
N/A
SRI section of a major financial
institution; manages separate
accounts for specific clients. $1
billion in SRI assets
Anonymous*
Anonymous*
N/A
SRI mutual fund with multiple billions
of dollars in assets
Julie Fox Gorte
Calvert Group
Equity/Fixed Income
Investing
Vice President, Chief Social
Investment Strategist at major SRI
firm with extensive understanding of
how environmental issues affect
investment screening decisions
Paul Hilton
Dreyfus
Equity Investing
Fund Manager at firm with $900
million in SRI investments, $180
billion in total
Lloyd Kurtz
Nelson Capital Management
Equity Investing
Quantitative focus, mainstream
portfolio manager, deep knowledge of
SRI and quantitative studies of SRI
David Loewing
Citizens Funds
Equity Investing (SRI)
Senior SRI researcher with extensive
experience evaluating and interacting
with companies
Meredith Miller
Don Kasebaum
State of Connecticut Treasurer's
Office
Equity/Fixed Income
Investing
Treasurer is principle fiduciary for the
state pension plans
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Person
Organization/Affiliation
Financial Market
Sector
Brief Rationale for Contact
Amy Muska O'Brien
TIAA-Cref
Equity/Fixed Income
Investing
Strategic planning official with strong
background in SRI at this very large
institutional investor
Bill Page
State Street Global Advisors
Equity Investing
Portfolio manager at large
mainstream and SRI investment firm;
user of environmental research (e.g.,
Innovest reports)
George Wong
New York State Comptroller's Office
Equity/Fixed Income
Investing
Comptroller is principle fiduciary for
the state pension plans
Anonymous*
Anonymous*
Company & Security
Analysis
Large quantitative analysis house and
index provider
Eric Feme Id
KLD Analytics
Company & Security
Analysis
Can represent SRI research process
and speak to interests of SRI users of
KLD data
Bruce Klafter
Applied Materials, Inc.
Corporate
Senior EH&S Director at major
manufacturer; firm is relatively new to
CSR and reporting but moving fast
Paula Norton
United Parcel Service
Corporate
Director of Investor Relations at
innovative leadership company
Ben Packard
Starbucks
Corporate
Director of Environmental Affairs at
firm with non-traditional approach to
environment and sustainability issues
Dave Stangis
Intel
Corporate
Perhaps the company official most
"plugged in" to the SRI industry
Jeffrey Smith
Cravath, Swain & Moore
Independent Expert
Corporate environmental attorney and
expert on Sarbanes-Oxley and U.S.
Securities and Exchange Commission
disclosure requirements
* Note: All three "anonymous" interviewees are employed by large, well-known financial services
industry firms.
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Appendix C: Environmental Management Systems
Overview
An environmental management system (EMS) is a systematic approach to dealing with the
environmental aspects of an organization. It provides the structure by which an organization's
activities can be carried out efficiently and effectively, while minimizing negative impact on the
environment. More specifically, an EMS is a cyclical process of planning, implementing, checking, and
continually improving a system and its elements, with the concept of continual improvement as a key
EMS component.
An effective EMS ensures that environmental considerations
are integrated into an organization's overall decision-making
structure, and environmental responsibilities are deployed
throughout the organization. Unlike traditional environmental
management, which consists of a small group of
environmental professionals trying to manage all of an
organization's environmental impacts, an EMS demands that
all employees take responsibility for the potential
environmental impacts of their own activities. Employees accomplish this task by examining their
activities, determining potential impacts, and finding ways to minimize those impacts.
By adopting an EMS, an organization can potentially discover many opportunities to reduce wasteful
use of resources, thus saving money and enhancing economic performance while reducing
environmental impacts.
Benefits
Organizations that implement effective EMSs will see improvement in their environmental programs
and overall environmental performance. However, these benefits can vary. Depending on the size and
complexity of the facility, the maturity and extent of pre-existing environmental programs, the
organization's mission, and the design and goals of the EMS, benefits can include management
efficiencies and organizational improvements.
More common benefits include:
•	Improved environmental performance;
•	Improved regulatory compliance;
•	Greater prevention of pollution and resource conservation;
•	Increased efficiency;
•	Improved procedures and documentation leading to operational consistency;
•	Enhanced employee morale;
•	Increased safety and decreased accidents;
Environmental aspects are
elements of an organization's
activities, products, or services
that can interact with the
environment.


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•	Reduced liability;
•	Enhanced image and better relationships with the public, regulators, and stakeholders;
•	Improved employee awareness of environmental issues and responsibilities;
•	Reduced environmental management costs; and
•	Access to international markets.
EMS Framework
The most commonly used EMS framework is the one developed by the International Organization for
Standardization (ISO). Established in 1996 and revised in 2004, the ISO 14001 standard
"Environmental management systems—Specification with guidance for use" is located within the ISO
14000 series, and specifies the actual requirements for an EMS. It is the only standard within the
series that can currently be used for certification by an external certification authority. It does not
state specific environmental performance criteria, but does provide management system elements for
determining conformity with the standard.
Elements of an ISO 14001 EMS
The five main stages of an EMS, as defined by the ISO 14001 standard, are:
1.	Commitment and Policy
•	Defining an environmental policy that reflects the commitment of the organization and drives
the EMS.
2.	Plan
•	Identifying legal and other requirements.
•	Assessing how the organization potentially impacts the environment through identification of
environmental aspects and impacts of the organization's activities, products, and services.
•	Determining the environmental aspects that are significant to the organization based on criteria
set by the organization.
•	Defining objectives to reduce the environmental impact of significant environmental aspects.
•	Setting a measurable target for each objective.
3.	Do (Implementation)
•	Developing programs to make desired changes in processes, work procedures, or procurement
to meet targets.
•	Developing and managing operational controls to minimize environmental impact, for
significant environmental aspects that are not tied to an objective.
•	Assigning roles and responsibilities and developing training, communication, documentation,
and an emergency management plan to ensure environmental targets are met.
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4.	Check
•	Reviewing progress toward meeting objectives and targets.
•	Measuring success in meeting targets.
•	Conducting audits.
•	Taking corrective action if needed.
5.	Act
•	Reviewing an EMS to ensure its continuing suitability, adequacy, and effectiveness (done by an
organization's top management).
•	Modifying an EMS to optimize its effectiveness.
For More Information
For more information on EPA's EMS-related policies, technical assistance and outreach programs, and
other initiatives, visit www.epa.gov/erns.
Continual Improvement
Environmental Policy
Plan
-	Identify Activities, Products, and Services
-	Identify Environmental Aspects and Impacts
-	Determine Significant Environmental Aspects
-	Determine Legal and Other Requirements
-	Establish Objectives and Targets
-	Develop Environmental Management Programs

11
Management Review
Plan-Do-Check-Act Model
Ongoing Monitoring and Measuring
Non-Conformance, Corrective and
Preventative Action
Periodic Internal EMS Audits
Do
implementation and Operation
|- Organization Accountability
-	Structure and Responsibility
-	Capabilities & Communications
I- Training, Awareness,and Competence
|- Communication
-	Controls
I - EMS Documentation
| - Document Control
Operational Control
-	Emergency Preparedness and Response
ss and Resp
Continual Improvement
- Records
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Appendix D: Glossary
Aspect: an element of an organization's
activity, product, or service that can interact
with the environment
Beta: a measure of a given company's stock
price volatility over time. Higher Betas imply
a higher cost of equity capital (return required
by the investor); a higher required return
implies a lower stock price
Domini 400: a market capitalization-
weighted common stock index; monitors the
performance of 400 U.S. corporations that
pass multiple, broad-based social screens
Dow Jones Sustainabilitv Index: an index
that tracks the financial performance of
leading sustainability-driven companies
worldwide
Environmental Management System
(EMS): a set of processes and practices that
enable an organization to reduce its
environmental impacts and increase its
operating efficiency
Equity: stock or any other security
representing an ownership interest; on a
balance sheet, the amount of the funds
contributed by owners (stockholders) plus
retained earnings (or losses)
Fiduciary Duty: the legal responsibility for
investing money or acting wisely on behalf of
another
Financial Incentive: an expression of
economic benefit that motivates behavior
Firm Cost of Capital: actual cost of capital
of a firm; would include the cost of debt and
the cost of equity
FTSE4Good: measures the performance of
companies that meet globally recognized
corporate responsibility standards, and facilitates
investment in those companies
Global Reporting Initiative (GRI): a multi-
stakeholder process and independent institution
whose mission is to develop and disseminate
globally applicable sustainability reporting
guidelines; guidelines are for voluntary use by
organizations reporting on the economic,
environmental, and social dimensions of their
activities, products, and services
Index: an imaginary portfolio of securities
representing a particular market or a portion of it
Intangible Assets: the characteristics and
abilities not found on an organization's balance
sheet, or captured by conventional accounting
measures
ISO 14000: a series of international, voluntary
environmental management standards that
address the following aspects of environmental
management: EMSs, environmental auditing &
related investigations, environmental labels and
declarations, environmental performance
evaluation, life-cycle assessment, and terms and
definitions
ISO 14001: the standard within ISO 14000
that specifies the actual requirements for an
environmental management system; the only
standard within the series that can currently be
used for certification by an external certification
authority. It does not state specific
environmental performance criteria, but does
provide management system elements for
determining conformity with the standard
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Net Margin: net profit divided by net
revenues, often expressed as a percentage;
can indicate how effective a company is at
cost control
Pollution Legal Liability (PLL): legal
responsibility for environmental risk
Return on Assets: a company's annual
earnings divided by its total assets, often
expressed as a percentage; can indicate how
profitable a company is relative to its total
assets and/or how well a company is able to
use its assets to generate earnings
Return on Investment: benefit (return) of
an investment divided by the cost of the
investment, often expressed as a percentage
or ratio; can be used to evaluate the
efficiency of an investment
Socially Responsible Index: passively
managed mutual funds comprised of
companies whose activities are considered
ethical; can offer competitive performance
with lower expense compared to actively
managed SRI funds
Socially Responsible Investing (SRI):
investing in companies whose activities are
considered ethical
Toxics Release Inventory (TRI): a publicly
available EPA database that contains
information on toxic chemical releases and
other waste management activities reported
annually by certain covered industry groups as
well as federal facilities
Value Creation: performing activities that
increase the value of goods or services to
consumers
Volatility: a statistical measure of the
tendency of a market or security to rise or fall
sharply within a set period
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