Two reminders came this week that environmental concern is a megalith aimed at corporate profits. First, MPs urged the Chancellor to give a significant hike to green taxes in next week's Budget. Then the Association of Certified Chartered Accountants put out a publication, The Big Picture, the first of several aimed at helping the long-term mplications of environmental issues for balance sheets and profit-and-loss accounts sink in.
Social pressure on the corporate sector is rising. Once represented by a few "ethical" funds, it is now addressed as socially responsible investing (SRI). At least two-thirds of the major pension funds have SRI issues in their investment strategies, and some put the size of the SRI iceberg at £400bn. On the legislative side there are already landfill and carbon emission taxes.
A new Companies Bill is likely to increase a mandatory requirement for wider disclosure of environmental and social risks and impacts. That will inevitably bring pressure for action. A cross-industry committee is drawing up criteria. The suggestion is that the top 1,000 companies should be covered. New instrumental accounting standards could result.
The sympathy investors feel with SRI investment is shown, says Noel Smyth, SRI specialist at the fund manager Morley, because they stick with the funds. These rarely outperform markets, though the star, the deeply green veteran Friends Provident Stewardship Income, lost only 16 per cent in the past year. The FTSE 100 index fell 29 per cent.
So what clues are coming from The Big Picture? Annelisa Grigg, manager of Sustainability Advisory Services at the accountant KPMG, picks up potential problems on carbon risks from the Kyoto Protocol aimed at reducing greenhouse gas emissions. Little of present investment analysis, she says, captures the potential effects. The UK started a trading scheme last year in which companies agree targets for emission cuts and are rewarded or punished on performance. Early bidders included British Airways, Barclays and Shell. They can buy or sell allowances, or achieve them through capital investment or operational efficiencies. Targets will rise.
Swings in the trading auction prices have been severe, from £12.50 to £5 a ton of CO2 emission and back again. This is not an easy risk to manage. But with the EU expected to ratify Kyoto in 2005, it is going to become a factor to cost into company earnings, mergers, acquisitions and disposals.
The landfill tax is to rise in the Budget. The aggregates levy, designed to minimise landfill and encourage recycling, could lead to pressure for infrastructure changes, say, more investment in rail to cut haulage costs.
SRI exponents such as Craig Mackenzie, head of Insight Investment, fund management arm of HBOS, with £68bn under management, see its influence as extensive. For him, socially well-behaved corporates such as BP and Shell are usually good investments, though they are not for green purists. So, for a start, he believes, they can be trusted to be aware of their image. That's vitally important, he says, when intangible assets such as brands are now such a huge chunk of company values, such as McDonald's.
Obesity and related issues are tackled in a UBS SRI research report, and brokers are increasing SRI coverage because it's a rare growth sector. Issues for which research will soon surface include the European Union's end-of-life vehicle directive, HIV/Aids in South Africa and packaging.
SRI stocks don't have to be dull. Look for changes in the FTSE4Good index and its reserve list. A couple of good stocks awaiting promotion are the fund manager Man Group and the former building society Northern Rock. Man at 965p is expected to produce a 30 per cent earnings rise this year to 82p, and a dividend of 22.8p. Northern Rock at 690p has a forward PE of 11 on a consensus earnings-per-share forecast for this year of 63.5p, up 13 per cent. Just in and still looking good is the international fashion favourite Burberry, at 224p. It is forecast to produce earnings increases of 21 per cent this year to 14.7p, then 14 per cent in 2004 to 16.8p.
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