The launch of the FTSE4Good index and a recent EU green paper have focused attention on corporate social responsibility. But analysts seem less than enthusiastic. According to a UK Business in the Environment (BiE) survey, only three per cent of City analysts believe environmental and social issues to be important in judging company performance. The US Environmental Protection Agency's report, Green Dividends? The Relationship Between Firms' Environmental Performance and Financial Performance, also took the view that there was only a 'moderate positive relationship' between environmental and financial performance.
Why do analysts give social and environmental issues such low priority? Some may be dubious as to the actual value added. It is easier to cite cases where failure to manage such issues has resulted in a loss, than cases where good social and environmental management has resulted in higher profits. But there is a growing body of hard evidence, as a recent paper from Salomon Smith Barney shows. ( www.salomonsmithbarney.com/prod_svc/asset/private/social_env.html )
A more likely reason, touched on by both BiE and EPA, is that neither companies nor analysts have yet come to grips with how to deal with social and environmental information. Companies are insufficiently skilled in reporting social responsibility in a way that relates to other financial data and benchmarks, or progress against sector performance. Analysts lack methodologies to value companies' strategies. In addition, judgments on what constitutes a socially responsible company tend to be subjective because there are so many factors involved.