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The Greening of American Capitalism

by William Greider

Could Wall Street become the vanguard of environmental activism?

For decades the environmental movement has been characterized as being at odds or out of touch with the bedrock assumptions of U.S. capitalism. According to the common view, investors will sacrifice returns if they allow social values such as clean air and clean water to influence their investment choices. Similarly, any strengthening of environmental protections by the government will add deadweight costs to a company's bottom line, thus undercutting efficiency and dragging down general prosperity. For these and other reasons, even the simplest environmental reforms are required to run a gauntlet of dense cost-benefit calculations to win approval as sound economics.

But what if this familiar lore turns out to be dead wrong? In the realm of abstract economic analysis, the conventional logic may seem unassailable. In reality, however, companies with superior performance on environmental matters (as well as other social concerns) are producing better returns in the stock market for shareholders, partly because those companies face fewer environmental risks to their future profitability. I am not simply talking about green startup companies on the leading edge of innovation -- the ones designing new solar panels. I am talking about the largest industrial corporations, from DuPont to Intel, across virtually every sector, including those sectors that are typically notorious polluters. In the bowels of capitalism, it turns out, environmental values make good business sense.

This revelation opens an entirely different path to achieving deep change in our economic and political systems, change that is driven from within the capitalist structure by people who act collectively as investors, consumers, workers, and citizens. Government at present is captured or stymied by dominant economic interests and unable to make fundamental advances, especially in the regulatory system. Business and finance, though, can become surprisingly pliable in their strategies and business models once citizens learn to locate the precise points of leverage. The connection between financial investing and environmental progress is one such point.

The bow wave for clarifying this issue was launched by the pioneers in socially responsible investing, or SRI. Often belittled by Wall Street, a number of the leading socially screened investment funds attracted notice during the 1990s, when they produced better records of return than did the broad market they compete with for investor dollars.

Mainstream brokerages, at the very least, recognized a new niche market and began opening their own SRI funds. Even the Dow Jones Company, which promotes its economic orthodoxy in the Wall Street Journal, caught the wave in 1999 with its global sustainability index, tracking the top 10 percent of the most environmentally, economically, and socially conscientious companies worldwide. (These companies, according to Dow, include 3M, Procter & Gamble, Intel, Volkswagen, Unilever, Siemens, and others.) The new index is beating Dow's broader global index by 2 to 3 percentage points. These differences are not trivial; when trillions of dollars are in play, 1 percent better adds up to real money.

SRI's edge in performance remains in contentious dispute among Wall Street bankers and brokers, and most of them, it is safe to say, still don't buy it. Environmentalists, who start from a broader understanding of what constitutes efficiency and value, may find it easier to appreciate the underlying logic. American business, despite its inventiveness and supposed obsession with efficiency, actually operates in a swamp of everyday wastefulness, as environmental thinkers have contended for years. It stands to reason that a company reducing toxic effluence from its plants, or modifying products and production processes to reduce collateral damage in nearby rivers or forests, is also engineering internal efficiencies that will be reflected in the bottom line.

Innovest, an upstart financial advisory firm with offices in New York, Toronto, Paris, and London, has taken this logic a step further, gathering abundant specific evidence that companies with better environmental records generally produce better returns for investors. Innovest has developed investment-risk ratings for 1,500 corporations, a grade that resembles the credit-risk ratings by Moody's or Standard & Poor's. In this case, a corporation's environmental performance and viability are evaluated according to 150 concrete indicators, including its liabilities for past pollution, risks of hazardous waste disposal, the energy efficiency of its production systems, exposure to future regulatory costs, and scores of other markers.

Based on these factors, the firm assigns risk ratings from AAA to CCC. The CCC rating signifies "a company where there are significant doubts about management's ability to handle its environmental/social risks and liabilities and where these are likely to create a serious loss."

The grading system allows Innovest to compare performance in the stock market; a portfolio of several hundred companies with higher eco-ratings is matched against several hundred "bad guys" with poor ratings. If a pension fund, for instance, invests its billions on highly rated companies and ignores those with lousy environmental records, it will reap higher returns -- 1.5 to 3 points higher than if the pension fund follows standard practice and invests passively across the entire stock market. Why then should pension trustees, mutual funds, and foundations park their money with the suspect performers?

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William Greider is author of the forthcoming title The Soul of Capitalism: Opening Paths to a Moral Economy (Simon & Schuster), from which the ideas discussed in this article are drawn.

Illustration: Michael Morgenstern

OnEarth. Fall 2003
Copyright 2003 by the Natural Resources Defense Council