Sustainability Increases Stockholder Value

New research indicates that sustainability may also equal profitability.

The question frequently asked by entrepreneurs, companies and investors considering an investment in sustainability is, "MAY I make money?"

The answer is currently a resounding "yes."

Actually, R. Paul Herman, founder of HIP Investor Inc. , is rolling out a research solution to determine the comparative profitability of companies which have adopted sustainable business models. The procedure includes the HIP 100 IndexSM portfolio of the S&P 100 stocks, re-weighted using "a hard-nosed data-driven approach . to get profitability and sustainability," Herman says.

For instance, ExxonMobil represents 4 percent of the composite S&P 100. The HIP Index weights ExxonMobil nearer to 1 percent of its fund due to poor scores on the business’s implementation of sustainability fundamentals that may affect its profitability. For instance, if carbon emission pricing is legislated by Congress, Exxon’s industry-high carbon emissions could dramatically increase Exxon’s operating costs.

"The HIP 100 approach has outperformed the S&P 100 benchmark by a lot more than 400 basis points, typically, in recent schedules, in both along markets," Herman explains (100 basis points is the same as 1 percent return upon investment). This makes HIP’s research the first professional analysis that links the adoption of sustainability with creating increased stockholder value.

The bigger stock valuation gained through the implementation of HIP criteria should command considerable attention from CEOs and CFOs wanting to maintain their stock’s price in this recession. It will also be electrifying to entrepreneurs seeking to profit from "another big thing." Herman indicates that you make money becoming enviromentally friendly while also outperforming your rivals, particularly if they use strategies that neglect to fulfill the customer’s growing demand for goods and services that align both environmental and economic value.

The HIP criteria represent the five areas a company ought to be centered on if it seeks to create a sustainable business practice that also achieves superior stock price performance. These areas are: health, wealth, earth, equality and trust.

For example, among HIP’s criteria is to include sustainability principals into an office building’s operation. According to a report by Capital E Analysis, the financial great things about a green building included savings in energy costs, operations, maintenance and also improved employee health insurance and overall productivity. The implications are that companies looking beyond the original, two-year profits on return criteria, by incorporating HIP-like analysis, are harvesting superior operating results. Likewise, this will result in superior stock-valuation results.

Another exemplory case of the impact of HIP criteria on stock valuation is demonstrated through the inclusion of women on a company board of directors. As identified in a previous post , women–or concerned caregivers–are an integral group driving the implementation of sustainability.

The explanation behind the HIP criteria is founded on research findings by Catalyst.org . The analysis indicated that companies with an increase of women on the board of directors achieved a 53 percent higher ROI on sustainability measures when compared to returns attained by companies with fewer women on the board. This probably is due to the actual fact that women represent more then 50 percent of the populace, so having more women on a board helps a company gain valuable insights on selling to women. Since women are also buyers of sustainable goods and services, having more women on a board of directors escalates the probability of that business aligning the business’s practices with the adoption of sustainability.

Another telling data point may be the recent sales of companies that pioneered green products. Three examples are:

  • Clorox’ acquisition of Burt’s Bees, a leader in natural personal-care products, for a lot more than $900 million.
  • Coca-Cola’s purchase of Odwalla, a leader in organic beverages, for $181 million and Republic Tea, a leader in organic tea bags, for $43 million.
  • Colgate-Palmolive buying Tom’s of Maine, a leader in natural toothpaste and other personal-care products, for $100 million.

These examples inform you that sustainability is emerging as an enormous opportunity for entrepreneurs wanting to grow a business and sell it for reduced to a more substantial company.

The data points to sustainability as a path for achieving superior stockholder valuations predicated on financial analysis, stock-price performance and the sale-valuations of green businesses. However, there are always a couple of what to bear in mind:

  1. Equity investors should turn to financial analysts and investment advisers such as for example R. Paul Herman and his HIP 100 IndexSM as a significant new investment wave.
  2. There exists a remarkable chance for entrepreneurs to build green businesses with a profitable exit strategy of selling out to a more substantial company.
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