The question most often asked by entrepreneurs, business owners and investors considering an investment in sustainability is, "Can I make money?"
The answer is now a resounding "yes."
In fact, R. Paul Herman, founder of HIP Investor Inc. , has developed a research method to determine the comparative profitability of companies that have adopted sustainable business models. The process includes the HIP 100 IndexSM portfolio of the S&P 100 stocks, re-weighted using "a hard-nosed data-driven approach . to seek profitability and sustainability," Herman says.
For example, ExxonMobil represents 4 percent of the composite S&P 100. The HIP Index weights ExxonMobil closer to 1 percent of its fund because of poor scores on the company's implementation of sustainability fundamentals that can affect its profitability. For example, 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 more than 400 basis points, on average, in recent time periods, in both up and down markets," Herman explains (100 basis points is equivalent to 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 higher stock valuation gained through the implementation of HIP criteria should command considerable attention from CEOs and CFOs seeking to maintain their stock's price during this recession. It should also be electrifying to entrepreneurs looking to cash in on "the next big thing." Herman indicates that you make money going green while also outperforming your competition, especially if they use strategies that fail to satisfy 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 should be focused on if it seeks to build a sustainable business practice that also achieves superior stock price performance. These areas are: health, wealth, earth, equality and trust.
For example, one of HIP's criteria is to incorporate sustainability principals into an office building's operation. According to a study by Capital E Analysis, the financial benefits of a green building included savings in energy costs, operations, maintenance as well as improved employee health and overall productivity. The implications are that companies looking beyond the traditional, two-year return on investment criteria, by incorporating HIP-like analysis, are harvesting superior operating results. Likewise, this should translate into superior stock-valuation results.
Another example 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 a key group driving the implementation of sustainability.
The rationale behind the HIP criteria is based on research findings by Catalyst.org . The study indicated that companies with more women on the board of directors achieved a 53 percent higher ROI on sustainability measures compared to the returns achieved by companies with fewer women on the board. This probably stems from the fact that women represent more then 50 percent of the population, 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 increases the likelihood of that business aligning the company's practices with the adoption of sustainability.
Another telling data point is 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 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 make it clear that sustainability is emerging as a huge opportunity for entrepreneurs seeking to grow a business and then sell it for a premium to a larger company.
The evidence points to sustainability as a path for achieving superior stockholder valuations based on financial analysis, stock-price performance and the sale-valuations of green businesses. However, there are a couple of things to keep in mind:
- Equity investors should look to financial analysts and investment advisers such as R. Paul Herman and his HIP 100 IndexSM as a major new investment wave.
- There is a remarkable opportunity for entrepreneurs to build green businesses with a profitable exit strategy of selling out to a larger company.
Bill is President of NCCT , a consulting firm that helps companies grow green revenue. His newest book, The Secret Green Sauce , profiles best practices being used by successful green businesses. He has previously held roles as senior vice president of PG&E Energy Services, president of Cleantech America (a solar power plant development company) and COO of Texaco Ovonics Hydrogen Solutions (which launched the first hydrogen-fueled Prius).