Despite the increasing participation in voluntary initiatives like the Carbon Disclosure Project and regulatory initiatives like the SEC’s Climate Change Disclosure guidelines, encouraging more companies to disclose sustainability-related information has been an uphill battle, especially among smaller and medium-sized companies. This study is doubly welcome in that regard because, consistent with underlying theories of voluntary information disclosure, the impact is substantially greater for smaller and medium size companies that have less coverage and visibility in the marketplace.

The study, by authors Paul Griffin of UC Davis and Yuan Sun of UC Berkeley, is an event study. Event studies are an indispensable tool in academic finance. A typical study is a statistical analysis of the change in a company’s stock price (and hence the value of the company) following a single event or type of event, such as the announcement of a merger or acquisition or a release of information. When the study results are statistically significant, it suggests that companies taking such actions are enhancing (or reducing) shareholder value.

The authors examined company news about greenhouse gas emissions released through the Corporate Social Responsibility Newswire (CSRWire) a leading provider of sustainability information from companies and organizations. The disclosures covered the ten-year period between 2000 and 2010; not surprisingly the bulk of the GHG news releases occurred in the more recent past (2007-10). 172 disclosures from 84 companies were able to be analyzed for stock price impact.

The results showed a small, but statistically significant increase in stock price for the companies between the day before and the day after their GHG-related information releases. The authors made the study more robust by also comparing the results against those for a matched set of similar companies over those same days. They found no evidence of an increase among those companies, strengthening the case that it was the GHG information release that was responsible for the stock price increase.

The results for smaller companies with less visibility and less available public information making GHG-related disclosures were more significant, literally and figuratively. Those companies outperformed matched peers in their industry by 2.3% in the days following their announcement (and the outperformance persisted over a 10-day period). This can be a helpful result in working with smaller companies where there may be a greater concern about the relative cost of providing sustainability information.

This is just a single study. But it does provide some statistical evidence that responding to investor demand for greater sustainability disclosure can benefit companies and their shareholders. We can hope that will encourage more companies to provide sustainability disclosures and more researchers to apply the tools of academic finance to this question.

Going Green: Market Reaction to CSR Newswire Releases is available for download from SSRN, the Social Science Research Network.

Energy efficiency improvement projects in existing buildings generally show very favorable return on investment, often with shorter payback periods and higher certainty than other uses of capital. But they aren’t happening in commercial buildings at anywhere near the pace these favorable financials would indicate.

One of the primary obstacles is the so-called split-incentive. The owner of the property has to make the investment, but the tenant gets the savings, because under many commercial leases, the tenants pay for the utilities.

In some cases, the owner can pass through the cost of capital improvements, but the amount that can be passed through to the tenants is typically based on amortizing the cost of the improvement over the useful life of the improvement. The useful life of such improvements (for example, a replacement boiler, new windows, upgraded light fixtures) is typically very long. Extending the payback period well beyond what it would be based on the energy savings is a significant disincentive to making the investments.

A solution takes shape – the “green lease”

A solution to the problem is conceptually quite simple – align the incentives. Here’s how it works:

• An independent engineer certifies that a specified energy efficiency improvement project will reduce utility consumption and provides an estimate of the yearly savings.
• The owner (lessor) finances and carries out the project.
• The tenant (lessee) passes the energy savings back to the owner (lessor) during the payback period, until the cost of the project is paid back. From that point forward, the tenant reaps 100% of the savings for the rest of the term of the lease.

Building science and energy efficiency engineering can now predict energy savings fairly reliably, but there are still uncertainties. Creating mutually-acceptable, legally binding language tying required payments from lessees to lessors based on those estimates required time and some compromises.

Three years after the National Resources Defense Council convened a forum in New York on this problem, the New York Mayor’s Office announced the signing of the first “green lease” on April 5th, 2011.

Here’s how the New York “energy aligned” model lease dealt with the uncertainties:

• The payments from the tenant to the landlord are based on the estimated savings, not measured savings.
  • This simplifies the language and reduces complexity, but it reduces the incentive to measure costs accurately and to follow operational procedures that may be required to get the full benefit of the energy reductions.
• The payback period is extended by having the tenant pay 80% of the estimated savings over 125% of the payback period
• Extending the payback period slows the return to the owner and slightly increases costs (because the cost of financing is not passed through).
• The tenant still pays 100% of the cost, but does see a cash flow benefit immediately (20% of the savings) rather than having to wait for payback to be completed. The tenant is also shielded from any impact if the actual savings are lower than expected, even temporarily.

Even with these compromises, the green lease is a powerful tool to increase the rate of energy efficiency improvements in existing commercial buildings. New York City has embraced it as an important tool in the city’s sustainability strategy. Others should follow.

Resources

• Model Energy Aligned Lease Language from PlaNYC, New York City’s long-term sustainability plan.
• Energy Efficient Lease Guidance – A comprehensive article providing principle-based guidance and example language. National Resources Defense Council, prepared by Sean Patrick Neill of Cycle-7 Consulting.

In fiscal 2010, this program provided companies $2.3 billion to support often hard-to-fund early stage research and development – evaluating the technical merit, feasibiltiy and commercial potential of innovative technology. Massachusetts companies are particularly successful – since 1982, Massachusetts has garnered 14% of all the funds awarded (over $4 billion), second only to California’s 21%.

The good news is not the reauthorization itself, as Congress usually does get around to reauthorizing programs eventually. The good news is in several changes to the program:

• six-year reauthorization – over its thirty year history, the SBIR program has regularly been subject to short-term (1 or 2 year) reauthorizations, often at the last hour. Ensuring that the program will be in place through 2017 allows companies and investors to focus on the task at hand.
• increased allocation – from 2.5% to 3.2% of agency budgets over six years – the authorizing legislation stipulates that the 14 federal agencies funding R&D allocate a guaranteed minimum of their external R&D budgets to small businesses through the SBIR program. By 2017, this could add over $600 million to the program each year.
• larger grants – the maximum size of individual project grants increases:
  • Phase I – from $100,000 to $150,000
  • Phase II – from $750,000 to $1,000,000
• funding for majority venture-owned companies – a 2002 interpretation of the statute, affirmed in court rulings in 2005, meant that many venture-funded companies were not eligible to receive funding through the SBIR program. This reauthorization fixes that problem, specifically authorizing federal agencies to provide a percentage of their funding to venture-funded firms as follows:
  • Health & Human Services (HHS), National Science Foundation (NSF) and Department of Energy (DoE) – up to 25% of SBIR funding
  • All other agencies – up to 15% of their SBIR funding

  This reduces a significant barrier to involving more companies and leveraging private funding to accelerate innovation and commercialization.

The SBIR web site is a useful and well designed source of information about the program. Each of the 11 federal agencies that participate in the SBIR program design their own programs and solicitations. Contacts for each agency are listed on this SBIR web page.

The SBIR reauthorization is included in HR 1540, National Defense Authorization Act for Fiscal Year 2012, which was sent to President Obama on December 21st. The President is expected to sign this legislation.

The intervening year has, if anything, highlighted the importance of the panel’s central message. These guidelines offer investors, investment managers and analysts a rare opportunity for new insights into the companies they follow, but they have to be prepared and willing to ask the right questions.

Selected takeaways from the panel:

• The guidelines are not “new” – they simply reflect a recognition that climate change may be a material issue and therefore should be evaluated and considered for appropriate disclosure.
• Companies are asked to consider:
  • legislative and regulatory risks, including international agreements
  • business risks as well as opportunities arising from climate change – increased/decreased demand for products, opportunities for new products
  • physical risks to operations and supply chains
  • reputational risk
• Climate changes risks and opportunities reach deeply into a company’s operations and supply chains and future profitability. Through and thoughtful disclosure is evidence of the depth of management’s understanding. Boilerplate disclosure should raise questions to management.
• Multiple public frameworks for disclosure exist and provide a wealth of information outside the SEC disclosure process. Investor disclosure should be evaluated with reference to company and industry information provided through these frameworks.
• Early results on disclosure are mixed – more companies are reporting, but the depth of information is limited, with many companies reporting only on legislative & regulatory risks
• Guidelines as well as examples of good disclosure are available – use them as leverage with peer and competitor companies..
• SEC enforcement is all domains is limited and has never been the primary driver of increased disclosure and transparency. Investor and analyst demand is the most effective driver. This is even more true as the agency is fully occupied with Dodd-Frank implementation and a target of political pressure in the current environment.
• More investment firms are incorporating ESG information and disclosure into their investment process.
• If you don’t ask, they won’t tell – Far too few analysts and investment managers ask companies these questions.

• Resources on Climate Change Disclosure referenced during the panel

My thanks go to the New York Society of Security Analysts and the Robert Zicklin Center for Corporate Integrity for co-sponsoring the session, to the Zicklin Center for hosting us and to our outstanding panelists Adam Kanzer of Domini Social Investments, Jim Coburn from CERES and Karoline Barwinski of Clearbridge Advisors.

Getting mainstream investment professionals – let alone investors and the public – to take advantage of this rare opportunity to extract a new source of insights into corporate prospects has not been easy. But a recent article that exposes contradictions between what some companies are saying to Congress and what they are saying to investors may help change that.

Larry Margasek of the Associated Press reported in an article published on November 25th that several companies, and industry associations that represent them, are telling Congress that proposed air and water pollution reduction regulations will cause great economic hardship and harm. Yet in their SEC disclosure filings to investors, these same companies “consistently said the impact of environmental proposals is unknown or would not cause serious financial harm to a firm’s finances”.

This is a profoundly disturbing finding that should cause investment professionals – as well as Congress, regulators and the public – to demand an honest and straightforward explanation from these companies.

Investment professionals, at least, should also ask probing questions of other companies in the industries involved. They have much to gain, because whatever they learn will be new and can be compared across companies – two of the most important criteria for information that provides a competitive advantage.

• Companies give GOP, regulators, different messages – as published by the Associated Press
• Also published in the Boston Globe, November 26th (may require subscription)

Our December, 2010 panel at the Boston Security Analysts Society reviewed the guidelines and discussed opportunities presented for analysts and investment managers. The interest the panel generated suggested a wider audience for this topic. The upcoming annual filing season for many companies – the second since disclosure guidelines took effect – is an appropriate time to revisit the topic.

Please join us in New York on November 29th to learn what the disclosure requirements are (and aren’t), what good disclosure practices are and what you can learn from companies who practice them, what you can expect to see and what opportunities these guidelines offer for analysts and asset managers to shape more informative disclosure going forward.

This session is co-sponsored by the New York Society of Security Analysts and the Robert Zicklin Center for Corporate Integrity.

Panelists:

• Adam Kanzer, JD – Managing Director and General Counsel of Domini Social Investments and Vice President and Chief Legal Officer of the Domini Funds.
• Jim Coburn, JD – Senior Manager, Investment Programs, Ceres.
• Karoline Barwinski – Research Associate, Assistant Vice President with the ESG Investment Program at ClearBridge Advisors.

Moderator: Michael Greis – Principal, Riverbend Advisors

The session will from 6:00 pm to 8:00 pm in Room 14-220 at the Zicklin Center at 55 Lexington Ave (enter on 24th or 25th street). Details and complimentary registration available here.

Our December, 2010 panel at the Boston Security Analysts Society reviewed the guidelines and discussed opportunities presented for analysts and investment managers. The interest the panel generated suggested a wider audience for this topic. The upcoming annual filing season for many companies – the second since disclosure guidelines took effect – is an appropriate time to revisit the topic.

Please join us in New York on November 29th to learn what the disclosure requirements are (and aren’t), what good disclosure practices are and what you can learn from companies who practice them, what you can expect to see and what opportunities these guidelines offer for analysts and asset managers to shape more informative disclosure going forward.

This session is co-sponsored by the New York Society of Security Analysts and the Robert Zicklin Center for Corporate Integrity.

Panelists:

• Adam Kanzer, JD – Managing Director and General Counsel of Domini Social Investments and Vice President and Chief Legal Officer of the Domini Funds.
• Jim Coburn, JD – Senior Manager, Investment Programs, Ceres.
• Karoline Barwinski – Research Associate, Assistant Vice President with the ESG Investment Program at ClearBridge Advisors.

Moderator: Michael Greis – Principal, Riverbend Advisors

The session will from 6:00 pm to 8:00 pm in Room 14-220 at the Zicklin Center at 55 Lexington Ave (enter on 24th or 25th street). Details and complimentary registration available here.

Anthony Brooks, veteran NPR reporter and co-host of WBUR’s Radio Boston, opened the session by leading a discussion with Massachusetts Department of Energy Resources Commissioner Mark Sylvia and Green Needham Chair Michael Greis on the role of the state, communities and households in creating our energy and economic future.

That future is outlined in the Massachusetts 2020 Clean Energy and Climate Plan, with its goals of reducing energy costs, creating energy independence, accelerating the development of a clean energy economy for Massachusetts and addressing global climate change.

The conversation covered how we get there. The Legislature and the Administration have together implemented legislation – the Green Communities Act, the Global Warming Solutions Act, the Green Jobs act and the Regional Greenhouse Gas Initiative – that provide tools to achieve those goals. The conversation ranged over the how those tools are being used by state agencies, communities, businesses and households across Massachusetts as well as some of the challenges we face going forward.

With the stage having been set, the evening was turned over to the audience as they moved to break-out sessions prepared and guided by local college and high school students. In those sessions, community members and leaders generated and discussed ideas on what Needham could be in 2020 and how we might get there. The break-out sessions covered: Water, Food, Transportation, Energy Sources & Choices, Development: the Built Environment, Energy Efficiency & Conservation and Green Economy: Opportunities & Skills.

Following the break-out sessions, the audience re-assembled and Anthony Brooks took the student leaders and the audience through the ideas generated by the groups.

Find out more about the session:

• Needham Patch October 27th article – Summit Raises Ideas for Greening Needham
• My Priority for Needham 2020 is – Statements from Summit Participants
• Summit Resource Page

With the backdrop of that morning’s announcement that Massachusetts had taken the top spot from California in 2011 ACEEE state rankings for energy efficiency, our extended discussion was an opportunity to talk about the interplay of state policies and community-level action in creating the clean energy economy.

• Listen to the story from the Radio Boston web site.

• How to invest in line with your values without giving up performance
• How your investments can lead to improvements in corporate behavior

Not a sales presentation, this session is a seminar and discussion among three professionals who have helped shape the field of responsible investing over the last 30 – 40 years:

• Amy Domini, Chief Executive Officer and Founder at Domini Social Investments LLC and the creator of the one of the first sustainable mutual fund companies as well as the first SRI stock index
• Robert Zevin, Chairman, Chief Investment Officer, & Portfolio Manager, Zevin Asset Management, ears ago and led the campaign for South African divestment in the 1980′s
• Timothy Smith, Senior Vice President and Director of ESG Shareowner Engagement, Walden Asset Management, a leading voice in Shareholder Activism and former Executive Director of the Interfaith Centre on Corporate Responsibility.

This session is presented by BASIC, the Boston Area Sustainable Investment Consortium, a network of Boston-area sustainable investment professionals.

While the subject matter is targeted at individuals new to sustainable investing and may be very familiar to sustainable investing professionals, this is also a rare opportunity to enjoy hearing these pioneers together in a local and open setting.