I was reviewing the proprietary model used by Standard & Poors to
total market value of a corporation and found a curious omission.
As I understand it, total market value is determined by multiplying the price of a stock by the number of shares outstanding and total returns are calculated by adding income & price appreciation for a given period.
Total return for the S&P500 Index is calculated with an indexed dividend return added to the index price change for a given time period.
However, the S&P Index Committee, which is responsible for overall management of the S&P500 Index will remove a company from the S&P for "lack of representation".
Most companies listed by S&P do not have a formal environmental management system (EMS), and similarly most firms don't provide shareholders/investors with an environmental performance report (EPR).
The absence of a corporate EMS and EPR is a clear case of "lack of representation" which the S&P Index Committee has chosen to overlook.
Without a formal corporate EMS and an EPR, the S&P equity analysts are partially disclosing a stock's volatility, Beta rating, and depreciation value.
Also, without a formal corporate EPR a firm's income and price appreciation is being partially represented.
ISO14000 (the International Organization for Standardization's environmental management standard) could have a roll to fill the EMS void in the S&P500 Index review.
A formal EMS similar to ISO14000 would however only provide a partial accounting of a firms' performance, because most businesses don't reveal environmental compliance to the nation's environmental regulations.
In other words, most if not all of the firms covered by the S&P500 Index are operating with a "lack of representation" by not providing shareholders/investors with an EMS/EPR which incorporates corporate compliance criteria to national environmental laws.
In addition to this S&P oversight , a publicly traded company is required by the Securities Exchange Commission (SEC) to file a form 10K for disclosure for material environmental expenses.
Significant expenses associated with corporate environmental financial risk is thought to be reported in the 10K, but actual compliance performance is not accounted for in a reactive internal environmental audit system which doesn't have a formal EMS.
Most firms without an EMS conduct environmental audits in a reactive pattern after a site violation and not in a proactive manner to preempt liability exposure to toxic torts.
How can a firm operating without a formal EMS effectively identify and quantify material environmental expenses for the SEC form 10k if the company's chief financial officer is not conducting a comprehensive internal audit of corporate environmental impacts and aspects?
ISO14000 is one of several formal international environmental management standards offering corporations a roadmap for proactive environmental auditing.
BS7750 and EMAS are two other standards which have educated the investor market in Europe and Asia on corporate environmental performance aspects and impacts for over two years.
U.S. firms (ie.Monsanto, Nortel, Baxter, Polaroid, and 3M) looking to stay internationally competitive with a formal EMS and EPR are initiating a trend of corporate environmental disclosure for investors.
These firms are seeking to strengthen their index rating on the stock market by initiating a market strategy to incorporate a comprehensive green annual report whick includes an EPR.
Product demand is expected to similarly be strengthened with environmental performance reports and consumer confidence and market share is also projected to increase with a green image (label).
The accounting of environmental performance is currently changing both in accounting and insurance services.
The American Institute of Certified Public Accountants have proposed to the Financial Accounting Standards Board that all businesses have to accrue environmental clean-up liabilities.
Broad based corporate environmental impairment liability has been replaced with specific environmental aspects and impacts by insurance underwriters such as Kemper National, Hartford Steam Boiler Inspection and Insurance Corp, and Zurich-American Insurance Group.
Standard and Poors reported U.S. property/casualty insurers will face as much as $40 billion in environmental impairment liability claims and most of these claims are long tail toxic torts based on prior broad based policy underwriting practices.
Overall, there is a need for full environmental performance disclosure to investors to determine a publicly traded firms overall performance and the current SEC/S&P proprietary models and bylaws are only partially disclosing corporte worth in their indexing.
Firms certifying to a formal EMS and filing environmental performance reports are taking the initiative to increase their index rating with environmental stewardship and these initiators will chance the face of the stock market in a very short period of time.