Integrated Environmental and Financial Performance Metrics for Investment Analysis and Portfolio Management

Abstract

This paper introduces a new measure, based on a study by Trucost and Dr Robert Repetto, combining external environmental costs with established measures of economic value added, and demonstrates how this measure can be incorporated into financial analysis. We propose that external environmental costs are relevant to all investors: universal investors are concerned about the scale of external costs whether or not regulations to internalise them are likely; mainstream investors need to understand external costs as an indication of future regulatory compliance costs; and SRI investors need to evaluate companies on both financial and social performance. The paper illustrates our new measure with data from US electric utilities and illustrates how the environmental exposures of different fund managers and portfolios can be compared. With such measures fund managers can understand and control portfolio‐wide environmental risks, demonstrate their environmental credentials quantitatively and objectively and compete for the increasing number of investment mandates that have an environmental component.