Target Rock Advisors, LLC today released the results of an analysis suggesting that the value of good sustainability policies and practices could be worth between $20-25 billion to utility investors. This first-of-a-kind estimate was based on a comparative analysis of the total returns over ten years for the 49 U.S.-domiciled utilities included in Target Rock’s 2012 sustainability rankings and indexes, previously released on February 14, 2012.
“Earlier this year, we demonstrated that as a group the stocks of utilities that scored highly in Target Rock’s sustainability rankings outperformed companies with lower sustainability performance over the ten years ended December 31, 2011,” stated Richard Rudden, chief executive at Target Rock. “Now, we have been able to place an estimate around the potential value that improved sustainability practices might bring to utility equities, and it is not insignificant. Our analysis makes another compelling case for sustainable and socially responsible investing in the utility sector.”
The $20-25 billion estimate reflects the incremental market value realized by the Target Rock High Sustainability Index relative to lower-performing utilities, plus the opportunity cost associated with being less sustainable for the Medium and Low Sustainability Indexes over the ten-year period 12/31/01-12/31/11. That represents approximately 10% of beginning market capitalization or roughly 1% per year on average.
While the precision of this estimate is necessarily limited by the universal complexity of sustainability assessment, it does provide an informed effort to place direction and boundaries around the potential industry-wide shareholder value of sustainability as measured by market capitalization metrics.
This analysis indicates that utilities’ sustainability efforts contributed positively to long-term total returns, even if relatively modestly. It is important to keep in mind that this analysis includes a period of time, particularly the earlier years, when only a handful of the most progressive utilities had sustainability plans in place. The impact of sustainability practices on shareholder returns could be more substantial over the next decade now that more utilities are taking the issues seriously.
The results of Target Rock’s analysis are contained in a Research Note titled “The Value of Sustainability: At Least $20-25 Billion for Utility Investors” posted on the company’s website, www.targetrockadvisors.com/research-reports/.