Taking Heat for Environmental PracticesAlex Halperin
What do Victoria's Secret, paint manufacturers, and gold miners have in common? They're among companies or industries which have been targeted by environmental activists or lawsuits for what their accusers feel are unsound environmental practices.
How should investors react? It's not such a simple equation. Green technology certainly has an appeal as its quality and effectiveness in many fields is likely to increase in coming years. Of course, many outfits touted as environmentally friendly may not pay off for years, if ever.
Meanwhile, accusations of pollution are hardly equivalent to a signal for investors to sell a stock. Andrew Brengle, an analyst with KLD, a research firm that focuses on "socially responsible investing" says individual incidents and even fines "rarely do much to impede a company's financial performance." However, he notes, especially problematic cases can weigh on a company's prospects. They can divert money and attention from pursuing growth opportunities.
In many instances companies have "been dealing with those issues for years, if not decades," says Al Tortorella, managing director of crisis management at Ogilvy Public Relations Worldwide "It actually becomes part of the culture." The most dire problems for companies are the ones that are inseparable from the outfit's primary business, not the ones limited to a single facility.
Also in the companies' favor is the fact that the legal processes involved can drag on for years before the company has to come up with large payouts for settlements or judgments. Investors, whether they define themselves as socially conscious or otherwise, would be well advised to keep that in mind.
Last week, Five for the Money looked at few companies providing earth-friendly products or technologies (see BW Online, 4/13/06, "Greener Pastures in Tech"). This week, we'll take quite a different tack, identifying outfits that are on the activists' -- and tort lawyers' -- environmental hit lists. (See slide show.)
1. Victoria's Secret
In 2004 the environmental group Forest Ethics cast a spotlight on a few major catalog distributors that did not, the group felt, use enough recycled paper in their mailings. Eventually they focused on Limited Brands' (LTD) Victoria's Secret; which mails out about 395 million lingerie catalogs annually. They're "one of the biggest destroyers," says Tom O'Leary, a spokesman for Forest Ethics and "they're a sexy target, admittedly." According to the group, much of the paper used by the Victoria's Secret catalog is from Canadian Forests.
For it to halt its campaign against the lingerie outfit -- which includes rallies and the Web site victoriasdirtysecret.net -- Forest Ethics demands that Victoria's Secret increase the recycled content of its catalogs and make sure its suppliers meet standards set by watchdog NGO Forest Stewardship Council. Forest Ethics has also called for Victoria's Secret to end its relationship with supplier International Paper (IP).
Limited Brands spokesman Anthony Hebron declined to comment on where the paper for its catalogs originates or whether activism could cause the company to rethink its contract with International Paper. However, he says that since 2004, Victoria's Secret has increased the post-consumer recycled paper content of its clearance catalogs -- about 12% of the total number of catalogs -- to 80% from 20%. "We're going to increase it in the rest of the books," Hebron says. "We're going to do the right thing but we're not going to be pinned down by a date."
Investors seem to have taken the controversy in stride, as Limited's stock is up about 30% since late October.
2. Gasoline refiners and marketers
Methyl Tertiary-Butyl Ether (MTBE), a clear liquid added to gasoline to improve its burn, is turning into a real headache for some energy companies, even as many have performed exceptionally well in recent years. When leaked, MTBE contaminates groundwater, leaving it undrinkable. It may be tied to cancer. Already banned in some states, the chemical is creating a legal feeding frenzy, though many oil companies have said they plan to stop using it.
In one such lawsuit, the state of New Hampshire is suing more than thirty defendants including oil giants like ExxonMobil (XOM) and Chevron (CVX). Maureen Smith, the state's senior assistant attorney general, couldn't name a figure for what "finding and fixing" all of the state's water would cost the defendants if they are forced to pay. The next step in the process will be a decision as to whether the case appears in federal or state court. "We will litigate the case no matter where it ends up," Smith says.
Again, MTBE appears to be a drop in the oil bucket. Through Apr. 13 the S&P Oil & Gas Refining & Marketing index was up 19.8% year to date.
3. Paint companies
In February, a Rhode Island jury decided that Sherwin Williams (SHW), Millenium Holdings, and NL Industries (NL) were liable for the public nuisance of lead paint in Rhode Island, though they sold the paint decades ago. A jury found that the companies must pay to remove it from hundreds of thousands of structures, a bill that could reach into the billions of dollars.
The effect of such a shocking verdict on Sherwin's stock has so far been surprisingly mild. On the day of the verdict, shares in Sherwin lost 18% to close at $43.20 but in the two months since, the stock has recuperated most of its losses and was trading at over $50 in mid-April. How did that happen? In March the company said it expected to surpass expectations for the first quarter and it has said it will continue to vigorously fight the verdict.
Emphasizing the strength in the paint store segment, a March report by Morgan Stanley (which pursues business relationships with companies that it covers) gave Sherwin an overweight rating compared with an on-line rating for the sector.
Chemicals outfit NL has also seen a partial rebound after a slump following the February verdict, including an 11% gain on Apr. 19, to $11.14 in afternoon trading. The shares are still well below their 52-week high of $19.93 reached in September.
4. Mining companies
While commodity prices continue to soar, mining outfits face some difficulties nonetheless. In recent months, two American mining companies have been under fire in Indonesia. A subsidiary of Newport Mining (NEM), a gold mining outfit based in Denver agreed to pay $30 million in February to fund environmental monitoring and community development near a mine that has ceased operations.
The payment dismisses a $135 million lawsuit that had been filed against the company by the government of Indonesia. Criminal charges related to arsenic and mercury pollution are pending against the subsidiary's president director and the subsidiary. Newmont spokeswoman Maureen Upton says Newmont is fighting the charges.
And Freeport-McMoran Copper and Gold (FCX) has had difficulties in Indonesia as well. In March, a landslide near one of its mines there killed three contract workers.
With the bull market in commodities, mining companies certainly have an appeal to investors these days. But both Freeport and Newmont receive mixed marks from analysts. Morningstar rates both companies a sell, Freeport because it has been "accused of poor environmental management" as well as protests at the same enormous mine, Grasberg. Of Newmont, Morningstar says lawsuits have "not caused a huge dent in Newmont's balance sheet so far." Nonetheless, the research group sees the stock as overpriced. It traded at around $57 on Apr. 19.
Merrill Lynch, which holds 1% or more of each company, is more bullish on both. The firm rates Freeport a buy and Newmont neutral. Regarding Freeport, a Merrill report says that a recent meeting with Indonesian government representatives relaxed their worries about the company's continuing operations in that country.
5. Blue chips with legacy issues
When it comes to the an outfit's environmental record "most companies present gray pictures not black and white" says Brengle of KLD. Nowhere is this more apparent than in some of the most established U.S. companies which are banking on green futures but also have had environmental problems in the past.
Two examples are General Electric (GE) and DuPont (DD). Both outfits appear on KLD's index for companies committed to reducing the effects of climate change and each is an enormous company with a stock price that depends on many factors. However, each does confront ongoing environmental complaints. GE is a market leader in environmentally sound technologies like wind power and the company also has agreed to reimburse the Environmental Protection Agency for dredging PCBs that it left in the Hudson River decades ago.
In December DuPont agreed to pay $16.5 million related to reporting violations of perfluorooctanoic acid emissions, a chemical used in making certain non-stick pans. The Sierra Club has also targeted the group for dioxin emissions from a plant in DeLisle, Miss.
While the companies mentioned above may ultimately come through their environmental controversies with little financial damage, the distractions and bad publicity may still take a toll on their reputations. It may cost you to go green, but it could cost you more if the world thinks you're brown.