intelligent measurement

Measuring the “Soft Issues” for Investors

March 4, 2006 at 5:26 pm Leave a comment

 One company that is a good example of “intelligent measurement” is Innovest Strategic Value Advisors, Inc.  an investment research and advisory firm (disclosure: there are no links between the authors of this blog and Innovest). This company specializes in analyzing “non traditional” drivers of risk and shareholder value, including companies’ performance on environmental, social and strategic governance issues.

Innovest’s research is focused on those factors which contribute most heavily to financial performance. Environmental and social performance measures are used as leading indicators for management quality and long-term financial performance, not as commentaries on the intrinsic ethical worth of the companies. At the heart of Innovest’s analytical model is the attempt to balance the level of environmentally and socially driven investment risk with the companies’ managerial and financial capacity to manage that risk successfully and profitably into the future.

Environmental assessment criteria:
In total, the Innovest EcoValue‘21™ model synthesizes over 60 data points and performance metrics, grouped together under six key value drivers – Historical contingent liabilities, Financial Risk assessment, Operating risk exposure, Sustainability risk, Strategic management capability and Sustainable profit opportunities.

Social assessment criteria:
Over 50 individual performance indicators are addressed in Innovest’s IVA™ rating model. The principal value drivers are Sustainable Governance, Stakeholder management, Human Capital management, Products and Services, and behaviour in relation to oppressive regimes or exploitative labour markets in emerging markets.

The measurement process is complex, intensive and time consuming. Once the interview/data gathering process is completed, each company is rated relative to its industry competitors. Companies are rated against the Innovest performance criteria, and given a weighted score, as well as a letter grade (AAA, BB etc.). Each of the factors has an industry-specific weighting, based in part on a regression-based factor attribution analysis examining recent (5 year) stock market performance.

This approach is intelligent measurement at its finest.  The methodology is rigorous, and the outputs have enormous strategic value to investors, and management of any capital intensive company trying to understand the correlation between investment in traditionally regarded “soft” management issues and shareholder value.

Which why Innovest commands a high price for its reports and is generally regarded as the leader in its field.

Richard

Entry filed under: Evaluation tools (surveys, interviews..), General, PR evaluation.