Increasingly, sustainability advocates both inside and outside business are zeroing in on the world's financial markets as critical to progress. Their challenge: to persuade the investment community that environmental and financial performance are linked. The case is strong and getting stronger. But Wall Street is resisting.

Typically, members of the financial community dismiss environmental considerations as irrelevant ("a moral or ethical issue, not our department") or immaterial ("a business issue, yes - but a trivial one"). Either way, the environmental gets short shrift, and this in turn deprives corporate executives of the Mother of All Motivations for ramping up their company's environmental performance - the prospect of being embraced by the gods of Wall Street.

Evidence is building that the investment community's indifference to corporate environmental performance is misguided. For much of this decade, academics and consultants have been finding a positive link between eco- and financial performance. The Alliance for Environmental Innovation, a non-profit supporting eco-efficiency partnerships with business, reviewed these studies and found, according to Ralph Earle (who until recently was the organisation's executive director), that "out of 70 studies, not a single one found a negative correlation between superior environmental performance and financial performance." Moreover, reports Earle, "the studies collectively suggest that environmentally superior companies command a marketplace premium of 1150 to 250 basis points."

More evidence comes from environmental (and socially responsible) stock funds and stock indexes. Europe of late has seen the launching of a number of 'environmental value' funds that invest in companies deemed environmentally superior performers. Although these funds don't yet have a long track record, the early returns point to a positive link between environmental and financial performance. For instance, the Storebrand Scudder Environmental Value Fund reported a 24 percent return for its first year of operation, outperforming the Morgan Stanley Capital Index-World by 4 percent after management fees.

On the index side, The Domini Social Index, which filters companies based on their social and environmental responsibility (as distinguished from solely on environmental performance), has outperformed the S&P 500 on a total-return basis since its inception in 1990. And in the UK, the National Provident Institution (NPI) recently introduced a social index to track the performance of socially responsible companies in its home country. NPI's backtesting indicated that a similar index would have outperformed FTSE, the British equivalent of the S&P 500 for the 1990-1998 period.

Plop all this evidence together, and it would seem to add up to a mighty convincing case. But Wall Street refuses to be convinced.

One problem involves the studies' lack of rigor. "Money managers find the research woolly and wobbly," says Rachel Crossley, a senior associate with EA Capital, a New York City-based consultancy that supports green investment practices.

A second worry is investigator bias. Most of the research is conducted by people who badly want to find a link between environmental and financial performance. Which makes it hardly surprising when they do, but casts doubt on the reliability of their findings.

• A strong if inconclusive case is developing that superior environmental performance improves a company's financial performance.
• The investment community resists the argument, for reasons both logical and ideological.
• Sustainability supporters inside and outside business are working to overcome this resistance through an ad hoc campaign that includes recruiting the support of Wall Street's 'gatekeepers', increasing demand-side pressure, developing common analytical tools, and getting corporate eco-leaders to argue the case.

Yet another concern involves the so-called 'causation/correlation problem.' Even accepting that the studies to establish a link between a) environmental performance and b) financial performance, this does not provide that a) causes b). In fact, as Wall Street sceptics are quick to point out, it could be precisely the other way around, with superior financial performance freeing up extra resources for environmental management.

These concerns undeniably have merit. Still, there is that large and growing body of evidence pointing to - at the least - some sort of correspondence between environmental and financial performance, and - at the most - a direct causal connection. But the evidence still tends to be dismissed without a fair hearing.

The most plausible explanation for this behaviour is ideological closed-mindedness. "The investment community has, let's say, 57 variables which they apply to companies," says EA Capital's Rachel Crossley. "When we come along and tell them they should be considering the environment, they say: 'Oh, a 58th variable. So what!"

Matthew Kiernan, chairman and CEO of the Unionville, Ontario-based Innovest Group International, an investment advisory firm specialising in analytical tools for measuring the financial impacts of environmental performance, is more bluntly critical of Wall Street's disinclination to motivate. He tells the parable of "the two economists who are walking along Wall Street and see a $100 bill on the sidewalk. 'Look, $100!' says one. 'No, it can't be,' says the other. 'If it were, someone would already have picked it up.'" His point: the investment community turns a blind eye to the obvious benefits of superior environmental performance. "Wall Street," says Kiernan, "is the Flat Earth Society."

It will clearly take a broad, concerted effort to overcome the investment community's entrenched resistance to integrating environmental performance into their corporate analyses. Such a campaign is taking shape, albeit gradually and somewhat randomly. Interviews with finance/environment specialists suggest there are five main strategies in all.

This calls for more and better research, and continuing strong performance from environmental funds and indexes. It also requires, as Ralph Earle points out, more and more case studies establishing the bottom-line benefits of eco-efficiency.

Wall Street is in a sense a closed community: it only really respects, really listens to, its own. The vocal support of investment-community insides is needed to supply credibility, currently the missing link in the argument typing eco-leadership to financial performance.

To that end, Innovest has formed a strategic partnership with the prominent investment company Morgan, Stanley to fine-tune its EcoRisk analytical software. The company has also sought out and received support from prominent Wall Street personalities such as Judith Woodard, managing director of Bear, Stearns & Co., and Barton Biggs, chairman of Morgan Stanley Asset Management.

When the world market starts demanding environmentally superior performance, the investment community will take notice. That's why eco-labels are such an important part of the puzzle. Not only do they have the potential to build demand, but they also make it easier to define an environmentally superior company - they're the ones offering certified green products. And when the companies offering those green products start outperforming their competitors, the case linking eco- and environmental performance will ring out loud and clear.

It's hard to compare performance across companies when you don't know what you're measuring, or how. The investment community needs standardised, widely accepted yardsticks for measuring corporate environmental performance. This is currently an area of considerable attention in the sustainable-business community, but that's not enough. Actual standards that the financial community can buy into are required.

Corporate eco-leaders have the most to gain in establishing the connection between superior environmental and financial performance. So: get then to argue the case! In the Spring 1998 issue of Corporate Environmental Strategy, a management journal, Linda Descano of Salomon Smith Barney and Yale University's Bradford Gentry wrote, "Since the perceptions of the capital markets are shaped primarily by information provided by companies, the challenge for the corporate community is to communicate the immediate and long-term financial implications of their progressive environmental practices. Until these linkages are clear, 'beyond compliance' environmental performance will continue to be under-valued by the markets."

Clearly it will not be easy to shift the investment industry's impacted attitude toward the environment. To have a chance of succeeding, any attempts must proceed gently. It's rather like untangling a ball of yarn - you do that by pulling very delicately at the multiple points, until things start eventually to untangle. Similarly for the investment industry: change won't come easily, but if it comes at all, it will be through this sort of tactful, collaborative, multi-point campaign.