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Evaluation of Envestra's ethical and financial performance

Evaluation of Envestra's ethical and financial performance
Evaluation of Envestra's ethical and financial performance

CONTENTS LIST

EXECUTIVE SUMMARY2 1.INTRODUCTION3

1.1Purpose3

1.2Definitions3

1.3Outline3

2.BACKGROUND4

2.1History of ethical investment4

2.2Overview of ethical issue4

2.3Ethical investment is profitable5

2.4Background of Envestra5

3.EVALUATION OF ETHICAL ASPECTS6

3.1Environmental concerns6

3.2Actions in relation to social issues7

4.EVALUATION OF BUSINESS ASPECTS7

4.1Evaluation of profitability7

4.2Other indicators9

5.CONCLUSION10

5.1Findings10

5.2Recommendation11

REFERENCES12

EXECUTIVE SUMMARY

This report was prepared for Mr Frank to provide suggestions for an ethical investment.It presents background information about ethical investment and Envestra before assessing the company.

All the information and data in this report are cited from authoritative media, such as government and other websites,educational journals and text books. All official documents referenced from Envestra were made against related laws.

There are several important findings:firstly,the product of Envestra is natural gas,which is more environmentally friendly than oil and coal;secondly, Envestra has been supporting many social activities;thirdly,Envestra's net profit in2010was slightly less than in2009,but their debt decreased,and their consumers have been continuously rising.

It is argued that Envestra seems to be a good investment because of those above mentioned findings.However,it is also suggested that Mr Frank consider other listed companies in order to spread risks and construct a good portfolio.

1.INTRODUCTION

1.1Purpose

This report is written for our client,Mr.Frank,to respond to his requesting for evaluating a company with a good Corporate Social Responsibility(CSR). Envestra has been chosen from his list of companies to investigate as a worthwhile investment.So this report will evaluate whether this company's behaviour is ethical,and whether their financial performance is profitable enough to invest.

1.2Definitions

Ethical investment,which is also called Socially Responsible Investment (SRI),is a new but burgeoning business.According to Hofmann,Meier-Pesti and Kirchler(2007,p.5),there is no consensus on the definition of ethical investment.This report agrees with the definition from Lewis et al.(cited in Hofmann2007,p.5)who defined ethical investment as intentionally avoiding any investment in business entities with negative business behaviour such as polluting natural environment and using child labourers.

1.3Outline

Evaluations of the company will be provided after providing some background information to ethical investment and this company.In the evaluation of ethical issues,the evaluation will mainly focus on two ethical issues,namely,environmental concerns and actions in relation to social issues.

Then the evaluation of Envestra's business will state the company's profitability in terms of revenue,loss and profit in2010and some other positive business issues.Finally,a recommendation will be proposed as to whether Mr. Frank should invest in Envestra.

2.BACKGROUND

2.1History of ethical investment

Modern ethical investment was originally applied by some religious groups who invested their money in an organisation without any"sin stocks"such as gambling,even if there was a great profit behind such"sin stocks"(Hofmann, Meier-Pesti&Kirchler2007,p.5;Hofmann,Penz&Kirchler2009,p.103). Recently,in Australia,more and more private and institutional investors have been tending to put ethical investment into their portfolios(Hofmann,Penz& Kirchler2009,p.103;Michelson et al.2004,p.1).

2.2Overview of ethical issues

When distinguishing whether an investment is ethical or not,investors mainly use their own moral values to do it.Five main issues are considered by investors:(1)environmental concerns,(2)actions in relation to social issues, (3)respect for the rights of their employees,(4)ethical corporate behaviour and(5)respect for human rights.This report will primarily focus on two of them, namely,(1)environmental concerns and(2)actions in relation to social issues,

because of the limited length of the report.

2.3Ethical investment is profitable

In addition to ethical issues,the financial performance of the company needs to be concerned as well.Ethical investment and financial investment seem mutually exclusive,investors used to think more ethical concerns leading to less profit(Hofmann,Meier-Pesti&Kirchler2007,p.5).A study conducted by Bauer,Otten and Rad(2006,p.46)shows that there is no evidence showing much of difference of investment returns between ethical investment and financial investment.Thus,it is doubtless that ethical investment can"make investors both virtuous and prosperous"(Richardson and Cragg2010,p.21)

2.4Background of Envestra

Before evaluating whether Envestra has performed both ethically and profitably,their background information will be stated first.Envestra was established in August1997and is one of the largest natural gas distributors in Australia,owning"approximately20,000km of natural gas distribution networks and1,000km of transmission pipelines"(Australian Ethical Investment n.d.)and serving more than1million customers with natural gas across the country except Western Australia(Mignone2009,p.1).

3.EVALUATION OF ETHICAL ASPECTS

Envestra is a new natural gas company which was created in1997,with a large market share in Victoria,South Australia,Queensland,New South Wales and the Northern Territory.Overall,their CSR record is good.Only few negative ethical issues could be found on-line during the research.

3.1Environmental concerns

As a natural gas company,Envestra has a natural advantage in environmental concerns.It is shown that the emission of greenhouse gas from burning natural gas is around30percent less than from burning coal,and over 10percent less than from burning oil to gain the same amount of heat (DEWRAGO2007,p.25).However,according to Envestra's own internal files (2007a,p.1),one flaw of their environmentally friendly performance is their old and broken low pressure network which has caused leaking methane.For example,in Victoria,the leaking methane was equivalent to approximately 330,000tonnes per year of carbon dioxide(Envestra2007a,p.3).In order to solve the problem,a long term plan was made by Envestra(2007a,p.1)and monitored by government.The plan claimed that"all of the low pressure system"would be replaced by around2020.

3.2Actions in relation to social issues

On the other hand,Envestra has really been taking positive actions in relation to social issues.These actions may include donating goods and

materials to disaster areas and supporting social activities.There is not a shred of evidence that Envestra donated anything to anyone,but they have been supporting many social activities.For example,as the major sponsor of the Plumbing Industry Awards,they take credit from Master Plumbers' Association of Queensland,because without their support those awards may not be held every year(2009,p.9);this company is also one of the main Sponsors of Red Gum,which is a non-for-profit organization aiming to save a piece of endangered plant named as red gum(Trees For Life n.d.).Their name also can be seen on"supporters and sponsors"list of South Australia Youth Arts Board(Machin2006,p.131).

In short,based on all the above mentioned evidence,it can be ensured that behaviour of Envestra is almost ethical.

4.EVALUATION OF BUSINESS ASPECTS

In this part,Envestra's profitability will be estimated on the basis of their financial report and other business issues in relation to sustanability.

4.1Evaluation of profitability

As shown in chart1below,the net profit after tax in2010was slightly less than in2009.In the chart,the positive information is that the non-existence of the amortisation and loan note interest means that all of those costs were paid in the2009,and that the costs of other borrowings being fewer than in2009 show some decrease in debt in2010,and that the less depreciation is in accordance with their less continuing operations revenue;in other words,less

property used to make money led to less depreciation occurring.In contrast with some costs decreasing,the costs of development have increased,which may suggest that this young company is growing.So those increasing costs are positive as well.Another increasing costs in2010is the network operating costs.According to chart2below,which shows the annual goals for replacing Envestra's low pressure networks,the length of networks renewed in2010is 20kilometres longer than the length in2009;thus the increasing number of costs of networks are also reasonable.However,in2010,their revenue decreased by7.5million Australian dollars compared with in2009.The official explanation is that the3%decrease was caused by"the relatively warm weather that occurred through the winter months"(Envestra2010,p.6).

Chart1:Envestra's Income Statement of2010&2009

Adapted form:Envestra2010,Envestra annual report,Envestra,viewed06January2010,

Chart2:Annual Targets of Mains Renewal

Adapted from:Envestra2007a,Envestra Mains Replacement Plan,Essential Services Commision, viewed06January2010,

4.2Other indicators

There are two other issues showing that Envestra has the ability to improve their profitability.First,chart3indicates that the number of their consumers was steadily on the increase,even in2010as their revenue decreased.Second,it was reported on October26th,2010(The Sydney Morning Herald,paras.1-5)that Envestra offered$108.6million to Country Energy,a NSW state-owned corporation,for Gas Networks which was a subsidiary company owned by Country Energy,including"1,160kilometres of gas distribution pipelines and65kilometres of transmission pipelines in southern NSW".Then the company secretary,Des Petherick(2010,para.1) representing the company,confirmed that the acquisition was completed on October29th.That deal might strengthen the company's power and expand their regional market share.

Chart3:The Annual Quantity of New Consumers

Adapted from:Envestra2010,Envestra annual report,Envestra,viewed06January2010,

5.CONCLUSION

5.1Findings

As a result of the evaluation,Envestra seems to be performing well in terms of CSR and profitability.Firstly,Envestra is a company that exploits and distributes natural gas.Natural gas is one kind of more environmentally friendly fuel than oil or coal.Although this company is faced with the issue of methane leak due to their broken low pressure network,they have made a plan to solve the problem,and the increasing number of their network operating costs in2010has proved that they have been spending money on the issue.Secondly,they have been supporting a number of social activities run by corporations or non-profit organisations.Thirdly,in2010,overall,their financial performance was good,although the revenue was slightly less than in 2009.For instance,their debt decreased;amortisation of capital raising Loan

note interest was paid off;their clients have been constantly growing;they purchased Gas Networks,which enlarged their network and could benefit their profitability in the future.In conclusion,as a new company which was established in1997,they have done their best to show their social responsibility and make a profit.

5.2Recommendation

It is recommended that Mr Frank could invest his money in Envestra because of their good CSR record and profitability.However,there is only one company estimated in this report so that there is not sufficient information showing which company listed in his companies'list has been performing the best in both ethical and business aspects.In addition,because of the unforeseen future and changeable circumstances,it can not be ensured that a company is able to perform well ethically and financially in the long term. Therefore,it is suggested that he do more research about other listed companies,and then compare their evaluations to choose a couple of companies before making his final decision.

REFERENCES

Australian Ethical Investment n.d.,Australian Ethical Investment,viewed06 January2010,.

Bauer,R,Otten,R&Rad,AT2006,"Ethical investing in Australia:Is there a financial penalty?",Pacific-Basin Finance Journal,vol.14,no.1,pp.33-48, viewed09January2010,Elsevier database.

Department of the Environment and Water Resources Australia Greenhouse Office2007,Global warming-cool it,A home guide to reducing energy

costs and greenhouse gases,DEWRAGO,viewed08January2010,

.

DEWRAGO2007-see Department of the Environment and Water Resources Australia Greenhouse Office2007.

Envestra2007a,Envestra Mains Replacement Plan,Essential Services Commision,viewed06January2010,

. Envestra2007b,"Sustainability",Envestra annual report,Envestra,pp.12-14, viewed09January2010,

.

Envestra2010,Envestra annual report,Envestra,viewed06January2010, .

Hofmann,E,Meier-Pesti,K.&Kirchler,E,2007,"The decision process for ethical investment",Journal of Financial Services Marketing,vol.12,no.1, pp.4–16.

Hofmann,E,Penz,E,&Kirchler,E,2009,"The‘Whys’and‘Hows’of ethical investment:Understanding an early-stage market through an explorative approach",Journal of Financial Services Marketing,vol.14,no.2,pp.

102–117.

Lewis,A,Webley,P,Winnett,A&Mackenzie,C1998,"Morals and markets: Some theoretical and policy implications of ethical investing",in

Taylor-Goodby,P(eds)Choice and Public Policy:The Limits of Welfare

Markets,Macmillan,Basingstoke.

Machin,J2006,2005-2006Annual report,Carclew Youth Arts,viewed09 January2010,

Master plumbers'association of queensland2009,"Nominations are open for the Plumbing Industry Awards",Master Plumber,September,viewed09 January2010,

Michelson,G,Wailes,NN,Laan,SV,&Frost,G2004,"Ethical Investment Processes and Outcomes",Journal of Business Ethics,vol.52,pp.1–10.

Mignone,R2009,Envestra Ltd comments on MCE’s Consultation-Harmonisation of Energy Technical and Safety Regulation,Ministerial

Council on Energy,viewed09January2010,

.

Petherick,D2010,Investing in energy infrastructure,Australia Securities Exchange,viewed07January2010,

.

Richardson,R&Cragg,W2010,"Being Virtuous and Prosperous:SRI’s Conflicting Goals",Journal of Business,vol.92,pp.21–39.

The Sydney Morning Herald2010,"Envestra buys Gas Networks",The Sydney Morning Herald,26October,viewed07January2010,

.

Trees For Life n.d.,Red Gum Sponsors,Trees For Life,viewed09January 2010,.

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