This has been a big week for corporate sustainability rankings, with the Dow Jones Sustainability Index (DJSI) and the Carbon Disclosure Project releasing news reports. Vote Solar and the Solar Power Electric Industries Association showcased the Top 20 corporate users of solar power in the US. A book called Good Company just landed on my desk, along with its own 2012 Good Company Index. And October will bring us the World Series, Halloween and, of course, the annual Newsweek “green” rankings of big public companies.
All of which raises a couple of questions.
Do these ratings and rankings matter?
More important: Should they?
Undeniably, they do matter, mostly but not entirely because of the prestige they confer upon companies that do well. Press releases are flying! “Carbon Disclosure Project Salutes Con Edison” (Really?) “PepsiCo Earns Sustainability Accolades.” “GM Named Top Solar User in the U.S. Auto Sector.” This is all well and good. Some middle-management executive had to fill out all those CDP forms or buy those solar panels, and who could be more deserving of an accolade or a salute?
Seriously, though, companies that do well–like Microsoft, which improved its performance on the Carbon Disclosure Index and was added to the global Dow Jones Sustainability Index -- used these rewards to track their own progress. Dan Bross, senior director of corporate responsibility at Microsoft, told me by email:
Rankings help us benchmark our work and help stakeholders evaluate companies on a range of criteria. CDP and DJSI are, in my mind, two of the most credible as their rankings are data driven and analysis extremely thorough.
More than PR cred and good feelings are at stake. Real money follows the Dow Jones Sustainability Index. About $6 billion in assets are invested in a variety of financial products -- including mutual funds and ETFs from such money managers as Barclay’s Capital and Credit Suisse — that track the DJSI. So, when Microsoft is added to the index and IBM is booted out (for reasons that aren’t explained in either case), some money managers will be selling IBM and buying MSFT. Will this move the stocks? No, because $6 billion spread across several hundred companies isn’t meaningful. But clearly it’s better to be in the DJSI than to be out.
Other additions to the DJSI World Index include Target, Hewlett Packard, Canadian National Railway Co. and -- to my surprise -- Enbridge Inc., a Canadian oil & gas company that is best known in the US because it “spilled 20,000 barrels of oil into Michigan’s Kalamazoo River in the most costly onshore spill in U.S. history.” That’s not an NGO talking; that’s the Wall Street Journal. The 2010 Kalamazoo oil spill “was the result of corrosion throughout many vital safety aspects of the Enbridge organization,” said Robert Sumwalt, a member of the National Transportation Safety Board, which investigated the accident. Enbridge had another nasty, but smaller spill, from a pipeline in Wisconsin this past summer.
Next page: How does an oil company get on a sustainability index?
We must think more broadly
We must think more broadly than the "best in class" approach of the DJSI. Sustainability ratings, rankings, and labels should be targeted at informing a particular type of actor to make a particular type of decision. The DJSI's purpose is to inform investors about which companies should be considered sustainable. And because oil can never be a sustainable fuel source, it should not be on a list with the word "sustainability" in the name.
While it is certainly important to recognize leaders even in lagging industries -- and they should be rewarded by investors -- overall, we as investors, consumers, governments, and civil society should start realizing that to try to choose which is the best oil company is to rearrange chairs on a sinking ship. Let us do all we can to shine a positive light on truly responsible companies.
Couldn't agree more. These
Couldn't agree more. These rankings are often based on either quantity or quality, but rarely both.
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Marc, I think that you let
Marc,
I think that you let these Ratings Agencies off lightly, all these Agencies rely upon self reported data, a company's membership of one of the 41 Protocols, Codes of Practice and similar self reporting and non verified sources, (PRI,etc) Their methodologies are "proprietory" and not published, each has a differing definition of ESG, SRI and CSR. All of them only rate listed companies and have no ability to quantitively rate non listed's.
Prowess is not measured in performance and accuracy but in the number of awards received, haven't we seen this before?, yes we have, in the Sub-Prime Ratings debacle, the "trust me,I am a big name" syndrome is in full swing in this totally unregulated market. When will investors discover that real environmental and Social risk is easily established and easily quantitively rated but then the circularity of this pseudo metrics Industry based upon absolutely no real metrics would be denied the vast fees which shareholders pay for, clearly the "Kings New clothes" of investment.
in defince of the best
in defince of the best strategy
Marc, Rankings actually
Marc,
Rankings actually matter, whether you like it or not. In my opinion there are three clear reasons for this. For the general public it is difficult to assess the sustainability performance of leading companies without looking at rankings. Furthermore, companies want to be rewarded for good sustainability performance - and look for ways to promote themselves. And most importantly, indexes serve a specific purpose in the investment industry. Most of the indexes and rankings you mention are built and paid for by investors. It is therefore important to assess them in that specific context.
Investors currently have access to a huge amount of data and information on the sustainability performance of companies. But how do you transform that data into usable information? This is where sustainability indexes come in. They are often the easiest and most cost effective way to integrate sustainability information into investments. Investors have a mix of motives for integrating sustainability information in the investment process. The three most important motives are to create a positive social and/or environmental impact through investing, to manage the investors’ reputation, and to benefit from a better invested portfolio by the broader identification of opportunities and risks. Currently none of the indexes you mention are explicitly geared to achieving any of these motives. The solution lies in creating advanced methodologies that measure performance related to achieving specifically formulated objectives. There are plenty of inspiring examples available in the market - just have a look! However, do not expect this from a one-size-fits-all sustainability index.
To your other points, the foundation on which the financial sector is built, is called trust. In this case the trust is based on the certainty that the research organization has come to a fair, objective and high quality assessment of the company. Transparency on the methodology and assessments is a good starting point. However compliance with the highest standards in corporate governance, and an active policy to avoid any potential conflicts of interest are just as crucial. For research companies it is not easy to recruit and retain talents with a deep knowledge on the intersection of sustainability and investments. This means that larger organizations with a strong base of experienced analysts that invest in thier development have a huge advantage.
Rather than look back and criticize what’s done by the usual suspects, I would be interested in having a constructive dialogue on how to further make this important innovation happen.
Kind regards,
Diederik Timmer
In defence of the
In defence of the 'best-in-class' strategy, see:
Best-in-class - a strategy ahead of its time
http://www.sri-connect.com/index.php?option=com_content&view=article&id=...
Diversity =>
Diversity => sustainability
Marc,
As your final comment acknowledges, there's much to be down about and much work to be done.
However, there are a few things to be positive about and one of these is the diversity of strategies to be found within SRI (Sustainable & Responsible Investment).
* There are 'best-in-class' relative strategies - represented both by indices such as DJSI and also active fundamental funds.
* There are absolute strategies such as thematic funds - which position themselves against environmental fundamentals
* There are exclusionary / inclusionary / activist & engagement approaches.
(See 21 SRI strategies: http://www.sri-connect.com/index.php?option=com_content&view=article&id=...)
The strength in this diversity is that it enables investors with all degrees of risk & return expectation to find a sustainable investment strategy that suits them.
As above, much remains to be achieved - but we have a lot of tools to achieve it. None of these tools are perfect - but we're making progress.
See also:
* SRI Ratings - a debt model in an equity world - http://www.sri-connect.com/index.php?option=com_content&view=article&id=...
* Nothing compares to you - http://www.sri-connect.com/index.php?option=com_content&view=article&id=...