Ratings and rankings: How competition promotes corporate sustainability

Competition breeds progress. Innovative products, remarkable technologies and consumer convenience are just a few examples of how competition improves our lives on a daily basis. Now, competition is changing the way that companies approach corporate sustainability.

Sustainability ratings and rankings offer a new landscape for viewing how the world’s premier companies compare. But deciphering the metrics and methodologies of different raters is challenging. Fortunately, the real value of ratings isn’t in the numbers, it’s in the fact that a simple benchmarking exercise can translate into substantial organizational change.

The field of ratings and rankings has grown significantly in the last decade. According to research by SustainAbility, the number of indices jumped from 21 ratings in 2000 to 108 in 2010. That’s more than a five-fold increase. Why the sudden explosion of “green” leadership tables and indices? The short answer is stakeholder pressure. Socially responsible investing has prompted many investors to look beyond balance sheets and earnings reports.

Additionally, the average consumer is shopping smarter and caring more about the practices and impacts of their preferred brands. Companies want to garner high rankings and win broad stakeholder approval, so they engage in new efforts to explain their practices. Beating out competitors is a key motivating factor. But do ratings and rankings provide an accurate depiction of robust sustainability performance?

In theory, ratings indices offer simplicity; they convert complex quantitative and qualitative data into a comparative and understandable value assessment. In reality, the large quantity of rankings and different evaluative criteria obscures which ones offer a credible assessment of sustainability and resonate with a desired audience. Finding which ratings are out there is easy compared to figuring out which indices to trust. Executive suites typically can rattle off perennial favorites, such as the ROBECO Dow Jones Sustainability Indices, FTSE4Good Indices, CRO Top 100, CDP and Newsweek’s Green Rankings. Unfortunately, the field grows murky after the top tier. Some rankings are biased; others evaluate only a narrow field of environmental, social and governance data. Critically, many rankings and ratings are snapshots of past performance. This confusion has spawned efforts to create standards for sustainability ratings. Being able to evaluate the raters is essential, and transparency from the rating organization is the only way to tell if its methodology credibly addresses material issues.

Ultimately, neither prestige nor methodology dictates the value of a ratings system. The true benefits evolve from the application process. Checking a box and hoping for the best just won’t cut it. Companies striving to make the top grade typically need to take a deeper look at their operations, nurture innovation and demand continuous improvement for the benefit of all stakeholders.

Next page: Continuous improvement