Ratings and rankings: How competition promotes corporate sustainability

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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.

But taking an objective look at your own company can be difficult. Complacency and “groupthink” can obscure emerging challenges and unproductive workplace practices. Because of this, sometimes you need to ask for help. For example, at BrownFlynn we evaluate the landscape of sustainability ratings and rankings to assist companies with the selection and survey process. The best ratings and rankings assessments compel management to demonstrate the issues that are important to their business -- and to explain why they are important -- through a more forward-looking strategic lens. We help our clients apply a similar rigor to their reporting process. Integrated reporting, either in general or specifically using the Global Reporting Initiative, complements the data management and focused materiality assessment demanded of companies by the more credible rankings and ratings.

Lockheed-Martin, a perennial leader in sustainability rankings, attests to the introspection and beneficial process that these questionnaires entail. “Sustainability-related rankings and indices offer value particularly for strengthening internal data collection processes,” says Leo Mackay, Lockheed Martin vice president of ethics and sustainability. “In some cases, misalignment between reporting and stakeholder expectations causes us to analyze the way we collect, manage and share data, and that often yields a better business practice. We consider it smart progress whenever we improve the measurement of what matters.”

At BrownFlynn, we see the benefits accrue to companies that leverage the rankings and ratings process to continuously improve business performance and to engage employees in the competitive spirit. Ingersoll Rand demonstrates this. “At Ingersoll Rand, we believe that integrating sustainability across all parts of our business enables us to achieve profitable growth by meeting the future needs or our customers, while simultaneously delivering efficiency and lowering risks,” says W. Scott Tew, executive director of the Center for Energy and Efficiency at Ingersoll Rand. “We do not look at our recent success in achieving improved rankings as the end-goal. Rather, we view the various rankings as a useful benchmark for companies like us to target areas where we need continued improvement.”

Tew adds, “As the bar for superior performance continues to rise, they (rankings) are useful in keeping management attention focused on where they rank among peers. For us, it is not about the volume of rankings where we appear, but the quality, consistency and lessons learned we garner over the long-term.”

To summarize, the ratings and rankings trend has attracted new players to corporate responsibility. What many companies started as a way to improve investor relations and edge out the opposition has morphed into something bigger. When approached correctly, sustainability rankings applications allow companies to engage in serious reflection about how their business operations impact internal and external stakeholders. By completing these assessments and applications, companies are able to identify performance gaps and improve their performance and level of disclosure. That means better information for all stakeholders.

The bottom line: In this competition, everyone wins.