Report Slams Eco-Ratings ‘Secret Sauce’

by | Feb 23, 2011

An evaluation of 21 sustainability ratings has found that most fall short on transparency and lack sufficient quality controls.

The research by think tank and consultancy SustainAbility also found that ratings systems are often too general in their stated goals and too complex in terms of their criteria and scoring.

“We also note inconsistency between some raters’ stated objectives of helping companies improve their performance and disclosure and their own lack of transparency and availability,” the report said.

SustainAbility said that too often, raters do not sufficiently explain their methodologies, treating those methods like a “secret sauce”.

“If raters truly want to help companies improve, they must provide clear blueprints for how to improve ratings performance (e.g. an “A” requires a company to do X, Y and Z),” the report added.

Even raters concerned about disclosing commercially sensitive information to competitors should offer signficiant disclosure to the companies they have rated, SustainAbility argued.

The report said that raters showing good practice on disclosure of methodology were CDP, Climate Counts, FTSE4Good, GS Sustain, Global 100 and the Access to Medicine Index.

SustainAbility argued that there is too little focus on quality control among the ratings. Many ratings systems rely on outside sources such as the media or non-profits. This system can’t survive as the users of ratings go more mainstream, Sustainability said. “For example, as major asset managers increasingly consider sustainability factors in their investment processes, they will look to ratings as ‘seals of approval’ on companies and will thus demand strong processes behind these seals.”

One example of a promising approach on quality is the Corporate Sustainability and Responsibility Research Voluntary Quality Standard, the report said.

Ratings systems overlapped significantly, the study said, and their objectives were often too general. Too many raters failed to explain why their rating system is distinct.

“We do not believe that the typical subject of ratings — large, multinational companies — need to be faced with multiple ratings to understand that improving performance and transparency is important,” the report said. “This may have been the case a decade ago, but today most companies appreciate this. Thus, ratings require greater purpose than the act of rating to increase transparency to justify themselves.”

The research found that some of the simplest ratings systems are also the best. More straightforward systems are more likely to encourage company participation, and more likely be used by consumers and investors.

Other findings:

  • Raters too often cite their web hits or media coverage to argue for their success, rather than explaining the direct impact they have on companies. Some raters showing good validation practices were CSRHub, FTSE4Good and Trucost.
  • Too many ratings focus on past or current performance. Ratings that will emerge as winners will focus not on greenhouse gas emissions, but on measuring revenue driven by climate-oriented products and services.
  • Raters must invest considerably more time directly engaging with the companies they rate. The majority of ratings today are based on arms’-length assessments, but getting closer to companies can better equip raters to verify publicly reported information and help companies to improve their performance.

The report evaluated companies on 13 criteria in four categories: governance and transparency, quality of inputs, research process, and outputs. Each participating rating completed a questionnaire and participated in a conference call with SustainAbility.

Two out of 23 companies invited to participate in Rate the Ratings declined the offer.

The 21 ratings systems assessed were:

— Access to Medicine Index

— ASSET4 (Thomson Reuters)

— Bloomberg ESG Disclosure Scores

— Carbon Disclosure Project

— Murky Waters: Corporate Reporting on Water Risk (Ceres)

— Climate Counts

— CR Magazine 100 Best Corporate Citizens

— CSRHub

— Dow Jones Sustainability Indexes

— EIRIS

— Ethisphere’s World’s Most Ethical Companies

— FTSE4Good Index Series

— The Global 100 Most Sustainable Corporations in the World (Global 100)

— GoodGuide

— GS SUSTAIN

— Maplecroft Climate Innovation Indexes (CIIs)

— Newsweek Green Rankings

— Oekom Corporate Ratings

— Sustainalytics

— Trucost Environmental Impact Assessment

— Vigeo

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