The proliferation of sustainability rating and ranking schemes over the last decade has impacted how global companies approach sustainability — generating both competition for recognition and scrutiny of their value and credibility (not to mention a lot of work for corporate EHS, sustainability and communications staff!).
Now that the dust settled for the 2011 Dow Jones Sustainability Index (DJSI), Carbon Disclosure Project (CDP) and Newsweek Green Rankings, three of the higher profile ranking schemes, it is a good time to reflect on their role in influencing corporate strategy.
Last month, we conducted a survey of 70 Fortune 500 companies to better understand how sustainability rating and ranking schemes affect sustainability strategy development and communications. The survey showed some interesting results regarding perceptions of the transparency and accuracy of these schemes.
For example, on a four-point scale from “not accurate” (1) to “very accurate” (4), only 25% of respondents gave the Newsweek Green Rankings a score of 3 or higher. Approximately 50% gave the DJSI a score of 3 or higher. Using a similar scale to assess the transparency of the rating process from “not transparent” (1) to “very transparent” (4), 25% gave Newsweek a score of 3 or higher and 38% gave DJSI a score of 3 or higher.
These results reflect some of the weaknesses and limitations in current rating and ranking schemes:
- Business Models – Outsourcing, accounting for joint venture operations, and the extent of vertical integration are just a few examples of how companies in the same sector can be fundamentally different in terms of their environmental footprint.
- Scope – Some rating schemes only consider the environmental programs and performance, while others address a broader range of sustainability issues (safety, community, labor, corporate governance, etc.); DJSI, Newsweek and CDP all have different scopes.
- Sector Variations – While most schemes have sector-specific lists, some of the sectors are very broadly defined, placing very different companies in the same sector.
- Methodology Continuity over Time – Changing methodologies can result in companies shifting positions (as with 2011 Newsweek Green Rankings).
- Performance vs. Disclosure – Some of the raters and rankers give substantial credit for disclosing information, but disclosing information does not necessarily equal good performance.
- Transparency – Finally, the methodology used to develop the resulting rating or ranking is often not disclosed in great detail, leading one to wonder just how credible the methodology is.
While this lack of transparency and questionable accuracy hurts credibility in the eyes of many EHS and sustainability professionals, the impact the rankings have on corporate reputations cannot be dismissed. The important thing is to use the ranking questions/topics as a strategic tool, not as the driver of your strategy. For example, by engaging directly with the analysts, understanding their methodology, and answering questions as completely as possible, a company can make a real difference in improving scores.
At the same time, a company can have a great score and still be leaving important risks and opportunities on the table. For instance, none of the schemes are particularly good at measuring how well your product development process is at leveraging sustainability drivers to create innovative products and services that can differentiate you in the marketplace and lead to real top line growth. Similarly, none of the rating schemes is very good at measuring how much low-hanging eco-efficiency fruit is still on the vine (or maybe even waiting for you to pick up on the ground!). Another example is supply chain partnerships—the raters and rankers might be interested in learning about your supply chain initiatives, but they can’t credibly assess the level of risk or opportunity that is out there.
The pursuit of a higher score can also open you up to greater risk. A common approach for improving scores may involve addressing low-scoring sustainability management areas which may not be the most material issues to a company. Putting resources into managing these issues can take away from managing more material aspects of your sustainability program.
So, by all means, do the common sense, cost-effective things that need to be done to improve your score. However, do not let rating and ranking schemes be the primary driver of your sustainability strategy and program. If you are like most companies, your sustainability strategy will need to address a combination of things, including: (1) effective governance processes that proactively manage risk and prioritize the issues most material to your company, (2) innovative products and services, (3) eco-efficient, safe and socially responsible operations, (4) creative supply chain management partnerships that enable all of the above, and (5) programs to engage and communicate with your stakeholders. The rating and ranking game is only a small piece of the puzzle.
James Margolis is one of ERM’s senior environmental, health, safety and sustainability management consulting practitioners. He has 27 years of professional experience, the last 20 focused on helping multinational companies obtain business value through improved EHS&S management.
Susan Lorenz is a sustainability and climate change consultant at Environmental Resources Management (ERM, www.ERM.com). Susan supports clients in all stages of sustainability program implementation from defining sustainability metrics to developing a public report. ERM is a leading global provider of environmental, health, safety, risk, and social consulting services with 140 offices in 40 countries.