Rating the Ratings

My friends often ask me, what is a ‘good’ company to buy from or what is a ‘good’ company to work for? Depending on how they define ‘good’, I usually start with supply chain issues. However, it’s not just consumers and job seekers asking this question. Increasingly, investors, NGOs, community groups, and possibly even governments looking to attract FDI are asking this question. Where do they go for the answer? One place they look is to sustainability ratings.

This explains why we are beginning to see a proliferation of these type of ratings. Yesterday, the Corporate Responsibility Officer’s (CRO) magazine (previously, Business Ethics) released its 8th annual Best 100 Corporate Citizens list. A few weeks ago, Innovest published their list of the Global 100 Most Sustainable Corporations. Not to mention AccountAbility’s second annual ranking of Global 500 companies on how well they conform to socially responsible business practices. I’ve heard some in the industry criticize these ratings as being at best useless and at worst a marketing ploy by the research groups that put the information out there. Furthermore, activists, environmental groups and some conscious consumers may question how, for example, any oil companies would be able to make the lists. In any case, a brief comparison of the methodologies for three sustainability ratings is provided below:

CRO/KLD Research & Analytics – Best 100 Corporate Citizens
Top 5 companies:
1 Green Mountain Coffee Roasters Inc.
2 Advanced Micro Devices Inc. (AMD)
3 NIKE, Inc.
4 Motorola, Inc.
5 Intel Corp.
Universe: The list is drawn from approximately 1,100 publicly held U.S. companies in the Russell 1000, S&P 500 and Domini 400 indices.
Methodology: The research, conducted by KLD Research Analytics, looks at seven factors: community, corporate governance, diversity, employee relations, environment, human rights, product and total return on investment (averaged over three years).
www.thecro.com/?q=be_100best

FORTUNE/AccountAbility – The AccountAbility Rating
Top 5 companies:
1 Vodafone (Computers and electronics)
2 BP (Petroleum refining)
3 Royal Dutch Shell (Petroleum refining)
4 Électricité de France (Energy and utilities)
5 Suez (Energy and utilities)
Universe: Top 50 companies on the Fortune Global 500 and 14 other large companies in five industry sectors
Methodology: The rating measures the extent to which companies have built responsible practices into the way they do business and looks at how well they account for the impact of their actions on their stakeholders. Criteria include governance, strategy, performance management, stakeholder engagement, transparency and assurance (independent verification).
www.accountabilityrating.com

Corporate Knights/Innovest – Global 100 Most Sustainable Corporations
This list is not ranked but includes some of the top five companies in the other rankings, namely: AMD, Shell, HP, Intel, and Nike. Other companies in the list include Unilever, BT, Adidas, Coca Cola, and Google.
Universe: Publicly-traded, MSCI World-listed companies
Methodology: Assess environmental and social risks along with the companies’ managerial and financial capacity to manage that risk successfully and profitably into the future. Innovest looks at more than 120 performance factors in the categories of stakeholder capital, human capital, strategic governance, and environment. Each company is rated relative to its industry competitors.
www.global100.org

This is by no means a definitive list of sustainability ratings; there are also the FTSE4Good and the Dow Jones Sustainability indices, among others (although companies are not ranked), but the above three take a similar approach.

Although Innovest makes a good point about the limitations of ranking companies in absolute terms since different industries face different sustainability issues, I like KLD's methodology the best for three reasons: firstly, it includes an explicit financial metric (return on investment), therefore, a company that engages with stakeholders, gives a lot to charity and runs on wind power would not necessarily make the list if it wasn’t actually making money. Secondly, the scores are not absolute; rather, they are adjusted to the performance of the group based on how far away they are from the average (like being graded on a curve). Lastly, a company may be eliminated from the list if a stated concern is considered too egregious. So, a company that performs well in all areas except for one major incident such as a child labour scandal or a lawsuit, they wouldn’t make the list (which is why HP and Apple are conspicuously absent this year).

So back to my friends; they usually all have something negative to say about any ‘good’ company and I’m sure we can all think of a stain on the records of some of the companies listed above and different issues resonate more strongly for different people, so what’s an ethical girl or guy to do? The rating I’m most interested in watching is a grassroots, participatory approach to tracking the real time social performance of companies. Instead of a complex ratings methodology, the website allows a virtual community to determine the criteria to be evaluated, the weighting of these criteria, and the measurement of social and environmental impacts. People can rate stories of company malfeasance or out-performance by selecting how important the issue is to them on a positive or negative scale. Yes, there are limitations (e.g. it’s based on stories that appear in the media), but people trust it (AccountAbility predicted the emergence of such ‘informal information networks’ in its publication, “What Assures Consumers”) and if it grows, it could become very influential. Check it out: www.dotherightthing.com