Sunday, 9 October 2011

Sustainability Rating &Business

There are a huge number of sustainability ratings for businesses, meaning that it can be hard to know which are most reliable.There are so many business sustainability ratings that it can be difficult to know how reliable they are. Awareness of the social and environmental impact of business as a whole is one thing, but how can we tell how well a particular company is doing, and where it stands compared to its peers?

Enter the "sustainability rating", a simple measure which – at least in principle – serves as an at-a-glance indicator of how sustainable a company really is. It's an appealing concept: distil the complexity of many interdependent factors down into a single score that anyone can understand. The last few years has seen the emergence of a large number of ratings organizations, each claiming to be the definitive authority on identifying the corporate good guys.Unsurprisingly, the reality doesn't live up to the hype.

Last year Sustainability surveyed this burgeoning field as part of the multiphase Rate the Raters project. We identified over 100 raters who – in some shape or form – claim to offer the last word on corporate sustainability performance. The number alone should give pause for thought; are 100 'definitive' views even possible, let alone necessary? To be sure, some raters concentrate on specific issues, sectors or regions, but around two thirds of those we surveyed take a global, cross-industry perspective.

Beyond the headline numbers, our survey revealed a variety of areas for concern. For example, there is a tendency for companies who respond to a rater's request for information to be ranked more highly than those that don't, irrespective of their actual performance. This and other findings made us dive deeper into how ratings work, for which we selected 21 ratings from our original survey. The results of this analysis are published as phase three of Rate the Raters.
First the good news: we came across examples of raters getting things right. For instance, some are joining forces to standardize information they request from the companies they are rating, which may go some way to reducing 'survey fatigue'.But we found plenty of areas in need of attention, and while our report highlights many examples of good practice, no one rater stands above the rest across the full range of evaluation criteria.
Most raters advocate and reward transparency among the companies they are rating, yet fail to apply the same thinking to their own operation.

Many rating methodologies are 'black boxes' in the sense that it is impossible to see how or why a company ends up with the score it does.Furthermore, there is enormous complexity among ratings in terms of the criteria, questions and scoring schemes they employ. To be sure, issues such as climate change are incredibly complex, but the evaluation of company performance in tackling them doesn't have to be.

Lack of openness and increasing complexity are perhaps understandable in a highly competitive field, but for raters they are counterproductive. Our analysis shows that ratings are far more likely to be perceived as valuable if their target audience understands them. Understanding engenders trust, which in turn fosters adoption. Raters may not want to give away the recipe for their 'secret sauce', but what if the price of secrecy amounts to no one wanting to use their rating?

Most ratings focus exclusively on scoring past and current performance. Surely if we truly wish to understand how well companies are faring on the journey to sustainability, we should be looking at innovative ways to score how they are positioned for delivering sustainable value in the future? For example, it might make sense to look at what proportion of a company's revenue or R&D investment involves products and services with a positive impact (eg telepresence solutions which reduce the need for carbon-intensive business travel).

As we enter 2011, corporate sustainability ratings are being taken ever-more seriously: companies are starting to link executive compensation to their standings in ratings; and major asset managers are switching to the sustainability agenda. Increased attention will undoubtedly bring greater scrutiny, and raters would be wise to think long and hard about how to deliver what's really needed. 

At SustainAbility we believe the raters who emerge from the pack will be those who actively strive to embrace openness and simplicity, and whose methodologies look beyond the here and now to reveal the winning companies of the future.

Michael Sadowski  Director of Client Services at SustainAbility
Ref: Sustainable Business blog

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