Quest for a good Environmental Sustainability Scorecard Part 4

By: Dr. Aruna Ram

My previous articles in this series reviewed the first four issues in current environmental rating schemes, certain insights and a new methodology, Corporate Environmental Performance Rating (CEPR) scheme that offers potential solutions to address these issues. This article will detail four more issues, insights and potential solutions for the same.

Credibility exists in the form of external verification of reports, data collected, product, material, other certifications and standards. EU and Japan are way ahead in external verifications of data reported.  However, very few companies in the US, especially in the retail industry, are externally verified other than a few for GHG and energy data alone. An example of lack of credibility is that most companies analyzed have conducted environmental audits for their supplier factories but have not disclosed information about their brand owned factories. Walmart dictates suppliers to reveal if they have been audited environmentally but provides no information about its own environmental audit as a company by a 3rd party. External verification is necessary both to give credibility to the data reported by companies and to prevent green washing. However, there is no evidence if Newsweek promotes this, while ULE 880 allots points only for GHG verification. CEPR addresses the above issue and promotes credibility by allocating a substantial weight to external verification of the report as well as the complete range of indicators, so companies are encouraged to verify them externally.

In Newsweek’s scheme, a company’s total green score is derived from its environmental impact score (45%), green policies score (45%), and reputation score (10%). However, it is highly recommended not to aggregate scores like the Newsweek’s. This is because companies that wish to improve their score might easily choose to focus their sustainability efforts more on marketing and policy adoption instead of actually reducing their environmental impact, which is what matters the most. However, companies need to understand that without a sound management, it is difficult to manage environmental initiatives that help lower the environmental impact load, which in turn minimizes their liabilities and controversies. For instance, product controversies and Superfund sites can be avoided right at the source, by complying with REACH and reducing hazardous waste like what DELL does. CEPR offers a potential solution by using the Environmental Impact Score as the key grade for comparison with Management and other relevant scores as a reference lookups, with the insight that if companies work to reduce their environmental load and a sound management, their liability score should improve as well. Also, Newsweek talks about product impact in Green policies, while this should rightfully be included in the Environmental Impact score as in CEPR.

None of the current schemes expose risks and liabilities to the public clearly.  They either act only  as investor information guide or give more weight to overall reputation such as the Newsweek’s, than  sharing leading environmental risks/liabilities such as environmental controversies through products or Superfund /hazardous waste sites. Currently, ULE 880 has this section empty for stakeholder feedback as Environmental Legacies, yet to be filled in. CEPR addresses this issue with a dedicated variable for Compliance, Litigations and Controversies and captures leading risks and liabilities of a company, which supercedes the environmental score in case of a disaster, such as the BP oil spill. This is to make companies aware that their risks and liabilities are being measured, so they can work on what drives this score. Also, manufacturing-related environmental issues will be much less significant for companies that do not engage in manufacturing. These in turn depend if subcontracted or not. If so, then supplier screening for environmental criteria takes priority in ratings. Again, having only a firm take back policy in place to earn 2 points in ULE880 does not capture the environmental damage caused by those disposed, especially that of non biodegradable waste or hazardous waste. CEPR promotes this by capturing the issue at its roots by encouraging companies to reduce such waste in the first place.

It is also observed that companies make more efforts and lock better targets in countries where public demand is more for environmental efforts or if it is foreseen to have tighter regulations such as the EU. Walmart, in its international operations has made much more efforts and locked better targets worldwide than domestic , while IKEA has been consistent in all its operations, targets and efforts worldwide.  Consistency in operations worldwide makes its reputation consistent worldwide as well. Walmart has better energy usage initiatives in the UK and Canada. While Wal-Mart Canada is aiming for an 85% recycling rate, Wal-Mart UK (ASDA) has already removed shopping bags from near the counter to discourage customers to use them. Wal-Mart Mexico and China are way ahead in water conservation than the US, where no specific targets have been set. Wal-Mart, UK has reduced packaging by 25%, while the goal for US is a low 5% by 2013. Inconsistency, as in the case of Walmart, gives rise to questions why the better international efforts/targets cannot be made in the US too. Hence, CEPR allocates weights to encourage operations in both domestic and overseas and not just the latter alone.

The next article will detail remaining issues and a snapshot look at the differences between CEPR, Newsweek’s and ULE 880.

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The rest of Dr. Ram’s Environmental Sustainability Scorecard series can be found here.

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