By: Dr. Aruna Ram
Everyone knows we need to strive toward environmental sustainability but how can we encourage companies to strive for the same? This is the first article in a series to review of currently existing environmental performance rating/measuring methodologies, drawbacks and potential solutions. Most current rating schemes warn investors of laggards in the industry instead of evaluating the environmental performance and improving the intrinsic ethical worth of a company on grounds of value based sustainability and environmental quality.
Currently, only 2 methodologies exist for rating corporate environmental performance, both of which are generalized, incomplete and lack clear directions for companies to improve their performance and hence improve ratings. These include:
Other existing popular rating schemes in the US are all proprietary, common ones include:
- Fortune’s Leaders and Laggards – Focuses on investor’s choice of stocks and performance assessed based on financial ends alone.
- Trillium Asset/ Franklin Research and Development Corporation – Has a simple rating system to warn investors of leaders and laggards in the industry.
- Risk Metrics (Investor Research Responsibility Center)
- Eco value 21 rating scheme by Innovest, a private investment management firm which makes detailed quantitative and qualitative analysis to advice investors of leader and laggards in an industry. The model has 60 indicator variables and uses factor attribute analysis for modeling regression. Methodology is not transparent to the public nor does it act as a whistleblower for environmental issues to companies or other stakeholders.
- Dow Jones sustainability Index – Is based on only 4 simple indicators such as land use, water use, GHG, other resource consumption, narrow range of indicators.
- ISO 14000 – Only four variables were broadly designed to represent environmental performance. Weaknesses of the standard include lack of specific performance indicators and common metrics for tracking and comparing environmental performance.
- KLD Analytics – Green rankings published by Newsweek is based on a proprietary, partially transparent methodology and acts mostly as an investor information guide. This firm has been acquired by Risk Metrics. g)
- ULE 880 – A joint venture between UL Environment and GreenBiz, is currently underway for creating sustainability standards. What is measured can be managed and thus, lack of good performance measurement systems has led to a need for explicit environmental performance metrics in order to provide stakeholders with more reliable, consistent, and accurate information and thus a quest for a complete, credible and comparable (3Cs) environmental scorecard.
A scorecard that not only measures but promotes corporate environmental performance, informs the public clearly of how green companies are with a transparent methodology and justification with criteria, data / units specified for clearer reporting, acts as mode for sharing best practices, informs investors and insurance companies of risks/ liabilities, helps screen suppliers environmentally, to name a few reasons.The next article of this series will constitute of issues and drawbacks of the abovesaid rating schemes in detail.
The rest of Dr. Ram’s Environmental Sustainability Scorecard series can be found here.