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What Investors Need to Know About Sustainability Rankings

By 3p Contributor

By Nancy Himmelfarb

Two sustainability rankings posted 2017 results in June: the 2017 Sustainability Leaders Survey and the Reputation Quotient on corporate social responsibility. Are these and other sustainability rankings meaningful to you as an investor? Certainly for Corporate Knights’ Global 100 ranking, the answer should be “yes.”

Earlier this year, Forbes writer Jeff Kauflin wrote, “If you had invested $100 in Global 100 companies in 2005, it would have been worth $232 at the of 2016. If you did the same for the ACWI, you’d have $208. In other words, the Global 100’s cumulative return is 24 percentage points higher than the ACWI benchmark.”

Whether you consider environmental, social and governance (ESG) criteria when making investments, you invest only in socially responsible companies, or you do not pay much attention to ESG criteria, it helps to understand where sustainability rankings fit in – separate from ESG funds and indices such as the Dow Jones Sustainability Indices.

Many rankings focus on ESG criteria or “sustainability” (broadly defined to include environmental sustainability, social responsibility, ethics, etc.) Some so-called sustainability rankings are issue-specific, while others cover multiple specific issues and key performance indicators (KPIs) on each. Some rely on publicly available data, while others use surveys to collect information. There is no consensus among the raters on what constitutes a good company.

By understanding the scope and methodology of certain key sustainability rankings, you can monitor those that mean the most to you and the companies that you follow. Are you interested in monitoring ESG or sustainability performance primarily to mitigate portfolio risks related to climate change; as a way to avoid companies with unethical conduct; or as an opportunity to support companies that could outperform their peers by integrating sustainability in their operations? Follow those that meet your objectives.

Click here to view a high-level summary of current details on several key sustainability rankings (starting with the two recently published rankings).

Raters’ use of different methodologies make it difficult to compare company scores across multiple rankings. A company might score very high on one ranking and low (or not at all) on another, and its ranking might fluctuate dramatically year-by-year under any single ranking. Part of the challenge is that individual raters periodically change their methodologies to reflect new risk calculations, disclosure practices, etc. For example, Corporate Knights added two new metrics to the Global 100 ranking methodology for 2017: the supplier score and clean air productivity score. The changes likely contributed to the increased turnover rate for 2017 results – from 25 percent in 2016 to 34 percent in 2017. This volatility in ratings outcomes, coupled with the myriad of different indicators, poses big challenges for investors. Notably, analysis in the current issue of The CPA Journal came to the same conclusion based on a review of rankings from three agencies.

Nevertheless, it is worthwhile for you to pay attention to key ranking results. Focus on the rankings that matter the most to you and conduct additional sustainability due diligence, using the rankings primarily as a way to engage with companies on their performance and plans for improvement. For instance, you could ask companies these questions:

  • Ranking: Why is your company listed/not listed on a specific sustainability ranking? Why do some peer companies rank higher?

  • Materiality: Has your company conducted a materiality assessment of the economic, environmental and social/ethical impacts of the business? If not, why not?

  • Management approach: What is your company’s vision, strategy and key priorities related to managing material impacts of the business? What are short and long-term goals? What procedures ensure accountability and transparency on the company’s performance?

Company reporting helps too. Organizations such as SASB, GRI and IIRC have developed reporting frameworks that are designed to elicit material sustainability information from companies – the information that is particularly useful to you as an investor. Though formal sustainability reporting is far from universal among U.S. companies of any size or type, reports and other disclosures, together with sustainability rankings, are important tools for due diligence and company comparisons.
Nancy Himmelfarb is Principal of NJH Sustainability Consulting. Based in Chicago, Himmelfarb helps companies create and leverage sustainable business strategies based on her unique combination of business, legal and sustainability expertise.
Image credit: Flickr / chedder

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