Grading Sustainability How Do We Know which Companies Meet Our Standards?

Which company is better for the environment, PepsiCo, Coca Cola, or Hewlett Packard? It would be nice to be able to rank companies, to know exactly which are good stewards of the environment and have beneficial social policies. Sustainability rankings, pioneered by the Dow Jones Sustainability Index and including the Newsweek Green Rankings, the Global 100 List, the Carbon Disclosure Project, and some 150 others, attempt to do just that.

Yet critics believe that there are too many companies and the standards behind them are often mysterious. “There need to be fewer rankings,” says Mindy Lubber, President and CEO of Ceres, a sustainability advocacy organization. And the fact that oil companies and other environmentally harmful sectors appear on these lists should give many pause.

Sustainability rankings affect companies’ reputations and even their stock prices. “Measuring the sustainability of the largest global companies has created a vibrant competition among companies for inclusion,” says Guido Giese, Head of Indexes for SAM, the investment boutique that produces the Dow Jones Sustainability Index. As Allen White, vice president and senior fellow at the Tellus Institute, explains it, “ratings are potentially powerful instruments for driving markets that earnestly practice sustainability services, products and statistics.”

And the social investment market is huge, according to White, about $3 trillion in the U.S. and $15 trillion worldwide. Reputations matter.

Who Decides?

Yet critics say that such rankings, as currently compiled, are questionable. There are “too many ratings,” says Lubber. “Some aren’t transparent, some are not comprehendible.” Says White: “For 95% of raters, it’s very difficult to understand how they have developed their ratings system.”

Even within the same sustainability index, the companies and their rankings can change from year to year. And the discrepancies between indexes are even harder to explain. “I could pull up five companies from the top 20 from Newsweek Green Rankings that are at the same time in the bottom 20 in three others,” says Lubber. Even oil company Halliburton is in the top 5% on some indexes and in the bottom 10% on others.

Aman Singh, editorial director of CSRwire (csrwire.com) wonders why IBM “doesn’t really make it onto the Dow Jones Index,” even though they’ve been working on sustainability “for longer than other companies.” (IBM does appear at number one among U.S. companies on Newsweek’s 2011 index.)

Still, companies often attempt to “game the system,” presenting themselves selectively for preferred indexes, a form of “greenwashing.” Says Lubber, “companies are waving the flag, greenest of the green, A+ on recycling, but have not integrated sustainability planning into the board, compensation, how they treat workers.”

In Search of Standards

The Global Institute for Sustainability Ratings (GISR) is an attempt to add standardization and transparency. “In today’s world, we need convergence around a set of norms that define what excellence means,” says White, one of the architects behind GISR.

Ceres and the Tellus Institute, the organizations behind GISR, will not actually be ranking companies, but will make their system available to ratings agencies.

The idea is to provide a tool to make rankings more trustworthy. “We’re an open book,” says White, “you can see: Here’s a set of principles, methods, to rate companies credibly.” Currently beta testing, GISR expects to begin broader use starting in late 2013.

GISR attempts to finesse another key criticism of sustainability indexes: that they include, for instance, oil companies such as Shell and Exxon Mobil whose core business would seem the antithesis of environmental stewardship. This is because many indexes use “apples to apples” comparisons of similar companies

The question is whether it’s best to rate similar companies or to look only at overall impact. Explains White, “Exxon Mobil is a leader in health and safety—on the other hand it is emitting vast amounts of carbon.” While an absolute comparison might be compelling, doing so would penalize companies working in high-impact industries, such as mining, that nevertheless make great efforts to minimize damage. To circumvent that problem, White expects GISR to “navigate a kind of middle ground,” giving some points for overall sustainability and some for “best-in-class.”

Such are the trade-offs involved in ranking sustainability. In the next few years, GISR seems likely to tame today’s jungle of agencies and criteria, making it possible to invest in the most sustainable companies with some measure of confidence.