Corporate Sustainability Ranking Gets a Face Lift
Last week's World Economic Forum in Davos, Switzerland, saw a major upgrade in the quantification of corporate sustainability with the unveiling of what I'll call the "second generation" of the Global 100 Most Sustainable Corporations in the World. When the Canadian corporate social responsibility magazine Corporate Knights teamed with the sustainable investing research firm Innovest to launch the list five years ago in Davos, the Global 100 turned heads by asserting the business relevance of sustainability while simultaneously meeting harsh criticism from the likes of sustainability guru Paul Hawken.
"My main point is that the criteria employed have little to do with sustainability as it is understood from a thermodynamic, biological point of view, that the term 'sustainable' is not defined by Corporate Knights or Innovest, and that the methodology is not transparent," Hawken told me. "The list does not advance sustainability because it cannot define, measure, or recognize it."
Now, the Global 100 methodology has finally gotten a major face-lift that addresses these critiques. Perhaps most importantly, the list included what the Global Reporting Initiative (GRI) calls "sustainability context," which frames corporate progress in relation to a defined sustainability goal that needs to be met if our culture is to survive and thrive. The Global 100 chose resource efficiency improvements as its sustainability goal, using a "factor four" yardstick. A self-admittedly "crude" rule of thumb first proposed by Hunter and Amory Lovins in their 1998 book by that name, the notion holds that we need to improve resource productivity by 400 percent (or a factor of four) over the next two decades in order to get back within the earth's carrying capacity - an assertion subsequently supported by Lord Nicholas Stern and McKinsey. Using 2006 as a starting point, the Global 100 assesses whether companies are upping resource efficiency by six percent per year, the rate needed to reach factor four by 2026.
"While the majority of company-reported resource use data is unaudited, it is notable that 71 per cent of the 2010 Global 100 companies who report such information meet the test (six percent per annum resource productivity improvements) of being on a path toward sustainable resource use . . .," the Global 100 blog states.
This is an important step in improving corporate sustainability ratings, but it falls short of taking a "thermodynamic, biological point of view." Measurements such as resource efficiency often express environmental impacts in financial terms, such as GDP per unit of emission - mixing apples and oranges. In contrast, true sustainability indicators compare apples to apples, measuring company-specific environmental impacts in terms of larger environmental limits, such as corporate emissions compared to global carbon capacity, assessing companies' proportional contribution toward meeting collective targets.
In this regard, the Global 100 represents a first step beyond first-generation sustainability metrics, which bordered on irrelevance, as they were untethered to a specific social or environmental goal that could objectively be defined as sustainable. Such first-wave sustainability claims may even be counter-productive, wooing us into thinking that corporate sustainability initiatives are making a difference, when in fact they may be lulling us into complacency with good intentions that have no chance of meeting social and environmental targets necessary for survival. Whether the Global 100 represents a true second generation effort, with "sustainability context" embedded at its core, is up in the air.
The other important step the Global 100 took this year involves transparency. Previously, the list relied on Innovest data, which is necessarily proprietary so the sustainable investing research firm could make a buck. The Global 100 took a two-step approach to free itself from the black box and "open the kimono." First, it selected the top ten percent of sustainable investment portfolios from the Global Sustainability Research Alliance (comprised of ten top sustainable investing research providers, such as Goldman Sachs GS SUSTAIN, EIRIS, and RiskMetrics, which use proprietary research) to constitute a beginning universe of some 3,000 companies. The Corporate Knights Research Group then applied its own set of 10 key performance indicators (such as carbon, energy, waste, and water productivity, as well as board diversity and CEO-to-worker pay disparity) to whittle down to the final list of 100.
While this innovative solution addresses the research methodology transparency conundrum, it doesn't necessarily solve the corporate transparency problem. To address this, the Global 100 added an equally weighted eleventh indicator, covering corporate disclosure. In a blog post aptly titled "Opaque Transparency," sustainability reporting expert Elaine Cohen noted the irony of zero overlap between the top 10 companies in the Global 100 and the top 10 in the Global 100 for transparency.
"For me, and perhaps I am a little extreme, or obsessive, or passionate, or stupid, transparency is an essential core element in sustainability which serves to leverage and drive performance in many different ways. Where there is low transparency, there is low trust, low dialogue, low openness to innovation, and low attention to stakeholder needs," Cohen said. "Whilst I do not expect such a ranking to be based on transparency alone, I believe that some degree of overlap would make this ranking more credible."
Cohen hit upon what I would call the "Oekom dilemma," so-named after the German sustainability research firm that came into criticism in the mid-2000s for downgrading company ratings for lack of disclosure, risking "inaccurate" assessment of companies with strong sustainability performance but weak transparency. Oekom's reasoning aligned with Cohen's: that sustainability without transparency is not truly sustainable. It will be interesting to see how the Global 100 handles this factor in the future.
Finally, the Global 100 added ranking this year. This seemingly superficial shift, moving away from an amorphous clump of a hundred sustainability leaders to a prioritized listing of best performers, may be the most satisfying change, fulfilling the human compulsion to create order out of chaos. It also sparks the competitive spirit, inspiring companies toward continuous improvement in sustainability performance as they vie for the top spot. Now that the list encourages companies to operate within at least some of the earth's thermodynamic limits, this competition may actually help us attain our salvation.
Bill Baue is Executive Director of Sea Change Media, and Executive Producer/Host of Sea Change Radio, a nationally syndicated show with a global podcast audience. Disclosure: He has written for Corporate Knights. This article was first published on CSRWire.