28 Oct CSR-RATINGS: SUSTAINABLE MANAGEMENT PUT TO THE TEST

Posted on: September 19, 2016 by | 0 Comment(s) – Update Trash

Sustainability may be the talk of the town, but how seriously do the companies take their environmental and social commitment? Independent rating agencies assess how far companies fulfil the minimum requirements for sustainable management and sustainability performances.

“Do something good and talk about it” – that is the golden rule for PR work that serves to place a company and its actions in the best possible light: commercially competent, socially committed, exemplary in ecological matters. Whether that convinces the general public is still questionable, because one’s reputation can make many claims… However, the external experts often come to a different opinion. Whereas the awareness for the availability of resources and socially responsible management are currently growing, companies are being examined more and more critically in this respect. Sustainability ratings assess the way the firms deal with ecological and social challenges. That is not only decisive for the corporate image, but also of particular interest for current and potential investors, who inform themselves in this way about the sustainability activities of the companies. At the same time, this gives the investors the opportunity to take their demands regarding the company’s sustainable performances into account when making investment decisions – buzzword: Socially Responsible Investments (SRI). On a global level the corresponding reports also help assess whether the sustainable development goals (SDGs) have been achieved, which were adopted in September 2015 by the General Assembly of the United Nations in the scope of the “Agenda 2030 for sustainable development”. The 17 goals formulated address themes such as fighting against poverty, inequality and injustice as well as the battle against the climate change up until 2030. “Among other things, the long-term success of the Agenda 2030 depends on the corresponding information and reports that make how countries and regions as well as companies implement the targets within their work visible,” commented Paloma Durán, Director United Nations Sustainable Development Goals Fund, in her greeting in this year’s annual report of the rating agency, oekom research.

Transparency and objectivity

Average evaluation of the companies of selected industries on a scale from 0 to 100 (top grade); Basis: GLCU; Status: 31.12.2015.

The assessments that are also known as CSR ratings are normally carried out by rating agencies – also by the corresponding departments in banks, which have specialised themselves in researching environmental, social and governance aspects (ESG) and who assess among others listed companies according to ecological, social and ethical criteria. The analyses of the rating agencies such as Inrate, oekom research, RobecoSAM and Sustainalytics are based on company information such as sustainability reports or websites, whereby the companies are also questioned themselves. External sources such as databases, scientific publications or the opinions of environmental or human rights organisations are also taken into account. Sustainability profiles or CSR ratings are then compiled based on the overall data collected. Hereby, depending on the access and own understanding of sustainability, the analysts can indeed come to variable cognitions that are not comparable with each other, because different benchmarks – different criteria and differently weighted fields of actions – are laid down when assessing sustainable management. Furthermore, the respective geographic, regional, ecological, cultural social, commercial and political situations have to be considered when carrying out the assessment. Since the concepts are also becoming more refined, new methodical approaches are arising and the fact that the analysts cannot know everything, the reliability of the ratings is limited and they can only be evaluated more as a snapshot of the situation. Critics are therefore demanding more transparency as far as the facts, methods and results are concerned in order to be able to classify the agencies and the assessments more clearly. The European Association for Independent Corporate Sustainability and Responsibility Research (AICSRR), which has since been renamed Arista, was founded in 2004 to secure more transparency and quality in the field of sustainability research and promote the further development of quality standards for sustainability ratings. The association certifies research companies according to European quality standards. Hereby the rating agencies commit to agree to principles such as independence, the active involvement of important interest groups, dialogues with companies, ethical standards as well as the quality regarding the scope, criteria, methods and topicality of the research.

The rating process: Procedure and criteria

Sudanese women recovering food dropped from aircrafts in the scope of the World Food Programme (WFP).

The example of oekom research shows how rating agencies compile sustainability analyses. The Munich-based company that has been Arista-certified has been specialising in the assessment of companies and countries since 1993 and is one of the leading independent rating agencies in the world in the sustainable investment sector. Oekom research analyses over 3,700 companies from 55 industries according to the defined sustainable management minimum requirements. In the course of the analysis those companies from each respective industry that deal with environmental protection and social responsibility the best are identified and awarded the “oekom Prime Status”. “The assessment is carried out according to the ‘absolute’ best of the class principle: In terms of ratings, best of the class normally means: For example, the best 20% of the companies of an industry are declared to be best of the class. However, that does not suffice for us, we have defined additional industry-specific minimum requirements. Here the following applies: The higher the (potential) negative effects of an industry on the environment, employees and society, the higher we raise the bar. In this way, companies from the oil and gas industry have to at least attain the grade B- in order to be awarded the ‘Prime’ status, for banks a C suffices at the moment,” explained Dieter Niewierra, Director Communications, oekom research.

According to company accounts, more than 120 finance service providers, specialised ethical banks and institutional investors as well as societies and foundations rely on the judgement of the analysists when it comes down to selecting bonds for mutual funds, special funds and asset mandates. The clientele of the agency includes banks, insurances and charity associations. The employees of oekom research collect the information relevant for the assessment both from the respective company itself as well as from independent experts. According to own accounts, during the rating process great value is placed on full cooperation. For example, the “tested companies” are regularly given the opportunity to comment on and enhance the results. After the evaluation the compiled “oekom Corporate Rating Report” serves as an inventory: “The sustainability rating of the oekom research AG has over the past years provided us with essential advice regarding areas of improvement,” stated Dr. Ignacio Campino, who was a representative of the Sustainability Board at Deutsche Telekom up until 2012. A win/win situation for investors and private customers, who are looking for a sustainable capital investment and also for the assessed company, which is thus presented with the opportunity to test its social and ecological performance and obtain external feedback: “OMV selected oekom research as one of the rating agencies with which we actively cooperate with. The reason for this is that the rating of oekom research is a very highly recognised rating in the SRI sector, furthermore we are convinced about the transparency and objectivity of the rating process. The dialogue and feedback mechanism function very well,” said Simone Alaya, Stakeholder Management at the oil and gas supplier, OMV. Thus, the rating ultimately also serves as a benchmark and issue management tool in order to learn the demands of the stakeholders and close any possible gaps.

The assessment of the social and ecological performance of a company is carried out based on over 100 industry-specific selected criteria in the three social areas “Employees and Suppliers”, “Society and Product Responsibility” and “Corporate Governance and Business Ethics” as well as in the three ecological areas “Environmental Management”, “Products and Services” and “Eco-efficiency”. Each of the criterion are individually weighted and assessed and finally summarised in an overall grade – from D- to A+ (top grade). A ranking of the assessed companies within each specific industry thus ensues, which demonstrates special commitment in the sustainable development of the respective companies. “On the one hand we want to highlight the companies’ efforts, on the other hand we also want to provide insights as to where improvements are possible,” explained Niewierra. In addition to this “positive screening“, a detailed “exclusion screening“ is also carried out which occupies itself with ethically controversial business fields and practices, including abortion, alcohol and nuclear energy, embryo research, fur coats, pornography and armaments, human right abuses, child labour and animal testing. Here, the work of the analysts is supported by international experts from the areas sustainability, human rights and employment rights as well as consumer protection. But the assessed companies also have the opportunity to issue a statement. Niewierra: “For us the dialogue is particularly important here, because we don’t want denounce anyone, nobody would benefit from that.” In addition to the analysis of big, listed companies, oekom research also examines the potential of small and medium-sized listed companies – so-called small and mid caps – the sustainable development of the products and services of which would be particularly conducive. In this way, the rating agency identifies companies for instance from the “Alternative Health”, “Sustainable Food”, “Recycling & Emissions Reduction” sectors, which thanks to their high innovation potential and forward-looking concepts and technologies often prove to be a lucrative, sustainable capital investment.

In the public eye

Evaluation of the sustainability performance of internationally operating big companies based in the industrial countries (GLCU) in %.

Once a year oekom research publishes the “oekom Corporate Responsibility Review” on the sustainability of corporate management – a review that also takes the UN Sustainable Development goals into account in its evaluation of the sustainability performances. For the analyses in the scope of the review, around 1,600 internationally operating big companies were selected, which are based in the industrial countries. “When considering the developments of the sustainability efforts of the companies, one observes that there is still a lot of room for improvement,” commented Robert Haßler, CEO of oekom research AG, regarding the results for the year 2015. “As before, only just over 16% of the companies worldwide fulfil our minimum sustainable management and performance requirements and were thus awarded the ‘oekom Prime Status’.” However he added that a gradual trend towards a general improvement in the sustainability performance is being identified. For example, the share of companies with a mediocre sustainability performance had slightly increased compared to the previous year and the share of companies with a poor performance has slightly declined. According to further results of the survey the most positively assessed industry is the “Household & Personal Products“ sector, the automobile industry ranked second here. In the country comparison, French companies achieved the most rankings under the top three last year, ahead of Great Britain and Germany. The leaders when it comes down to breaches against the principles of the UN Global Compact, the most significant self-commitment of companies to a responsible corporate management, are suppliers and service companies in the oil and gas sector, who are also most frequently involved in cases of corruption. Whilst in the textile industry the number of employment rights violations even increased in 2015 – every fourth company assessed committed a corresponding violation – human rights violations were above all detected in the metal and mining industry, in international retail groups as well as in the oil and gas industry.

Besides the development within the companies, in the scope of the corporate rating the “Corporate Responsibility Review“ also examines to what extent the demands of the 17 UN sustainable development goals including their in total 169 subgoals are put into practice. In the course of which the various aspects of the SDGs are taken into account, which are summarised under the five main themes People, Earth, Wealth, Peace and Partnership that encompass topics such as fighting hunger, health and education, climate change, energy, water, employment, production and consumption. “As the ‘oekom Corporate Responsibility Review’ underlines, the SDGs can indeed be understood as guidelines for sustainability commitment. Analyses like this annual report contribute towards explaining this and encouraging commitment in order to build a more sustainable world,” reasoned Durán. Even though the progress of the companies – as the ratings demonstrate – is slow and the awareness for environmental and social aspects is only growing slowly, there is still a chance of making the world a bit better through sustainable management – following the motto: “Do good and make things even better!“ And then perhaps others will talk about it too.