The Sustainability Ratings Industrial Complex: Breaking the Hold

The TakeAway: The recent launch of the Global Initiative for Sustainability Ratings seeks to bring some order, quality, and accountability to the diverse and booming growth industry of sustainability ratings and rankings—also a topic of the online “SustyChat3” among experts, occurring this week on the OpenEyeWorld platform.

Today we celebrate another “movement milestone”, one of several occurring during the month of June: the long-awaited launch of the Global Initiative for Sustainability Ratings (GISR), announced at a Washington, D.C. briefing held June 9th by the nonprofit groups Tellus Institute and Ceres.  GISR’s purpose, according to the press release, is to “create and bring to widespread adoption a single standard for rating the sustainability performance of companies.”  GISR will operate as an independent, non-commercial framework that “builds on the current system’s strengths and, corrects its shortcomings, thereby unleashing the full power of ratings to drive sustainability deep into capital, procurement and consumer markets.”

That announcement coincides with year-long efforts of SustainAbility, a think tank and strategic consultancy, to examine and improve the corporate social responsibility (CSR) / sustainability ratings space, and sustainability expert Bill Baue’s work to spark conversation among experts about the value, role, and improvements needed to link ratings to performance improvement and impact.  “Corporate sustainability ratings are trending as a hot issue in the CSR space, so they’re a perfect focal topic for the third Sustainability Chat on OpenEyeWorld,” said Baue.  Baue, a MurnPost Co-Founder and ad hoc Editor, is curator of the two-day “SustyChat3” on Sustainability Ratings.  It’s happening today and tomorrow at OpenEyeWorld, a commercial platform for online sustainability expert engagement.  Representatives of both SustainAbility and GISR are moderating one of the three SustyChat3 dialogues.

Improving Corporate Performance?

They’re everywhere: sustainability reports, rankings, ratings, “Best Of” lists, “Worst of” lists, narrative reporting, integrated reporting—not to mention the firehose of social media Tweets and Facebook posts.  What once was a niche market has become de rigueur for business firms that want to attract and retain their customers and shareholders, not to mention comply with regulations and wider stakeholder expectations of transparency and disclosure.

Like the proliferation of Hollywood award shows, market saturation of sustainability ratings fosters confusion, contradiction, and concealment—even burnout over “too much information”, both for reporting companies and those expected to absorb the information generated.  “Survey fatigue” plagues many firms that are bombarded with data requests and allocate staff and money to respond.  Meanwhile, those conducting the “research” often monetize the process—sometimes as consultants to help companies get higher scores.  And there’s nothing to prevent companies from picking which ratings results best suit their aims, and ignoring those that don’t.  As for “objectivity”—there are no generally-accepted principles, frameworks, or standards against which to gauge best practice.  Until now.

A GRI for Sustainability Ratings

According to its founding partners (which include TIAA-CREF, the Calvert Group and Bloomberg), the mission of the GISR is to “continually expand the contribution of businesses and other organizations – including social enterprises, non-profits, and public agencies – worldwide to sustainable development through the creation and promulgation of a generally accepted, organization level sustainability ratings framework.”  Modeled after the approach used by Ceres and Tellus to incubate the Global Reporting Initiative (GRI), the idea is to bring some order to a sprawling ratings-and-rankings industrial complex, while bolstering credibility, accountability, and quality.  “GISR aims to create a benchmark standard rooted in technical excellence, impeccable integrity, and continuous improvement, via a process involving multiple stakeholders,” the announcement stated.

“The GISR initiative is about creating a world-class, transparent ratings system,” said Tellus Institute Senior Fellow Allen White, a co-founder (with Robert K. Massie, Jr., now running for U.S. Senate in Massachusetts and MurnPost Co-Founder). “GISR will help drive capital, procurement and consumer markets toward companies committed to continuously higher standards of sustainability excellence.

“Getting this right matters,” said White. “If we aren’t infusing sustainability into all ratings frameworks, both financial and non-financial, we are losing precious time in the race toward shifting markets to sustainable outcomes.  That’s why GISR is an idea whose time has come.”

Put another way:  “The simply-stated goal of this system is to avoid the next BP disaster,” said Mindy Lubber, Ceres President. She was referring to the fact that, as the GISR release pointed out, “Prior to last year’s Gulf oil spill – and well after BP’s fatal Texas oil refinery disaster and a slew of other major violations – there were no credible ratings that flagged BP as a material risk to investors.  Even investor screens like the Dow Jones Sustainability Index held BP’s stock for a long time before divesting at a significant loss to shareholders.” (Sustainability legal expert Sanford Lewis writes about this, in connection with current revision process of the GRI Guidelines.)

Sustainability Experts Weigh In

Improving sustainability ratings also is the focus of SustyChat3 on Sustainability Ratings at OpenEyeWorld.  “Some of the key influencers on this topic are co-facilitating the three discussions, including Michael Sadowski of SustainAbility, who heads its Rate the Raters project, and Mark Tulay, who’s managing the Global Initiative on Sustainability Ratings for Ceres and the Tellus Institute,” Baue said.  Sadowski and Tulay will moderate the “Rate the Raters” conversation.  Corporate folks are on deck, too, with Suzanne Fallender, Director of CSR Strategy & Communications at Intel, and Tracey Noe, Senior Director, Global Citizenship and Policy at Abbott, managing the “Rated Companies” discussion stream.  “Bahar Gidwani and Cynthia Figge of CSRHUB are moderating the ‘Raters’ thread,” said Baue, referring to two of the founder of this online resource for user-generated corporate sustainability ratings.

“The multi-day format of Susty Chats allows for in-depth dialogue to develop, as sustainability experts from around the world contribute to several threads of conversation that unfold organically,” Baue said.  “We welcome sustainability experts and CSR practitioners to join in the conversation!”  You can take a look at OpenEyeWorld, but registration is required.

It’s Raining Ratings!

These efforts mark yet another step in the evolution of how to foster improved corporate sustainability performance, with ratings schemes but one of many tools in the toolkit. (Others include wise policy, laws and regulation; thoughtful activist shareholders; informed citizen and consumer action; and virtuous boards and executives.  No doubt I’m missing others.)  But it’s just a step in a long long journey, with many challenges ahead—chief among them how best to engage a broader public of everyday people who remain generally clueless about what’s going on.  We need to include them in discussions of accountability, materiality, and impact, not to mention the evolving definition of “sustainability”—and suitability in public discourse.

As I wrote nine months ago in “It’s Raining Ratings!”, back in 1983, when I first started working in this field, “you could count on one hand the number of credible corporate responsibility ratings schemes—starting with the Sullivan Principles, the most prominent due to the dominance of the South Africa anti-Apartheid movement.  The Sullivan Principles served as the prototype for subsequent ratings, including the MacBride Principles for Northern Ireland, the Valdez (now Ceres) Principles, and others.”  By 2000, there were roughly a couple dozen; by 2010, there were 108, according to Sustainability.

Nowadays, it’s practically raining ratings, with many sponsored by magazines such as Newsweek (based on research from MSCI and Trucost), Corporate Responsibility (research by IW Financial) and Corporate Knights (research by Inflection Point Capital Management). Add to that the ratings that serve the sustainable investing community – such as the Dow Jones Sustainability Index and FTSE4Good – and you have a veritable deluge.  But even the worst corporate offenders – Exhibit A:  BP and the Deepwater Horizon rig explosion – can receive high sustainability ratings scores.  What gives?”

I continued by describing SustainAbility’s release of Part Two of its four-phase “Rate the Raters” research program launched in May 2010.  SustainAbility launched the Rate the Raters project to shed light on the universe of external sustainability ratings, while improving their quality and transparency.  The project’s second phase (June to mid-September 2010) inventoried more than 100 sustainability ratings—providing insight into source of research, issue focus, and whether or not its methodology is disclosed.  Rate the Raters: Phase Three, released this past March, zoomed in to conduct an in-depth evaluation of 21 ratings schemes.

According to SustainAbility’s Vice President Michael Sadowski, during this phase “we went out of our way to capture key insights and good practices across the 21 ratings in our selection…[and] came away with a number of fundamental questions/dilemmas, answers to which we believe will shape the future of sustainability ratings:

  • What is the ‘right’ funding model for sustainability ratings to ensure their objectivity and own sustainability? The predominant model for ratings today is ‘client pays’, but as [Sustainability points out], that may not translate to strong ratings in all cases.
  • Can raters also be consultants or service / product providers? If so, under what conditions?
  • How can raters provide greater details on their approach and results to companies and clients without giving away commercial secrets? …[S]ome think private and public ratings might need to be treated differently.
  • Could the major raters agree on a core set of standard criteria and format (to reduce survey fatigue), then compete/differentiate themselves only on a smaller set of future-oriented criteria?
  • What might a universal quality standard look like for ratings? Could more ratings espouse the sort of principles and commitments that underlie the CSRR-QS standard we describe in our report?

Answering these questions – affecting revenue models, common standards, and ethics – constitutes the basis for Phase Four, which is still underway.  SustainAbility wants your thoughts on these, so if you’ve something to say, go to their website, Facebook page, or Tweet them @SustAbility.

Still Evolving

All of these welcome efforts remind me of something that occurred in the late 1980s, another era of business greed and deception.  Back then, I was retained by James A. Joseph, then president of the Council on Foundations, to conduct a first-time survey of the 110 institutionalized ethics programs in the U.S.  This burgeoning “ethics enterprise” resembles the equally robust sustainability ratings-and-ranking enterprise: hugely autonomous, ambiguous, and often aligned with business, academic institutions, or nonprofits.

The oldest were (and remain) free-standing, with a national or international purpose and constituency.  Writing for the September / October 1989 issue of Foundation News, I said, “The ethics enterprise – particularly as it concerns public policy and the professions – is still evolving. As a result, it is hard to discern the existence of a professional community of shared beliefs, language, and practices. Even though there are emerging networks and evidence of some collegial activity, there appears to be little effort to guide its growth.

While there are numerous examples of ‘success stories’ provided by survey respondents, the ambiguous nature of the field makes it difficult to judge program impact and quality. Several respondents said as much in their replies, stating that success is hard to measure and that the results of their work – particularly with regard to human or organizational behavior – may not be seen for some time to come.

Given the need to develop a more conscious and conscientious ethical dialogue, the need to foster imaginative replies to public moral dilemmas, and the need for us to treat each other with greater dignity and respect, the ethics enterprise has a way to go.  So, indeed, do we all.

Twenty-two years later, the same could be said for the Sustainability Ratings Industrial Complex. Perhaps with the help of the Global Initiative for Sustainability Ratings and the efforts of many other groups and individuals, progress can occur on addressing these “public moral dilemmas” with respect to human and organizational behavior in advancing sustainable prosperity and justice for all.


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3 Responses to The Sustainability Ratings Industrial Complex: Breaking the Hold

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  3. Alan Petrillo says:

    There’s an old saw about not believing one’s own press releases. GISR overstates its case that “Prior to last year’s Gulf oil spill – and well after BP’s fatal Texas oil refinery disaster and a slew of other major violations – there were no credible ratings that flagged BP as a material risk to investors.”

    GISR is entitled to its opinion of MSCI ESG’s credibility, but their statement is false. Please see this compilation of the various downgrades that MSCI and its antecedents had assigned to BP BEFORE the Gulf disaster. KLD, for example, had thrown BP off its indexes years earlier. These were a response to that “slew” of violations.

    While the “ratings raters” have good intentions, I am skeptical of their odds for success. They seem to envision a metric system where everyone agrees on how long a meter of sustainability is. But slippery concepts don’t lend themselves to measurement. That’s why a variety of companies compete with one another on the quality and salience of their proprietary ratings frameworks and data sets. These are for-profit firms that are unlikely to put themselves out of business by commoditizing their core assets.

    I would be curious if any managers ditched the DJSI and switched to KLD post-BP.

    Marcy, as always, thanks for your work on this and other topics.

    Alan Petrillo

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