BSR Conference 2012: Fast Forward / October 23-26 / New York

The Future of Sustainability Ratings

One-Hour Conversation Session / October 24, 2012

Speakers

  • Leontien Plugge, Director, Network Relations, Global Reporting Initiative (GRI)
  • Amy Muska O’Brien, Managing Director and Head, TIAA-CREF, Global Social and Community Investing
  • Tim Mohin, Director, Corporate Responsibility, Advanced Micro Devices (AMD)
  • Allen L. White, Vice President and Senior Fellow, Tellus Institute (Moderator)

Highlights

  • More than 100 sustainability ratings initiatives exist today, composing a chaotic landscape with numerous variables at play. Companies face daunting challenges in this landscape, including increased burden, survey fatigue, and the loss of credibility.
  • The sustainability ratings market is quite large but not fully realized; it is at the same stage in its evolution today where reporting was 10 to 15 years ago—creating an opportune moment to learn from reporting and increase the value delivered to ratings customers.
  • Companies are becoming frustrated in the face of increasingly diverse and specific questions on ratings surveys, such as those about executive remuneration and political contributions. A key lesson for ratings agencies is to be clear on the intent behind each question.

Memorable Quotes

“Key indicators are really important. We use the term KPI [key performance indicators], but we’ve forgotten what K is. K is key.” —Tim Mohin, AMD

“We have recognized that there are limits to ‘one size fits all.’ Core indicators can help a lot of companies start on the path to reporting … [but] once they get more evolved, sector-specific indicators become most important to help drive real change.” —Leontien Plugge, Global Reporting Initiative

“We can say with confidence that there are certain core aspects of business that are transcendent… Is energy as important to the financial sector as it is the mining sector? No. Is it more or less important than lending practices [or] money management? No. But is it unimportant or inconsequential? No. It does matter.” —Allen White, Tellus Institute

Overview

White kicked off the session by recounting an illustrative anecdote from the prior evening. A woman launched into an animated critique of sustainability ratings at a reception he attended. She said that her boss and CEO were distressed after they dropped from number six to 36 on the Newsweek Green Rankings. White replied that he understood her concern, and then he tried to reassure her that this is only a microcosm of the issues that companies face related to sustainability ratings.

Delving further into the subject, White highlighted that more than 100 sustainability ratings initiatives exist. This chaotic landscape forms just a small part of the larger world of sustainability information involving many actors—companies who report information, auditors, aggregators (like Bloomberg), researchers, raters, and finally users like media and consumers—all coupled and interacting. He indicated that the landscape is rich but facing challenges; sustainability ratings have a power similar to that of credit ratings, but the former are not yet as credible as the latter.

Building on White’s opening, Mohin stressed that progress has been made in sustainability ratings. Companies no longer fight against regulations but rather fight with each other to become the greenest. He credited GRI as an enormous achievement that provides the standard of indicators that define corporate responsibility and also proves that disclosure has matured to a credible level. To sum up his comments, Mohin offered three provocative thoughts regarding the current industry of sustainability ratings:

  1. As sustainability ratings have grown, so has the burden for companies.
  2. Competing ratings systems have caused a general loss of credibility.
  3. There is a huge opportunity cost to not improving the ratings landscape. If we can improve the ratings landscape, then we will release the potential of business and see a race to the top.

Consequently, O’Brien agreed that progress has been made, but there is still room to improve ratings. O’Brien explained that she spends much of her time trying to understand the new ratings people attempt to sell her. She felt strongly that the proliferation of competing ratings systems is sending mixed signals to customers and investors, which is highly problematic.

Heading in a different direction, Plugge spoke about stakeholders. Many people have asked her who actually reads sustainability reports, and she always responds that one thing is sure—raters are definitely using these reports. She stressed the importance of considering the entire stakeholder landscape, an important step for GRI as they created a reporting standard by consulting 35,000 people from vast stakeholder groups. Plugge further stated that many ratings groups have a conflict of interest; companies are paying to get listed in ratings and also to get advice about how they can improve their standing.

After the panelists provided their perspectives, White opened the floor for questions. First, O’Brien responded to a question about whether GRI is delivering value to customers such as the investment community. She replied in simple terms that yes, investors see value in the consistency, credibility, and comparability of GRI data.

Next, Plugge took a question about how companies should react when GRI indicators exceed local regulations, citing materiality as the key to dealing with this challenging situation. Companies should focus on choosing those indicators that are important to stakeholders and core to their business and on explaining reasons for not reporting on immaterial indicators—even if the indicators in question are required by regulation.

Finally, Mohin responded to a question about whether ratings that aggregate industries increase or decrease the rating’s credibility. He felt that this practice makes it difficult to create comparable benchmarks, especially considering that performance on indicators like climate change, water use, or biodiversity loss show very different data depending on a company’s activities. O’Brien agreed that it is better for users to have sector-specific ratings, clarifying that they are not looking to choose between industries such as oil or technology, but rather they are looking for leaders in each sector.

In summary, this session showed that the landscape of sustainability ratings faces many challenges on the road to increased credibility. Essentially, the panelists agreed that those groups developing ratings can learn much from what disclosure initiatives such as GRI have developed. True advancement will come as those developing rating systems continue to clarify their intentions.



Thank You, Sponsors

Executive Sponsors

Cisco Hitachi PwC Target UL Responsible Sourcing

Associate Sponsors

Anheuser-Busch InBev

Supporting Sponsors

Adobe AT&T ExxonMobil Green Mountain Coffee Roasters, Inc.

Participating Sponsors

American Express Baker & McKenzie LLP Best Buy BNY Mellon Ford Hyatt Hotels Corporation The Walt Disney Company UPS Vale

Contributing Sponsors

Chevron icix Levi Strauss & Co.

Convening Media

Bloomberg Business Week Weber Shandwick

Marketing and Media

3BL Media BEF Caixin Media Corporate Knights Globescan GreenBiz Group Inc. Hemlock Responsible-Investor Sina Stanford Social Innovation Review (SSIR) Tomorrow Partners