Rating the ratings surveys

Q. We’re getting more and more requests to fill out sustainability surveys. How do we prioritize all these demands?

A. The key point for IROs is that mainstream investors are now actively pursuing sustainability information, so not only are asset owners researching these issues on their own, but they are also asking asset managers to commit to researching, analyzing and integrating sustainability into their investment process.

This in turn has created an entirely new type of research that is dramatically changing the way everyone sees ‘sustainability performance’. It is crucial that IROs understand not only who is conducting this type of due diligence, but also how entire sectors are being compared and contrasted on both quantitative and qualitative disclosures.

All the surveys you’re getting are just the tip of the iceberg, hinting at the proliferation of rankings, ratings, listings, research tools and sustainability indices. IROs (and companies in general) aren’t aware of how many entities constantly monitor, analyze and convey sustainability information about individual companies, entire industries and/or entire indices.

A lot of them rely on already public information, but they can also flood you with requests for more information. That can be overwhelming as you deal with queries around an ever-widening list of performance metrics, both financial and non-financial.  

In this age of transparency, it is critical for companies to align the stories coming from departments such as marketing, public relations, government affairs, environment, health & safety, human resources and sustainability. In these economically challenging times, it is also vital for IROs to realize that all these departments are crucial resources and key partners when addressing the growing number of disclosure requests in your inbox.

For example, every company in the Russell 3000 has received a questionnaire about its energy performance (that is, its carbon footprint) from the Carbon Disclosure Project (CDP). Initiated in 2003, the CDP currently represents more than 550 institutional investors, holding more than $71 tn in assets under management.

The CDP has expanded its focus to include water, and is also working with major procurement bodies (companies and governments) to help these large-scale buyers gather consistent information from big supply chains. Note that CDP questions are likely to be entering your company through a range of inboxes.

A recent study by independent think tank and consultancy SustainAbility mapped the expanding universe of sustainability monitoring and identified more than 100 of the most recognized rating services. This four-phase study eventually narrowed the field to 21 raters and provides in-depth reviews of them. It offers a very useful overview of the market and will help IROs better understand the types of organizations involved so that their company can prioritize responses.

There has been an exponential increase in the amount of interest in sustainability issues in the last few years, which is being accelerated by the growing number of groups (ie, stakeholders) paying attention to sustainability performance. Local mayors, current and future employees, corporate customers and the average consumer all want to know they are doing business with ‘sustainable’ and ‘responsible’ companies.

One of the most significant developments was the launch of the United Nations Principles for Responsible Investment (UN PRI) in 2006. With more than 850 investment institutions as signatories, the UN PRI represents asset owners and managers with approximately $25 tn under management. It helps investors integrate the consideration of environmental, social and governance issues into investment decision making and ownership practices, and thereby improve long-term returns to beneficiaries. For IROs, it is important to note that it also stimulates increased active ownership and aims to contribute to improved corporate performance on environmental, social and governance issues.

Another very dramatic change affecting this entire area has been the entry of Bloomberg, which not only saw the growing demand for sustainability information as a business opportunity, but also recognized the need to be credible in the area of sustainability – to ‘walk the talk’.

Bloomberg started tracking sustainability data not only for the thousands of companies in its databases, but also started understanding its own sustainability performance. It noticed a trend in sustainability reporting: the majority of sustainability reports are done in accordance with the Global Reporting Initiative’s (GRI) Reporting Framework. Not only did this inform Bloomberg’s research methodology, but it also led it to produce its first sustainability report according to GRI’s globally accepted guidelines.

Bloomberg now tracks and distributes sustainability information on close to 5,000 global public companies. Its terminals sit on more than 300,000 desks around the world, and the majority of the signatories to the CDP and UN PRI have access to Bloomberg data at the touch of a button. Not only can these users see detailed sustainability information on a single company but, more importantly, they can quickly see the sustainability performance on hundreds of companies in the same industry and across hundreds of sustainability data points.

While in most jurisdictions companies are not required to report such non-financial information, several countries and stock exchanges have started requiring companies to report on sustainability issues. An overview of these growing regulatory trends can be found in GRI’s report Carrots & sticks – promoting transparency and sustainability.

How can you quickly understand the sustainability issues most relevant to your company and determine how best to disclose this information? Given the developments outlined above, IROs and companies in general need to realize how they are being compared and contrasted with their competitors. The traditional financial metrics used to identify and buy shares in companies have expanded to include a broad range of quantitative and qualitative metrics on a range of environmental, social and governance criteria.

The most widely used and accepted format for reporting on these issues is through the GRI Guidelines. In essence, GRI is to sustainability reporting what GAAP is to financial reporting. Anyone on the user side of data (be it financial and/or non-financial) prefers consistent, comparable and reliable information, which is what GRI provides.

On the reporting side, the GRI guidelines provide a tried, true and tested path to successful sustainability reporting. In fact, GRI reporters repeatedly dominate many of the most well-known sustainability listings, ratings and rankings. This includes:
-95 percent of the Dow Jones Sustainability Index
-78 percent of the FTSE4Good
-70 percent of the Global 100
-70 percent of the NASDAQ OMX CRD Sustainability Index.

Therefore one of the first things an IRO should do when trying to determine whether or not to report on non-financial performance issues is review the extensive list of organizations that are already reporting according to the GRI. The GRI Reports List is updated weekly and is designed so that users can quickly sort the spreadsheet to benchmark themselves against companies from across the world, as well as look at large customers that are very likely to be asking their suppliers for sustainability information.

It also allows the user to see what level each organization has reported, as well as whether the sustainability report was externally assured.

This simple exercise can quickly show a company where it stands against competitors, and how it is being compared and contrasted on non-financial disclosure and sustainability performance. A review of competitors’ sustainability reports quickly enables a company to see whether or not such reporting is achievable given current internal reporting systems, as well as determine how feasible such reporting will be within the existing organizational governance characteristics.

For many companies, the first step in reporting on such issues is complicated and difficult. It is important to remember, however, that by not reporting, a company leaves a wide range of stakeholders with the need to build their own story. It is much more beneficial for companies to take the necessary steps and inform these stakeholders in a direct and credible manner, which GRI reporting enables companies to do.

Five steps toward addressing the growing demand for sustainability reporting
1. To understand who is interested in their sustainability performance, IROs should regularly compare their own investor list to the signatories affiliated with the CDP and the UN PRI:
-CDP’s signatory investors
-UN PRI’s signatories.

2. To understand the ever-changing and dynamic field of sustainability research, IROs should review the series of reports conducted by SustainAbility called ‘Rate the raters’.

3. To understand the significance of these issues and the market that is growing around this type of research, IROs should read this recent article on the entry of Bloomberg to this field.

4. To understand the content and context of sustainability reporting, IROs should review what their peers are doing by downloading GRI’s Report List.

5. To understand how to get started with GRI reporting, IROs should review the Support for reporters area of GRI’s website.

Mike Wallace is director of the Global Reporting Initiative’s Focal Point USA.

A shorter version of this article appeared in the September print edition of IR magazine.