GISR launches principles for rating the raters
The proliferation of corporate sustainability ratings, rankings, and indices is an old story. For years, just about everyone has griped about the sheer volume of such things, and the time, resources, and attention companies must spend on them. Currently, more than 100 sustainability ratings, ranking and indices evaluate the performance of more than 10,000 companies, using more than 2,000 different indicators.
The idea that this cacophony could be harmonized — never mind quieted — has long been an unattainable dream for companies. This week, that dream moves one small step toward reality.
The nearly two years, a nonprofit called GISR — the Global Initiative for Sustainability Ratings — has been working to create a standard for company-level sustainability ratings. It is doing this, it says, “to accelerate the integration of environmental, social and governance (ESG) issues and indicators in investment decision-making” by “building a new standard that equips investors, companies and other stakeholders with the tools to recognize true excellence in corporate sustainability.”
That is, to get Wall Street and its counterparts around the world singing from the same hymnal on sustainability.
GISR does not intend to rate companies on sustainability. Instead, it will accredit other sustainability ratings, rankings or indices that new to its principles, issues and indicators.
GISR, like the Global Reporting Initiative and Ceres, take an investor-centric perspective, with eye on how shareholder interest can move management and markets. Indeed, all three organizations are linked to the Tellus Institute, a Boston-based nonprofit research and policy organization. GISR is a joint program of Ceres and Tellus, as was GRI, which the two groups spun off as a separate organization, now based in Amsterdam.
At the center of both GRI and GISR is Allen White, vice president and senior fellow at Tellus, who directs the institute’s program on "corporate redesign." White is credited with co-founding GRI and served as its acting CEO until 2002. In 2004, he co-founded and now directs of Corporation 2020, an initiative focused on “designing future corporations to create and sustain social mission.”
This week, at the Ceres conference in San Francisco, White and Mark Tulay, the GISR program manager (and former program director at Ceres) are unveiling GISR’s first major initiative: a beta version of GISR’s 12 principles, the core attributes of a ratings framework required to achieve credibility among key stakeholders. The principles are the first step in a multi-year process of building an accreditation process that ratings organizations can begin to use.
This week, GISR also will announce that UPS and McDonald’s have committed to participate in its Supporting Stakeholder program. They join other companies that already are playing an active role in GISR's standard development process, including Bloomberg, Deloitte, Intel, Pax World, TIAA-CREF, and UBS.
Relief from survey fatigue
The ratings system GISR envisions could be a boon to companies suffering from survey fatigue from the dozens of organizations currently rating companies, both multi-issue ratings organizations — such as Dow Jones/SAM, FTSE, MSCI, Oekom, Sustainalytics, Thomson Reuters, and Vigeo — and issue-specific raters — CDP, Climate Counts, Newsweek, Oxfam, Trucost and many others.
According to White, early company response to GISR has been largely positive. “We haven’t had almost a single negative comment or skepticism,” White told me last week. “Ratings are a fact of life for CEOs, who have to get up in the morning and see that they’ve been shoved off the Dow Jones Sustainability Index or dropped down from the Iris score or some other scorecard, and they don’t like it.”
On the other hand, says White, “They feel disempowered because they are the rated entity. They’re asked to fill surveys out, sometimes dozens of surveys every year. And then the scores are published via Newsweek or Corporate Knights or others. The outcomes can be wildly volatile: on a list one year, off the next year; a leader by one rater in the same year, a laggered by another rater in the same year.”
Moreover, he says, companies’ ability to seek recourse for erroneous data or misperceptions can be challenging. “More than occasionally they’ll be met with a black box. They’ll be told that ‘This is intellectual property and we can’t disclose of any of it,’ or in some cases, ‘We can disclose, but it’ll cost you.’”
“Every single company that we’ve spoken to said there’s extreme volatility in these ratings outcomes, coupled with too many surveys and too many indicators,” says Tulay. “They also express concerns about how to engage with these raters. Sometimes there’s a fee associated with getting information on why a company achieved a certain score.”
GISR's principles aim to address such challenges. For example, one them, “Value Chain,” states that “a rating should apply to all portions of a rated company’s value chain over which the company exercises control or significant influence.” The principle "Transparency" states that “A rating should be transparent to those whose decisions are affected by the application of such rating.” (All 12 principles can be viewed at the end of this article.)
Some of this may seem like common sense, but creating such principles isn’t easy. Take Transparency. There’s a natural tension between raters, who want to maintain their intellectual property, and the rated, who want visibility into what’s behind the ratings. Or Comprehensiveness: While ratings systems themselves need not be comprehensive — many look at just one issue, like greenhouse gas emissions — they need to be comprehensive in the way they look at things.
50 shades of green?
For example, White explains, “If you’re rated on carbon emissions and all that the carbon rater does is to say your emissions went up or your down, or are more or less per dollar of revenue than some other company, that’s actually a very narrowly defined concept of disclosure of carbon emission. There are many, many ways to reduce carbon, some of which have very favorable or positive effects on society, on the economy, on communities, on labor practices relative to others. What about all the aspects of those impacts, positive and negative, quite apart from the absolute up and down numbers?” GISR will require that raters address such issues.
GISR joins an emerging ecosystem of players working to provide investors and others with reliable information on companies’ sustainability performance. It includes
- SASB, which is establishing a methodology for understanding of material sustainability issues facing industries and creating sustainability accounting standards suitable for reporting and disclosure.
- GRI, which established a framework for how companies should report their sustainability information.
- IIRC, which is promoting integrated reporting of both sustainability and financial data
While each of these organizations has a distinct mission and methodology, they share the goal of elevating sustainability among investors by creating a set of relevant tools for measuring, reporting and comparing companies’ sustainability performance. The theory is that once this is possible, investors will reward leaders and punish laggards, moving companies further and faster than regulations and other policy mechanisms.
This week’s release of the 12 principles will precede a public comment period during June and July, followed by the creation of a public registry of sustainability ratings, including the indicators used by each, eventually contained in a searchable database. After that, GISR will produce a guide for asset managers and asset owners to use to assess the suitability of different sustainability ratings for their purposes. GISR also plans to look into developing a sustainability questionnaire app “to help companies address survey fatigue by automating the information pipeline of sustainability information with raters.”
A number of sustainability executives are no doubt panting expectantly right about now.
GISR, for its part, isn’t short of high expectations. I asked White where he sees his organization’s impact five years from now. “Our big vision is that we are a major market mover, equivalent to the way financial ratings have an enormous impact on who raises capital, at what cost, and who gets boxed out of the market because of poor credit standings.”
Will companies eventually be boxed out of markets because of poor sustainability ratings? It’s a pipe dream, at least for now. But if corporate sustainability performance can’t eventually affect markets, the idea of companies collectively moving the needle on sustainability issues is essentially a pipe dream, too.
The 12 GISR Principles
- Balance: A rating should utilize a mix of sources, issues and indicators that depict both past performance of the company in relation to internally and externally defined targets as well as prospects of future performance based on leading and forward-looking indicators.
- Comparability: A rating should allow users to compare performance of the same company over time, and different companies in the same industry within the same period.
- Comprehensiveness: Rating the sustainability performance of a company is a multi-dimensional concept that encompasses impacts on of all forms of capital, including human, intellectual, natural and social.
- Sustainability Context: A rating should assess performance within the wider context of the company’s impacts at various geographic scales, incorporating scientifically based and/or widely-accepted normative thresholds and limits, applicable to such impacts.
- Long-term Horizon: By definition, sustainability can only be measured using a long-term perspective. A rating should enable the evaluation of the long-term prospects of the rated company while simultaneously providing insights into short- and medium-term outcomes that lie on the critical path toward positive long-term outcomes.
- Materiality: A rating should assess performance based on sustainability issues and indicators relevant to the decision-making of investors, and companies, consumers and other stakeholders for which a rating is designed.
- Value Chain: A rating should apply to all portions of a rated company’s value chain over which the company exercises control or significant influence.
- Assurability: A rating should be designed to allow for independent, third-party assurance of its application in accordance with the GISR standard by qualified parties.
- Continuous Improvement: Through periodic update, a rating should track and integrate the best-available science and measurement techniques, issues, and indicators.
- Impartiality: The design and application of a rating, whose primary users are external to the rated organization, should be protected from undue influence by the rated company.
- Inclusiveness: Development and stewardship of a rating should identify and systematically engage those stakeholders whose decisions are influenced by the application of the rating.
- Transparency: A rating should be transparent to those whose decisions are affected by the application of such rating.