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Are sustainability ratings asking the right questions?

July 2015

Why is it that inherently unsustainable oil and gas companies rank so well in sustainability indices, such as the Dow Jones Sustainability Index? Tom Idle explores a new approach to benchmarking - one that better understands how fit companies are to flourish in the future

Followers of solar pioneer and environmental activist Jeremy Leggett’s ongoing e-book serial, ‘The Winning of the Carbon War’, will be aware of the trends emerging on the frontline of the said-war against traditional fossil fuels.

The “tipping point in the demise of fossil fuel industries” that Leggett describes is certainly compelling. First, the cost of deploying renewable energy systems is falling. In fact, clean energy generation overtook conventional fossil fuel and nuclear installations globally in 2013.

At the same time, the cost of delivering hydrocarbons is rising. Drilling for shale is losing its appeal, with US shale companies going bankrupt, drillers losing money and assets being written off by the multiple billions. Last year saw the lowest rate of discovery of new oil and gas reserves in 20 years.

And then there’s the politics of climate abatement, which are showing signs of alignment. More than 100 countries now have a 2050 target to reach zero net greenhouse gas emissions. Even China has, for the first time, committed to cap its carbon output by 2030 while generating at least 20% of its energy needs using clean energy sources, such as solar and wind.

“Imagine yourself as the CEO of a big energy company, with these mega-trends playing out around you right now,” says Leggett. “Any one of these challenges would be bad enough to confront and face on their own. Facing them all at once is going to be tough and could trigger the downfall of the industry.”

Even the less avid followers of this shifting landscape will have struggled avoid the news that the heirs to the fabled Rockefeller oil fortune, who control around $860m in assets, withdrew their funds from fossil fuel investments last year as part of a wider divestment movement involving 800 global investors promising to remove $50bn worth of support over the next five years.

These waves of change serve up significant challenges for businesses to overcome - even if only a fraction of Leggett’s hoped-for future becomes a reality. Progressive organisations will ride these waves and flourish by creating new business models, reducing their dependence on natural resources and becoming energy-independent.

But many will collapse under the weight and sink.

So, how do investors assess which companies will sink or swim? As Carbon Tracker Initiative has spent the last few years pointing out, plenty of these assets could be left ‘stranded’, a term it uses to describe fossil fuel energy and generation resources which “at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to earn an economic return…as a result of changes in the market and regulatory environment associated with the transition to a low-carbon economy”.

Currently, stakeholders are at the mercy of numerous non-financial ratings and rankings systems, designed to give a better understanding as to which companies are performing best when it comes to managing their social and environmental impacts.
Amongst the best-known are Dow Jones Sustainability Index, the Carbon Disclosure Project and FTSE4Good Index Series. But the list of organisations - from media agencies and consultants, to asset managers and publishers - attempting to compare the sustainability performance of companies is long and wide. It includes the likes of The Global 100 Most Sustainable Corporations in the World, CR Magazine’s 100 Best Corporate Citizens List and Ethisphere’s World’s Most Ethical Companies list, to name just a few.

But how credible are these benchmarking exercises? And do people pay any attention to them?

According to research produced by SustainAbility and Globescan as part of its ‘Rate the Raters’ project - designed to shed some light on the universe of corporate sustainability ratings, and ultimately improve their quality and transparency - the answer is ‘yes’. When asked how much trust they place in certain players to accurately judge a company’s sustainability performance, rankings organisations are only beaten by NGOs in the perceived credibility stakes - and that trust has been steadily increasing.
Rankings and ratings clearly have a role to play. More than 60% of respondents said that ratings will be more important three years from now in driving improved corporate sustainability performance.

But not everybody is convinced. Geoff Kendall, a former director at SustainAbility, is one of them. “Of course, there is value in external validation; and companies pay attention to the likes of DJSI.

“But most of them focus on current best practice, and often at the level of individual sectors. You can get a very good score if you are performing better than others in your sector, even if you have a business model that is doomed to fail.”

Kendall points to the example of Thai Oil plc which achieved an 85% score on last year’s DJSI rankings. “I’m sure they are progressive within their sector. But in a world where we are needing to wean ourselves off fossil fuels, is it right that we are telling them they are 85% sustainable? Will that score encourage them to change their business model?

“It’s the very definition of ‘thinking inside the box’ and not thinking about whether that box is being slammed against the wall.”
The problem, as Kendall sees it, is the continued focus on “today’s best practice in favour of tomorrow’s required practice”. And it is a concern raised by the SustainAbility/Globescan research, with most respondents claiming that ranking credibility could be best be improved by focusing on the right issues. “You won’t get the full picture if all you look at is where you are relative to the unsustainable status quo. You need to benchmark yourself against a sustainable future.”

But what does this sustainable future look like - and how can companies understand how far away they are from being safe and secure in the knowledge that they will be a part of it? Kendall’s new Future-Fit Business Benchmark (FFBB) is designed to answer these questions.

Using the four basic principles of sustainable development originally devised by The Natural Step, the FFBB has created a series of 21 goals that companies can use to track their true sustainability progress. These include things like making sure all product and packaging materials are repurposed at end of life, and all staff are paid at least a living wage. A second public draft of the goals will be published this summer, along with a new online wiki inviting feedback that might lead for a refined final list. Then, by the end of the year, the goals will be supported by a list of KPIs that companies can use to assess how they are getting on in achieving them.
“It’s a line in the sand that any company, regardless of size and sector, must reach if it is to get an entry ticket into the future,” says Kendall. “Some of the goals might seem impossible to some companies. But they are only ‘impossible’ in the context of current business models.”

This line of thinking is not new; Wayne Visser’s Kaleidoscope Five-S Future-Fitness Framework, for example, is similar in scope. But the FFBB is a tool designed to be used on a wide scale. Companies won’t be charged to use the FFBB, but they will need to get third party assurance if they want to talk publicly about their progress (with Kendall happy to train up any consultant that wants to play the role of assurer). “We want 1,000 companies to use the FFBB within three years.”

So, what does the future hold for the well-established sustainability ratings organisations? Well, there’s nothing stopping them adopting the FFBB goals and KPIs, says Kendall, while acknowledging the struggle ahead in encouraging companies to transition to a new sustainability scoring methodology. “If a company has consistently been scoring an 80% sustainability score and another organisation comes along and paints a truer picture that says it is more like 20%, they might want to stick with their original ratings organisation.

“But you only have to look at the wave of unacceptability that is beginning to break, with the divestment movement and talk of stranded assets. This can only help investors get ahead and ride the waves too.”

Global | Benchmarking

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