Over the last several years, an increasing number of institutional investors, ratings agencies, and other stakeholders have turned up the heat on companies to disclose their environmental, social, and governance (ESG) initiatives. The idea is that such information provides a more complete performance picture than traditional, purely financial, measures.
“The corporate community is responding to this heightened and accelerated interest on the part of global investors,” said Hank Boerner, chairman and co-founder of the Governance & Accountability Institute (G&A), during a recent webinar on sustainability reporting trends.
According to a report conducted by the G&A Institute, just under 20 percent of S&P 500 companies published a sustainability report in 2011. By 2015, however, 81 percent of the S&P 500 were publishing reports.
Pressure on companies to improve their ESG initiatives and disclosures only continues to mount, with trillions being poured into ESG investing. Consider the following groups:
Carbon Disclosure Project: Established in 2002, CDP currently represents 827 investors with $100 trillion in assets.
Principles for Responsible Investment: Established in 2006, PRI currently represents nearly 1,500 signatories from over 50 countries with $60 trillion in investment capital.
Institutional Investors Group on Climate Change: Established in 2001, the organization currently has over 130 members from nine countries, representing over €18 trillion (U.S.$19 trillion) in assets.
Investor Network on Climate Risk: Established in 2003, the INCR currently represents over 120 institutional investors representing more than $15 trillion in assets.
Interfaith Center on Corporate Responsibility: Established in 1972, ICCR currently compromises nearly 300 organizations with $200 billion in investment capital.
From these growing requests for ESG disclosures, a number of reporting initiatives have emerged to provide information to investors about companies’ ESG efforts. One of those is the Dow Jones Sustainability Indices (DJSI), launched in 1999, making it the first global sustainability benchmark that tracks the stock performance of the world’s leading companies in terms of economic, environmental, and social criteria.
Each year, RobecoSAM, an investment specialist focused exclusively on sustainability investing, invites more than 3,400 companies to participate in the Corporate Sustainability Assessment (CSA) questionnaire. Together with the S&P Dow Jones Indices, RobecoSAM publishes the DJSI, compiled from the results of the CSA, creating a comprehensive database of financially material sustainability information.
“First and foremost, we’re an asset management firm. Our approach to sustainability is, therefore, through the eyes of investors,” said Robert Dornau, senior manager of sustainability services at RobecoSAM.
Of the 3,400 companies invited to participate in the CSA, the largest 2,500 global companies by market capitalization are eligible for inclusion in the flagship DJSI World index. Additional companies are eligible for the growing family of regional and country-specific sustainability indices, such as the DJSI North America, Europe, Asia Pacific, and Emerging Markets.
“If you participate actively, it’s very likely that your ranking on Bloomberg will be a lot better than just being assessed based on what is available in the public domain.”
Robert Dornau, Senior Manager of Sustainability Services, RobecoSAM.
As part of that process, RobecoSAM also annually publishes its Sustainability Yearbook. In order to be listed in the Yearbook, companies must be within the top 15 percent of their industry and must achieve a score within 30 percent of their industry’s top performing company.
“Our aim with this whole assessment is to take companies through an annual process of competitive benchmarking regarding their sustainability performance,” Dornau said.
In the Yearbook, companies are classified into three categories:
Gold Class: Companies with a minimum total score of 60 and whose score is within 1 percent of the top performing company’s score;
Silver Class: Companies whose total score is at least 57 and whose score is within a range of 1 percent to 5 percent of the industry’s top performing company’s score; and
Bronze Class: Companies whose score is at least 54 and is within a range of 5 percent to 10 percent of the industry’s top performing company’s score.
This year, RobecoSAM awarded 77 Gold Class medals, 83 Silver Class medals, and 107 Bronze Class medals to the evaluated companies.
By region, many of the world’s most sustainable companies are located in Europe. In total, 198 European companies were included in the Yearbook, receiving 39 gold medals. Following European companies, 13 out of 122 Asia Pacific companies received gold medals.
In North America, 14 out of 82 companies received gold medals. These include Abbott Laboratories, Agilent Technologies, Ball Corp., Hewlett Packard, Humana, Lockheed Martin, Newmont Mining, Owens Corning, and more.
In 2016, RobecoSAM and Bloomberg teamed up to make the results of the CSA available to the global investment community. Only the percentile rankings of the CSA scores are made available to licensed Bloomberg users—not a company’s answers, data points, comments, documents, or other confidential information.
Collaborating with Bloomberg is a positive development for companies, many of which have requested that the results of the CSA be more visible to investors. According to a survey conducted by RobecoSAM in 2015, the vast majority of companies favored increased disclosure around CSA results.
Support of the CSA is also reflected in the numbers. Last year, out of more than 3,400 companies that were invited, a record 867 companies from 42 different countries participated.
SUSTAINABILITY YEARBOOK METHODOLOGY
Below is an overview of the methodology used for RobecoSAM’s Sustainability Yearbook.
Gold class: Within each industry, companies with a minimum total score of 60 and whose score is within 1% of the top performing comany’s score receive the RobecoSAM Gold Class award.
Silver class: All companies receiving a total score of at least 57 and whose score is within a range of 1% to 5% of the industry’s top performing company’s score receive the RobecoSAM Silver Class distinction.
Bronze class: Companies whose score is at least 54 and is within a range of 5% to 10% of the industry’s top performing company’s score receive the RobecoSAM Bronze Class distinction.
Industry Mover award: Within the top 15% of each industry, the company that has achieved the largest proportional improvement in its sustainability performance compared to the previous year is named the RobecoSAM Industry Mover.
Sustainability Yearbook Member: All companies that have been included in the Yearbook, but that have not received a medal distinction, are listed as a Sustainability Yearbook Member. In order to be listed in the Yearbook, companies must be within the top 15% of their industry and must achieve a score within 30% of their industry’s top performing company.
Companies should be aware that even if they opt not to formally submit a CSA questionnaire, they will still be rated. To meet market caps for the industries assessed, RobecoSAM uses publicly available data to evaluate companies that have elected to forgo a questionnaire invitation, and then it goes about choosing which companies rank in the top ten percent of their industry.
“If you participate actively, it’s very likely that your ranking on Bloomberg will be a lot better than just being assessed based on what is available in the public domain,” Dornau said.
Participation, however, does not automatically mean acceptance. NASDAQ, for example, tried for four years to became part of the DJSI before it was accepted last year. “It was a useful process in terms of maturing our operations,” said Evan Harvey, director of corporate responsibility at NASDAQ.
The actual process of participating in the CSA questionnaire provides enormous business benefits, Harvey noted, including:
Involvement of multiple departments in a common goal;
Exposure of sustainability measure processes to multiple organizational levels;
Disciplined and seasonal reporting;
Creating a culture of continuous improvement; and
Detailed reviews to serve as benchmarks.
Other participating companies have also lauded the CSA’s business value. “It provides a credible external perspective that informs internal discussions of how our ESG performance and transparency compares to others in our industry,” said Dan Bross, senior director of global corporate citizenship at Microsoft. “This helps us prioritize opportunities and drive to further enhance our efforts and level of transparency. Sustainability benchmarking has helped us to become a better business.”
In another example, Canadian multinational aerospace and transportation company Bombardier said it looks to RobecoSAM’s CSA as “the key benchmark index of sustainability for our organization, which supports not only improvements in our reporting, but also strategic decisions related to how we manage and anticipate sustainability issues,” said Daniel Desjardins, general counsel, corporate secretary, and CSR committee chairman at Bombardier.
Other companies say sustainability reporting results in real and quantifiable business results. “We see many tenders coming by with sustainability questions,” said Simon Braaksma, senior director of sustainability reporting at Dutch technology company Philips. “If we can address those questions, and also refer to our position in the Dow Jones as a credible, external, holistic assessment, that helps us to score high in those benchmarks and, thereby, helps us to gain business.”
Other reporting initiatives. The DJSI is not the only ESG reporting initiative. Others include the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), the International Integrated Reporting Committee (IIRC), and many more.
All of these reporting initiatives, however, have different missions. SASB’s standards, for example, focus on ESG issues that matter most to the operational and financial performance of companies trading on U.S. exchanges. In comparison, the GRI and the IIRC guidelines have a global focus—an important consideration, when European views on ESG issues can be quite different from material disclosures under U.S. securities law.
Another distinction is that RobecoSAM is the “only ranking assessment out there that is third-party audited,” Dornau said. Each year, Deloitte conducts a full audit on RobecoSAM’s processes and selected audits on certain companies—for example, how they were assessed, how the questionnaire process works. “We have to defend our decision making on a very detailed level,” he said.
But with so many ESG reporting initiatives to choose from, companies that have never participated in RobecoSAM’s CSA may still be wondering if it’s worth the effort. The process, after all, can be quite time-consuming and requires a strategic, coordinated approach among departments.
Such obstacles can be reduced, however, by having a strategy in place. Typically, the sustainability or CSR group within the company will head the initiative, said Louis Coppola, co-founder and executive vice president at the G&A Institute.
Additionally, it’s helpful to engage subject matter experts within different divisions in the company, Coppola said. For example, if the company’s initiatives concern innovation, consider engaging with someone from research and development; financial information, the chief financial officer or investor relations; social issues or employee issues, human resources.
Deciding whether to participate in the CSA is not an easy decision, but just going through a self-review of the questions in the CSA can be valuable, Harvey said. “In the end, hopefully, you get better at these things, and you get better at tracking and measuring them, and you have some interesting and satisfactory results.”
The start of this year’s online questionnaire process begins March 30, when invitations will be sent out. Companies that decide to participate have until May 30 to submit the questionnaire, documents, and a signed approval form. New DJSI members will be announced Sept. 7.