Sustainability ratings - Are they underestimating the potential of corporate citizenship?

Notes from the Field #1/2017

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Sustainability ratings - Are they underestimating the potential of corporate citizenship?

Notes from the Field“ in less than 100 Words:

• Sustainability is a diverse concept that is becoming increasingly important to both companies and society as a whole

• Social engagement outside the course of normal business (corporate citizenship) is, however, often neglected in the public discourse around sustainability

• Even well-known sustainability ratings focus primarily on business activities in economic, ecological and social terms, and regard corporate citizenship as a sub-category to
which little analysis is devoted

• Given the absence of role models and their desire to win awards, businesses often align their behaviour with the criteria used in the ratings. They therefore run the risk of underestimating the opportunities afforded by corporate citizenship, such as promoting innovation and employer branding

Corporate Citizenship - terra incognita

Sustainability is an increasingly important subject in the world of business. This diverse concept encompasses not only inwardly focused economic, ecologic and social responsibility, but also corporate citizenship1 – social engagement that goes beyond the company’s usual business operations.
However, corporate citizenship represents unknown territory for many companies. 

In seeking to orient themselves, an increasing number of company representatives are coming to rely on ratings2, which analyse and evaluate
their sustainability efforts.

The ability to compare themselves directly with their peer group and the lure of an accreditation marking them out as particularly sustainable or socially active encourages companies to use criteria defined by the rating organisations to measure their own performance on societal objectives.

The Concept of Sustainability

Corporate Citizenship in sustainability ratings

The focus on the assessment criteria mentioned above has a number of disadvantages, however. A quick glance at the assessment processes used in determining sustainability ratings indicates three main weaknesses in the area of corporate citizenship:

• Ratings use a three-pillar model of sustainability, evaluating companies based on their economic, ecologic and social performance. Corporate citizenship is classified as a sub-category.

• As a result, only a small number of criteria are used in the sustainability ratings to assess corporate citizenship. This is not proportionate to the importance of the subject.

• Current trends such as social innovation and corporate impact investing are not appropriately reflected in sustainability ratings, despite the great potential that lies in these developments for both companies and society. These assumed weaknesses stand in contrast to recent developments which have further increased the importance of corporate citizenship, particularly for companies with international operations. These include regulations such as the Companies Act 2013, which requires large companies in India to donate 2% of their profits to charity. Social changes like demographic trends are also ramping up the pressure on companies. Those changes lead to societal challenges such as a shortage of qualified personnel and therefore companies are required to make good on their responsibilities to society. 

Several rating organisations around the world now seek to address the issue of sustainability. Experience has shown that the results of their ratings are playing an ever-more important role in the world of business. This issue of Notes from the Field takes a closer look at selected examples to investigate the true relevance of corporate citizenship in sustainability ratings. It should be noted that this sample represents only a small portion of the rating systems currently in existence.

Example 1: oekom Corporate Rating

The oekom Corporate Rating is conducted at regular intervals by the Munich-based rating organisation oekom research AG. Ratings are unsolicited. The coverage universe includes about 3,700 companies worldwide.

Oekom research uses an absolute, “best-in-class” scale – that is, companies are not primarily ranked relative to each other. Instead they are given a
rating from D- (poor) to A+ (excellent) on the basis of an environmental and a social rating. If a company exceeds a certain threshold, the company is awarded “oekom Prime Status” – a distinction achieved by about 550 companies to present.

Although the rating is unsolicited, oekom research remains in contact with the companies in order to obtain more data. They also maintain dialogue with independent experts and thoroughly screen media outlets.

On balance, the result is a comprehensive assessment of sustainability. Corporate citizenship in the form of social engagement represents only a sub-category, however. It is assessed on the basis of four criteria: (1) goals and (2) nature of social engagement, (3) monitoring and evaluation and (4) disclosure of outcomes. As a result, social engagement remains a negligible component of the oekom Corporate Rating. Furthermore, the lack of transparency means it is not possible to review the indicators and scales used in reaching a conclusion.

Assessment Criteria of oekom Corporate Rating
Assessment Criteria of oekom Corporate Rating

 Example 2: Good Company Ranking

In autumn 2016 Kirchhoff Consult published the fifth edition of the Good Company Ranking, in association with HHL Leipzig Graduate School of Management. In its current edition, Kirchhoff is focusing exclusively on the companies that make up the DAX 30.

This comprehensive ranking is divided into four spheres of business responsibility: society, employees, environment and financial integrity. These are assessed individually by expert teams using a range of criteria. The results in each sphere are reviewed by a panel of six judges, after which they are weighted and fed into a single overall score. Companies are then rated as very good, good, average or unsatisfactory, depending on their score.

Corporate citizenship is assessed as part of the “Society” category, which uses customer- and supply chain-related criteria to build a comprehensive analytical framework. Direct social engagement, on the other hand, is the subject of only two questions. These are (1) the nature and extent of activities and (2) companies’ regional engagement.

Companies can achieve a good score in these categories if they pursue a systematic approach with regard to their core business, guarantee the independence of the projects they support and clearly demonstrate the scope of their engagement. Sustainable sponsorship and giving that takes into account the number of laces in which the company does business also positively impacts the score.

Transparent communication of the criteria and their components makes the expectations that Kirchhoff Consult has of companies very clear. In spite of the individual, comprehensive assessment of “Society” as a sphere of responsibility, evaluation of a company’s active social contribution remains limited.

Assessment Criteria of Good Company Ranking
Assessment Criteria of Good Company Ranking

 Example 3: Dow Jones Sustainability Index

Many companies consider the Dow Jones Sustainability Index (DJSI) one of the most important sustainability indices. Since 1999, this family of indices has been produced as a collaboration between the Swiss asset management firm RobecoSAM and the American index publisher S&P Dow Jones.

The foundation for the benchmark is Robeco-SAM’s Corporate Sustainability Assessment (CSA), in which over 3,000 of the world’s largest corporations are invited to participate every year.

The companies in this “invited universe” are allocated to one of 59 industry categories and are then asked to fill in an online questionnaire specific to their  industry. To ensure that at least 50% (in market capitalisation) of every branch is represented in the rating, RobecoSAM supplements the received questionnaires by rating further companies based on publicly available information on their own. However, this leads to unequal, biased information basis for individual  ssessments. In 2015 over 2,100 companies were assessed using this method.

The DJSI questionnaire contains economic, ecologic and social categories, which are customised and weighted based on industry. Each company is ultimately assigned a Sustainability Score out of 100. The top-scoring 10% of each sector are then included in the DJSI. The DJSI is therefore another example of a “best-in-class” approach.

Corporate citizenship is assessed as a separate category, comprising three sub-categories: group-wide strategy, nature of philanthropic activities and extent of philanthropic activities. The assessment process makes use of various indicators which, given the high degree of transparency exhibited by RobecoSAM, are freely disclosed to third parties.

Transparency is, however, restricted when it comes to the results. While new additions to the index are published and the leaders named in each industry, individual companies’ scores in the various categories are not disclosed. It is therefore impossible to draw conclusions about a company’s performance as a corporate citizen.

Assessment Criteria of Dow Jones Sustainability Index (all sectors)
Assessment Criteria of Dow Jones Sustainability Index (all sectors)

Corporate Citizenship –
 an undervalued field

A more in-depth look at sustainability ratings confirms the hypothesis that the issue of corporate citizenship generally plays only a limited role in the assessment. Corporate citizenship activities are rated as sub-category of criteria focusing on core business activities. As a result, corporate citizenship is in danger of losing prominence as a integrated but individual approach – in the evaluation and consequently in the company itself.

Recent developments in the area of social engagement show, however, that there are considerable benefits to looking at corporate citizenship separately, and to giving the subject more space. This subject is no longer as simple as collecting donations and painting a few walls in kindergartens. Aforementioned methods such as social innovation and corporate impact investing are featuring ever more prominently in public discourse and demonstrating what can be achieved by approaching corporate citizenship in a strategic manner. It is undeniable that social engagement offers vastly more benefits to companies and society than its role in many sustainability ratings suggests. This conclusion is relevant across sectors including companies that automatically align their behaviour with the ratings criteria and therefore run the risk of underestimating the potential of corporate citizenship. Social actors such as charities should also bear this shortcoming in mind. They are precisely the parties who could promote the topic of corporate social engagement and thus develop stronger relationships with companies by increasing their focus on corporate citizenship. The charitable sector has thus far paid too little notice to sustainability ratings and their influence on corporate behaviour.

In order to close the demonstrated gap within common sustainability ratings, Beyond Philanthropy has developed its own benchmarking which solely focuses on corporate citizenship. This tool has already been used in assignments for international companies. It enables us to identify strengths and weaknesses of our clients’ corporate citizenship approaches and to compare them to their main competitors. In many cases, the Beyond Philanthropy Benchmarking successfully
helped companies to improve their societal commitment. We would be delighted to also show you how you and your company could benefit from a strategic approach to corporate citizenship.

1: people commonly refer to CSR when what they actually mean is corporate citizenship, i.e. direct social engagement on the part of the company
2: here the concept of ratings includes assessment in the form of a ranking or index, since these methods are always based on an original rating process