CSRHub Blog Research on ESG metrics and comments on sustainability best practice

By Bahar Gidwani

Several groups have written predictions about the future course of the Environment, Social, and Governance (ESG) measurement space.  We’ve seen stories about the importance of millennials (as both customers and employees), a sense that carbon tracking is finally an accepted part of corporate life, and that companies must watch out for a range of new legal and regulatory issues.

At CSRHub, we are exposed to all of these trends, and many more.  Our data collection engine automatically absorbs new data elements on 3,500 topics from 435 data sources.  It analyzes this information, normalizes it, weights it, and outputs ratings on more than 15,000 companies.  Each month we get a fresh look at what sustainability professionals around the world think is important.

One thing we’ve watched for several years is the shift in emphasis between interest in Environmental, Social, and Governance issues (“ESG” issues).  Governance and Environment each had their time as the top area of focus.  However, our data shows clearly that Social issues are now emerging as the focus for corporate social behavior analysis.

The overall sustainability ratings for the companies CSRHub tracks was stable or even dropped a little between 2009 and 2011.  We believe this was due to cutbacks on ESG spending, following the great recession of 2008-9.  Since 2011, we have seen steady overall improvement across companies in all industries and geographic regions.

It is relatively easy to drill down into this data and pull out the average ratings across all of the companies CSRHub tracks, for each aspect of ESG.  However, our coverage has grown rapidly over the past eight years, partly due to the fact that we’ve found more data sources (we started with only 70 sources) and partly due to the fact that more companies are reporting sustainability information.  To ensure that we could focus just on trends in ESG focus, we selected 400 companies from this year’s Fortune 500 for whom we had full ratings back to 2009.

As you can see in the graph below, the ratings on Governance issues for this set of 400 companies have fallen since 2009 (probably as the legal and governmental pressures from the recession receded).  Environment had an upward spike in perceived performance from 2012 through 2014, but has now leveled off.  Social ratings have now started to move up and look likely to soon pass those for the other two areas of ESG.

We can also track how much information we receive from our sources for each area of social performance.  If we assume that the amount of information our sources receive ties to the amount of information that companies produce, we see evidence that the group of companies we study have generated more data in Social than in either of the other two areas.

CSRHub tracks six different social metrics areas: Community Development & Philanthropy; Compensation & Benefits; Diversity & Labor Rights; Human Rights & Supply Chain; Product; and Training Health & Safety.  We expect to see our clients continue to step up their efforts to benchmark their performance against that of their competitors in each of these areas.  Software firms will add more tools and consultants will write more reports on Social practices—just as they did during the 2008-09 era for the Governance space and in the 2012-14 era for the Environment space.  The overall effect should be a refocused interest on improving corporate performance on social issues, over the next few years.

 Bahar Gidwani is CEO and Co-founder of CSRHub.  He has built and run large technology-based businesses for many years. Bahar holds a CFA, worked on Wall Street with Kidder, Peabody, and with McKinsey & Co. Bahar has consulted to a number of major companies and currently serves on the board of several software and Web companies. He has an MBA from Harvard Business School and an undergraduate degree in physics and astronomy. He plays bridge, races sailboats, and is based in New York City.

CSRHub provides access to the world’s largest corporate social responsibility and sustainability ratings and information.  It covers over 15,000 companies from 135 industries in 132 countries. By aggregating and normalizing the information from 435 data sources, CSRHub has created a broad, consistent rating system and a searchable database that links millions of rating elements back to their source. Managers, researchers and activists use CSRHub to benchmark company performance, learn how stakeholders evaluate company CSR practices, and seek ways to improve corporate sustainability performance.

Guest Author: Adriana Salazar

A well-known quote from 19th century American writer Mark Twain says “Comparison is the death of joy”, but if you’re a company wanting to create a sustainability strategy that makes business sense, what if I tell you there’s a lot to be happy about in comparing yourself with others?

And what if I tell you mandatory reporting is instrumental in helping you make these comparisons?

By others, of course, I mean your industry peers. Peer benchmarking is the process designed to assist companies in comparing themselves with each other (on specific metrics or processes for instance) in order to grow and make better strategic decisions. If we focus on sustainability benchmarking, the process naturally closes in on sustainability-relevant metrics.

So why benchmark? Companies that grasp the importance of a solid sustainability strategy (and view it as an asset rather than a hindrance) know investors increasingly value this forward-thinking approach. In addition, knowing where you stand against your competitors and identifying strengths and weaknesses for improved strategic decision-making can help your corporation drive innovation and increase bottom line benefits. But for all its benefits (if you follow the blog, you’ll know we’ve discussed this before), the benchmarking process also has its challenges. To name one, sustainability benchmarking is only as good as the data it’s based on.

If you’re a company wanting to benchmark your sustainability data against your peers, you’ll likely want to use third party tools and services offering a good range of data and allowing you to run quick and reliable comparisons on a variety of indicators. But if you think about it, the only reason your company will even have access to this type of data in the first place, is because your industry peers and competitors have made their sustainability data publicly available.

In short, data (always) matters. Good quality and publicly available metrics are at the core of sustainability benchmarking. And this is where the question of mandatory reporting comes in. The next time you hear someone complain about compulsory sustainability reporting, there’s at least one solid argument you can give them: Although voluntary reporting is fairly extended, it’s the mandatory disclosure of key (and sometimes sensitive!) data that’s going to take sustainability benchmarking to the next level. For a corporation to obtain a truly reality-based snapshot of where it stands against its peers, both industry leaders and laggards need to have previously measured and released the ‘metrics that matter’, including those they would rather not report about.

While it’s true that regulatory instruments remain largely voluntary at the global level, mandatory sustainability reporting standards and legislation are increasingly present at the national level. According to GRI’s 2013 ‘Carrots & Sticks’ publication, which analyzed the increasing number of national and international reporting policies from around the world, in 2006, 58 percent of policies were mandatory, while 7 years later, over two thirds (72 percent) of the 180 policies in the 45 reviewed countries were compulsory.

In 2013 (see image below), GRI already highlighted that sustainability reporting requirements and recommendations were on the rise in the EU. More recently, due to the December 2014 EU Directive on the Disclosure of non-financial and Diversity Information by Certain Large Undertakings and Groups, by the end of 2017 an estimated 6,000 public interest companies with over 500 employees, across 28 Member States, will be required to disclose relevant and material environmental and social information in their annual reports.

In addition, increased mandatory reporting (contributing to improve and expand the quality and availability of data for sustainability benchmarking), also means the days of greenwashing are over. Highlighting a few obscure and supposedly ‘green’ KPIs in your next sustainability report is probably not going to convince anyone. Fortunately, globally and in the past few years, sustainability reporting has taken the opposite direction (towards increased disclosure, transparency, visibility, dialogue…), and that’s something we should all be very grateful for.

There are a number of user-friendly solutions to help you benchmark. At Enablon Publisher, we partnered with CSRHub to create a benchmarking tool allowing any corporation to quickly and efficiently measure environmental, social, governance and community performance against industry peers. From a user perspective, all you have to do is enter the name of your company, select your competitors, and start benchmarking!

If the idea intrigues you, visit us at: http://publisher.enablon.com/templates/benchmark/

By Guest Blogger, Kevin Hagen

The Hagen-Wilhelm Change Matrix

Phase IV is getting to some rarified space.  While there are groups or divisions within companies who are demonstrating phase IV behavior and results, there are few complete companies at this level.  To get a sense of how many, I turned to CSRHub.  This powerful on-line resource distills some 291 sources of data into a 100-point scoring system.  Using CSRHub score as an indicator of where a company is on the change matrix can give an idea of the distribution of companies on the journey.  Out of hundreds of thousands of companies worldwide, about 8,500 have been identified and analyzed for their sustainable business efforts.  Fewer than 2000 score above a 56 and no company scores above an 80.  That suggests that less than 1% of companies are possibly operating at stage IV.  With so little real world experience it becomes clearer why there is little understanding of this definition of “sustainability”.  It also says that companies just getting started are not too late.

An objective score is helpful, but it’s very difficult to use a single snapshot to understand where a company really is.  Remember, companies are just collections of people, each one has to make their own shift to sustainable business thinking. So what are other indicators of Stage IV?  One is when sustainable business skills, competencies and education are required to be successful at “ordinary” roles.  At REI it was pretty much required to understand sustainable forestry and the FSC system in order to be a paper buyer.  USGBC LEED accreditation was becoming a necessary credential to work in store development and real estate.  Competency with the Sustainable Apparel Coalition’s HiGG Index and other Life Cycle Assessment tools was becoming required to be a Product Designer.  And an understanding of social tools like those from the Fair Factories Clearinghouse is needed to be in sourcing.

Another indicator is to look at how “sustainability” projects are being managed. Is there a special project office running unique efforts, or are sustainable business criteria helping to drive priority and resources to projects across the organization.  How about collaboration?  Do good ideas have to climb a whole chain of command and then back down the other side in order to get permission to proceed, or are people at all hierarchy levels empowered to reach across silos to get things done?

More clues come from looking at business results. In stage IV negative environmental and social impacts (the brown line) are understood, measured and being aggressively addressed holistically.  In fact, through game-changing innovations, negative impacts have been disconnected from company growth and are being reduced in absolute terms without unintended consequences.  In other words, the brown line is going down while the business prospers.  Beyond success at “doing less bad”, the company has started to identify ways in which it can use the power of enterprise to create value and measurably make things better.  The Green Line is on the rise.

A good example happened at Gildan, a multibillion-dollar textile company based in Montreal, Canada.  At first they successfully improved energy efficiency in their mills in Central America (less fuel, less pollution, less cost = less bad).  Not satisfied, they radically redesigned the steam plant that runs their factory, switching from barges of imported bunker fuel oil to biofuels provided by local agricultural waste and secondary crops.  They not only eliminated carbon emissions and eliminated a potential spill hazard; they broke their financial dependence on external fossil fuel and replaced it with a stable local energy supply that also provides an economic engine for their community.  They used their business to create environment and social benefits while driving down operating costs and insulating themselves from risks.  That’s an example of the green line rising – Stage IV results.

Keys to the game: 

In previous articles I offered ways to anticipate what's coming and set the stage for successful next steps.  The problem this time: No one has reached Stage V, so we're not sure what the keys to the game are.  But I can offer an educated guess.

Radical Collaboration: As I talked about in an earlier article; Sustainability is a description of a system, not an individual entity or business.  Without a forest eco-system not even a tree is sustainable.  So in order for business to achieve sustainability we’ll have to do it together.  The capabilities for business people to engage with organizations outside their four walls will be critical.  While we’re used to working with customers and suppliers, the idea of radical collaboration is effective engagement with organizations in a more complex web - beyond buy/sell relationships. A great example is the Sustainable Apparel Coalition.  This is a group of well over 100 Brands, factories, NGOs, academics and others working to make the textile industry more transparent, accountable and profitable by tackling social and environmental challenges.  Learning the skills needed to be successful in these kinds of collaborations will certainly be a key in Phase V.

In the final post in the series, we’ll dive deeper into the illusive Phase V.

See Kevin's post introducing The Roadmap Series.
See The Roadmap Series: We all start at Stage I
See The Roadmap Series Phase II: The First Big Step
See The Roadmap Series, Phase III: From Personality to Process

Kevin Hagen is a sustainable business advocate. For over a decade he has helped business be more successful by making the shift to more sustainable thinking. As a leader inside medium to large companies or as an external advisor Kevin helped design and implement successful sustainability strategies and programs. Most recently, Kevin lead Corporate Social Responsibility (CSR) strategy and implementation at REI, a leading outdoor retailer and the U.S.'s largest consumer co-op. Kevin's team delivered great results, received a lot of recognition and showed that a mission based company with nearly $2B in sales can reduce it's environmental footprint while growing profitably. See Kevin's blog where he shares ideas, news and offer resources and organizations that he thinks can help companies make progress toward sustainability while delivering bottom line benefits at the same time.

By Guest Blogger, Kevin Hagen

The Hagen-Wilhelm Change Matrix from Making Sustainability Stick by Kevin Wilhelm

A quick recap of the Change matrix for context; Phase I is conventional thinking, it’s where we all start and where the majority of companies still are.  Sustainability is confused with “green stuff” or even philanthropy by the organization and sometimes by the heartfelt folks who are acting as heroes (or martyrs) for change.  Phase II is marked by that pivotal first step.  The company goes from “random acts of greenness” to adopting a strategy or agenda for taking more responsibility for environmental and social impacts.  If they are doing it right, they start to see opportunities and begin to enjoy the benefits such as reducing costs and risks.  Stage III marks the next big transition.

Why move from personality to process?

The personality phase is great; lot’s of love, lot’s of attention and lot’s of personal fulfillment for making change.  The company is proud of progress and is reaping business rewards.  But to make progress you have to change.  Why? Quite simply to get more done.  No matter how much charisma one has, you can’t be everywhere, it’s not enough and it has a shelf life.  All three of the leaders I mention in the opening made this shift and that’s one of the reasons they’re stars.  They modeled the transition to organizational process for bigger gains, both inside and outside of their companies.  They saw that sooner or later the charm offensive runs out of steam.  In addition to leaving your program high and dry, you will leave people inside and outside of the company with the idea that it was just a fad – the bubble bursts.  Reinforcing that view makes it really difficult for everyone to make progress.  To avoid cratering, it’s really important to be driving the shift toward Phase III well before the infatuation runs out.

A critical factor in the shift was one of the “Keys to the Game” in Phase II – rigorous metrics.  With a track record of success and measured financial impact you can show the correlation between success and the new metrics. Then pivot from correlation to causation – your metrics are not a happy coincidence, they are the key indicator (even cause) of success.  Thus leaders can have confidence that pushing for the next level of sustainability goals will result in more business success.

Keys to the Game: Phase III:

1.  Telling the internal story really well – credit where credit is due:  By this time, folks are not surprised by success.  In fact, they are taking pride in the fact that the company is more environmentally and socially responsible and they are thrilled that it’s delivering financial returns too.  At this point it’s really important to do effective “after action reports” with leaders and influencers.  Retell the story in terms of the process so that they understand that success wasn’t luck, it wasn’t one person’s passion and it wasn’t an isolated instance.  Success came from following a process of change that can be taught to everyone, repeated often around the company and is worthy of further investment.  Make sure that in public, the people involved get full credit and praise, while in private with company leaders the process is the hero.

2.  Involve more stakeholders:  At this stage you can get a lot done within the scope of authority of mid level managers within the organization, but don’t stop there.  Make a point on some projects to cast a larger net for collaboration, more divisions, outside organizations like vendors and service providers and even NGOs if possible.  For example if you’re working on energy efficiency, don’t stop with the facilities team.  Involve divisions that might be able to make for a bigger win – like the office workers in the space where lights or HVAC is being changed.  You can also involve the utility company, perhaps get them to contribute incentive dollars.  And you could involve a non-profit such as Environmental Defense Fund’s Climate Corp fellows who can add a lot of horsepower to your efforts.   All these stakeholders can make the project more successful, but the real up-side is that you’ll be developing organizational skills for collaborating – a critical skill required in Phase IV.

And that’s the hook for coming back for the next article in the Roadmap series – Phase IV – taking it to scale.
See Kevin's post introducing The Roadmap Series.
See The Roadmap Series: We all start at Stage I
See The Roadmap Series Phase II: The First Big Step

Kevin Hagen is a sustainable business advocate. For over a decade he has helped business be more successful by making the shift to more sustainable thinking. As a leader inside medium to large companies or as an external advisor Kevin helped design and implement successful sustainability strategies and programs. Most recently, Kevin lead Corporate Social Responsibility (CSR) strategy and implementation at REI, a leading outdoor retailer and the U.S.'s largest consumer co-op. Kevin's team delivered great results, received a lot of recognition and showed that a mission based company with nearly $2B in sales can reduce it's environmental footprint while growing profitably. See Kevin's blog where he shares ideas, news and offer resources and organizations that he thinks can help companies make progress toward sustainability while delivering bottom line benefits at the same time.

By Cynthia Figge

A recent article in the Harvard Business Review by David Lubin and Daniel Esty should bring cheer to anyone who has been concerned about how slowly corporations seem to be adopting sustainability strategies.  The article titled “The Sustainability Imperative” argues persuasively that incorporating sustainability practices into corporate behavior is a “mega trend”.

A section titled “Reporting and communication” made me especially happy.  The authors say, “Developing metrics that allow companies to measure benefits and understand costs is essential to adapting and refining their strategy, as well as communicating results.”  Companies need an external measure of their sustainability progress —and they need benchmarks that compare them to their competitors, so they know how much further they need to go.  We have spent two years developing a measurement instrument we call CSRHUB—a tool we hope can provide this type of broad and uniform metric.

The authors go on to point out something I and my partners at EKOS International have seen in many of the companies we have worked with.  “When the assessments were based only on publicly available information and a company’s external reporting, we got scores that were almost always lower, and often significantly so, than scores developed in consultation with the company and with full inside information.”  In other words, many companies may be doing better on sustainability issues—and on their corporate social responsibility performance in general—than is publicly known.

For example, if you look at the default ratings on the CSRHUB site for Wal-mart and Costco, you will find Wal-mart gets a score of 56 and Costco gets a 48 (on a scale of 0 to 100).  As a Costco customer I hope that this difference may be overstated, but it’s difficult to know. Some of the difference our sources perceive between these two companies may be driven by their varying policies of disclosure. One explanation for the rating difference is that it’s the penalty for lack of transparency.   Costco is followed by fewer data sources:  Only twelve sources report on Costco compared to seventeen for Wal-mart. Wal-mart has expanded its website coverage of CSR, while Costco has only recently published a first report on sustainability.

If you are a subscriber to our system, you can see more of the picture.  Subscribers will see that Costco gets a 39 on its corporate transparency and reporting compared to 52 for Wal-mart, and 45 on its environmental policy and reporting compared to 63 for Wal-mart.  In contrast, we show closer ratings for a more fundamental element—environmental resource management (Costco gets a 51 rating while Wal-mart gets a 59).

I hope more companies come to understand both points this HBR article makes regarding communication. First, companies need to develop metrics that enable them to track their own progress.  Second, companies should contribute to the metric-forming process by revealing their policies and practices.  Doing both will strengthen transparency, and give good-performing companies credit where due for the improvements they have made, and hopefully serve as a catalyst to “manage sustainability as a business megatrend”.