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

By Bahar Gidwani

After an eighteen month break, Newsweek has re-launched its Green Rankings.  On June 5, it issued new ratings for the 809 companies that are on either the US 500 or Global 500 lists. The Green Rankings list is likely to continue to draw attention to corporate social responsibility performance and we are glad to have it back. We hope that Newsweek will continue to publish and promote work in this area.

Over the past few years, Newsweek’s Green Rankings had become one of the best known corporate CSR rating metrics partly because of its simplicity (everyone likes a top to bottom ranking) and because Newsweek’s large circulation put it in front of millions of ordinary consumers.

For several reasons we explain below, the Newsweek Rankings may not be a good benchmarking or best practices discovery tool for the sustainability professional.  In fact, as in past years, the new rankings are likely to continue to generate anxiety and confusion, as we all try to puzzle out and decode the signals they offer on how the world’s largest companies are performing. 

Newsweek’s methodology for calculating the ratings has changed several times.  This year’s revamp is pretty radical.  The initial data set for the 2014 list was supplied by Bloomberg and RepRisk.  Bloomberg captures a wide range of environment, social, and governance (ESG) from company financial disclosures, sustainability reports, and other public documents.  Bloomberg also ingests data from CDP—formerly the Carbon Disclosure Project—on carbon and water-related issues.  RepRisk has one of the world’s largest databases of corporate risk information.  Newsweek arranged for Corporate Knights, a well-respected Canadian research firm, to review these data sets.  It also sent a survey to 775 of the 809 companies. It is interesting that they could only find contact info for 95% of these very large companies—and that only 363 of them or 45% of the sample set responded.  Corporate Knights may also have consulted some of the other data sources it has available, such as MSCI’s Intangible Value Assessment (IVA) and Thomson Reuters Asset4 databases.

The 2012 Newsweek list included data from Sustainalytics—a full service ESG ratings firm—and Trucost—one of the leading suppliers of carbon, water, and other environmental information.  The 2012 list dropped an interesting and deep source of CSR data that was in the 2011 list—expert opinions on CSR performance that had been gathered by Corporate Register. The 2012 list had a strong emphasis on environmental performance, driven perhaps by a desire to make the list a “Green” ranking.  For the 2014 list, Corporate Knights decided to explicitly include corporate risk, board involvement, management compensation, and credit for outside assurance to its criteria.

We have ingested most of the sources from both years’ methodologies into our database, including RepRisk, Trucost, Asset4, CDP, and MCSI’s IVA.  As do many of the 300+ sources we studied, Corporate Knights studied the publicly-disclosed information that Bloomberg collects.  So, we would expect to see a fairly high correlation between our ratings (which measure the overall perceived sustainability performance of companies) and Newsweek’s scores.  The chart below shows that we had a 35% correlation between our scores and the Green Ranking scores, for the 2014 US data.

Interestingly, this year’s ratings for the US 500 seem somewhat less correlated with our overall ratings than they were in the past.

We believe these factors may have driven this shift:

• The old index gave more weight to environmental issues than the new one does.  Environment is probably the most/best studied area within corporate social responsibility.  As a result, there is less variation among expert opinions within the environmental area than with other parts of CSR such as employee, community, or governance performance.  There was a 55% correlation between the 2012 Newsweek rating (based on an average of their four reported subcategories) and our Environment category rating (which includes climate change, transparency/reporting, and resource management issues).  There was only a 25% correlation between Newsweek’s ratings and our Environment category in 2014.

• The new ratings methodology includes a penalty for “disclosure.” Rather than trying to fill in missing items, Corporate Knights decided in 2014 to penalize companies that fail to disclose a required item.  CSRHub has so much data that it is generally able to automatically fill data gaps. This methodological difference may have introduced a new source of variation between our ratings and reduced the correlation between them.

• The CSRHub database has grown substantially since 2012.  We currently have 53 million data points and cover 9,000 companies in 102 countries.  In 2012, we had only 13 million data points and covered only 6,500 companies in 83 countries.  As we add more information to our system, it is natural that our correlation with any individual and more limited data source, will drop.

As with any rating system, we could find fault with some of the individual results within the Newsweek Green Rankings.  For instance, Campbell Soup has a 67 overall rating in CSRHub.  This puts it third in the list of 216 food companies that we track.  Campbell supports BCCCC, CECP, and the Sustainable Packaging Coalition.  It was on Corporate Knight’s own Global 100 list in both 2013 and 2014.  But, Campbell gets only a 39.6% score in the Green Rankings system.

Inconsistencies between rating systems reinforce the need for corporate sustainability managers to focus on broad measures of performance that are stable across industries, geographies and time. Again, we applaud Newsweek for raising awareness of sustainability across a wide audience. Professionals in the field should feel free to use CSRHub data dating back to 2008 to get an independent perspective on the hundreds of sustainability metrics that are produced each year.

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. Bahar is a member of the SASB Advisory Board. He plays bridge, races sailboats, and is based in New York City.

CSRHub provides access to corporate social responsibility and sustainability ratings and information on 8,900 companies from 135 industries in 102 countries. By aggregating and normalizing the information from 325+ 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 change the world.

By Bahar Gidwani and Carol Pierson Holding

We learned recently that Newsweek may stop issuing its annual “Greenrankings” list.  Its ordinal ranking of the top 500 US companies and its companion list of 500 world companies had become a highly anticipated annual event.

Is the loss of Newsweek’s list a sign that our ratings ecosystem is deteriorating?  Over the past few years, there has been a lot of consolidation between ratings sources.  (E.g. the KLD/RiskMetrics consolidation into MSCI, Corporate Library’s merger with GovernanceMetrics and AGR, and the various agencies that grouped together to form Sustainalytics/Jantzi.)

Are we losing diversity? Will we know less about corporate sustainability as a result?

CSRHub has gathered sustainability ratings over the past six years from more than 290 different sources.  This unique dataset should allow us to measure how much diversity there is between ratings of corporate social responsibility performance.  Our database should also allow us to examine whether or not ratings are starting to converge.

The distributions of our ratings for 2009 and 2011 were pretty similar.  It is only in 2012 and 2013 that our ratings started to “focus” around their midpoint.

Clearly, the spread among sustainability ratings of the 8,500 companies we track is narrowing. Yet there has been no change in CSRHub’s rating system that would cause our ratings to compress.  What about our sources? Has the reduction in diversity of sources led to ratings compression?

While our analyses show a slight increase in correlation between raters, it is not enough to explain the reduction in ratings diversity—especially since our data covers a much broader set of companies and many more small companies than in our individual ratings sources.  What other explanation could make sense? 

We believe that this ratings compression is due not to a loss of ratings diversity but to the fact that smaller and mid-sized companies may have begun integrating the sustainability advances that bigger companies pioneered.

Since we’ve added over 1,500 smaller companies in the last two years, many of our largest, best performing users have commented on (and some have complained about!) a gradual decline since 2008 in their scores. This trend is fairly easy to see on an industry basis.  Below is the overall ratings chart for Pepsi and Coke and the average ratings for all companies in the beverage and food industries:

As the average performance of the companies in an industry improves, it becomes harder for sustainability leaders to maintain a lead over their peers.  As a result, though the absolute performance of an industry leader may remain high or even improve, its relative performance may appear to fall.

These performance ratings are based on 290 sources and included Newsweek. Did Newsweek have any “special sauce” that we may miss after it is gone? The correlation between the last Newsweek ratings (their 2012 scores) and the same vintage ratings from CSRHub is 53%--an extremely high number.

The Newsweek data set covered only 500 US companies and another 338 non-US companies (162 of the companies on the Newsweek Global list were US companies).  This is only about 10% of the universe that CSRHub covers.  The Newsweek data set was updated only once per year—many of CSRHub’s sources update their ratings monthly.  And, Newsweek generated only four ratings elements per company—other CSRHub sources generate more than 100 elements per company.  Losing Newsweek should not affect CSRHub’s ratings and probably will not affect how the 800+ companies who were on its list are seen by other ratings sources.

The disappearance of Newsweek leaves CSRHub as the broadest (only?) remaining publicly-available measure of corporate environmental performance.  We don’t feel its passing will make much difference in our knowledge about corporate responsibility.

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. Bahar is a member of the SASB Advisory Board. He plays bridge, races sailboats, and is based in New York City.

Carol Pierson Holding writes on environmental issues and social responsibility for policy and news publications, including the Carnegie Council's Policy Innovations, Harvard Business Review, San Francisco Chronicle, India Time, The Huffington Post and many other web sites. Her articles on corporate social responsibility can be found on CSRHub.com, a website that provides sustainability ratings data on 8,400+ companies worldwide. Carol holds degrees from Smith College and Harvard University.

CSRHub provides access to corporate social responsibility and sustainability ratings and information on 8,400+ companies from 135 industries in 104 countries. By aggregating and normalizing the information from 290+ 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 change the world.