Why sustainability rankings matter — but maybe shouldn't

The Gunther Report

Why sustainability rankings matter — but maybe shouldn't

This has been a big week for corporate sustainability rankings, with the Dow Jones Sustainability Index (DJSI) and the Carbon Disclosure Project releasing news reports. Vote Solar and the Solar Power Electric Industries Association showcased the  Top 20 corporate users of solar power in the US. A book called Good Company just landed on my desk, along with its own 2012 Good Company Index. And October will bring us the World Series, Halloween and, of course, the annual Newsweek “green” rankings of big public companies.

All of which raises a couple of questions.

Do these ratings and rankings matter?

More important: Should they?

Undeniably, they do matter, mostly but not entirely because of the prestige they confer upon companies that do well. Press releases are flying! “Carbon Disclosure Project Salutes Con Edison” (Really?) “PepsiCo Earns Sustainability Accolades.” “GM Named Top Solar User in the U.S. Auto Sector.” This is all well and good. Some middle-management executive had to fill out all those CDP forms or buy those solar panels, and who could be more deserving of an accolade or a salute?

Seriously, though, companies that do well–like Microsoft, which improved its performance on the Carbon Disclosure Index and was added to the global Dow Jones  Sustainability Index -- used these rewards to track their own progress. Dan Bross, senior director of corporate responsibility at  Microsoft, told me by email:

Rankings help us benchmark our work and help stakeholders evaluate companies on a range of criteria. CDP and DJSI are, in my mind, two of the most credible as their rankings are data driven and analysis extremely thorough.

More than PR cred and good feelings are at stake. Real money follows the Dow Jones Sustainability Index. About $6 billion in assets are invested in a variety of financial products -- including mutual funds and ETFs from such money managers as Barclay’s Capital and Credit Suisse — that track the DJSI. So, when Microsoft is added to the index and IBM is booted out (for reasons that aren’t explained in either case), some money managers will be selling IBM and buying MSFT. Will this move the stocks? No, because $6 billion spread across several hundred companies isn’t meaningful. But clearly it’s better to be in the DJSI than to be out.

Other additions to the DJSI World Index include Target, Hewlett Packard, Canadian National Railway Co. and -- to my surprise -- Enbridge Inc., a Canadian oil & gas company that is best known in the US because it “spilled 20,000 barrels of oil into Michigan’s Kalamazoo River in the most costly onshore spill in U.S. history.” That’s not an NGO talking; that’s the Wall Street Journal. The 2010 Kalamazoo oil spill “was the result of corrosion throughout many vital safety aspects of the Enbridge organization,” said Robert Sumwalt, a member of the National Transportation Safety Board, which investigated the accident. Enbridge had another nasty, but smaller spill, from a pipeline in Wisconsin this past summer.

How does an oil company make its way onto a sustainability index? Well, the DJSI follows what it calls “a best in class approach, including companies across all industries that outperform their peers in numerous sustainability metrics.” So Enbridge was added to the index by SAM, an investment boutique that focuses on sustainability, because it was judged a better performer than the rest of the oil and gas industry, which tells you something about the rest of the industry.

Kicked out of the DJSI World Index, along with IBM, were United Technologies, Dell and Duke Energy. Those were surprises to me, too. IBM works hard to make cities smarter and more sustainable, UT is into energy efficiency big-time and Duke’s Jim Rogers has been a leading utility industry voice for climate regulation although the company remains a major coal-burning utility.

The setback for Duke pleased Greenpeace and its climate campaigner Robert Gardner, who said by email:

Unlike those companies on the index that distinguish themselves through a commitment to delivering a sustainable product with minimal environmental impact, Duke is setting itself apart with a profit model tied almost exclusively to dirty, polluting energy.

To be fair, Duke held onto its place on the DJSI North America Index.

As for the second question -- about whether these and other ratings and rankings should  matter -- my answer is, they shouldn’t matter as much as they do.

Partly that’s because comparing one company to others, particularly across industries, is an inherently difficult task. This is why the DJSI uses its “best in class” approach. For investors who want exposure to a variety of industry sectors, this approach makes sense. But an index that includes oil and coal companies doesn’t deserve the name sustainable.

What’s more, without context, rankings don’t mean much. Walmart ranked No. 1 on the solar list, and there’s no doubt that the giant retailer is committed to sourcing renewable energy. Then again, Walmart is a giant, as big as Home Depot, Target and Kroger combined, and it sells more of just about everything, from organic cotton to prescription eyeglasses to guns and ammo, than anyone else. So it ought to be No. 1 in solar, too.

Still, there are trends worth recognizing here, for better or worse -- mostly worse, I’m sorry to say.

The DJSI World has, since its inception in 1999, very closely tracked the stock markets as a whole. Actually, it slightly trails the MSCI World Index.

That’s discouraging. If the index is, in fact, selecting the most sustainable companies, they ought to be rewarded by forward-thinking investors. Here’s a chart:

 

Another finding, this one from the Carbon Disclosure Project: The companies reporting on their carbon emissions targets said they plan to reduce their CO2 emissions by 1 percent a year. The trouble is, global consultant PwC, which worked with the CDP, says annual reductions of about 4 percent are needed to keep global temperatures from rising more than 2 degrees C (3.5 degrees F), the target agreed up by UN climate negotiators, as my colleagues at GreenBiz reported.

Malcom Preston, PwC’s global lead for sustainability and climate change, put it simply: “The reality is, the level of corporate and national ambition on emissions reduction is nowhere near what is required.”

Sorry to be a downer, but that’s the way it is.