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Our Insights 22 Oct 2012

How Are Companies Using Sustainability Ratings?

By Michael Sadowski

When we wrapped up phase four of Rate the Raters in July 2011, we expressed our desire to further understand how ratings were creating value for and being used by companies, investors and other key stakeholders. Throughout our research, we’ve heard a good deal from companies about the pain caused by ratings, and so we were keen to ascertain how much (if any) of this pain is worth it. We thus set off in phase five to explore this question of value, and spoke with individuals responsible for ratings at nearly 30 companies in the process.

The Value of Ratings: Benchmarking, Radar and Lever for Change

When asked how they use and get value from sustainability ratings, nearly all of the interviewees mentioned the role that ratings play in helping to identify strengths and areas for improvement, as well as their value in benchmarking performance against that of peers. This resonates strongly with how our surveyed experts use ratings: 57% said they use ratings at least once every few months to benchmark against their peers.

A number of the folks we interviewed raised the point that ratings can help put emerging sustainability issues on their radar screens, and also serve to emphasize the importance of known issues. For example, several interviewees cited how raters have for some time raised the importance of supply chain sustainability, which is now being more seriously considered by their functional colleagues for reasons of business risk and resiliency. However, interviewees also stressed that there are diminishing returns to ratings over time. As companies advance in their sustainability journeys, they need raters less to identify emerging issues since they have other sources of intelligence (e.g. NGOs). For these companies, raters must bring unique perspectives and insights on “known” topics or deliver valuable intelligence on emerging issues (points we raised in phase four).

A good number of interviewees cited that ratings can be key levers for change within their companies, helping to get the attention of senior management and employees outside of sustainability functions. Their competitive juices flowing, these colleagues aim to beat their peers, in turn helping sustainability teams get additional management time, attention and resources. As one interviewee put it, “ratings create a tension that we can leverage to drive change in how we manage and report on our sustainability efforts.” The downside of this is that management gets hooked on doing well on ratings, and come to expect their companies to excel year after year without considering how ratings change and how they might be used by key stakeholders.

To support companies in determining the ratings that will most add value to their work, we offer a prioritization framework in the white paper.

Attention Raters: Deliver More Value to Companies

In our discussions, not one interviewee asserted that their performance on ratings had any significant influence with key stakeholders such as employees, investors, suppliers and other business partners. Couple this with the fact that companies face a deluge of requests for information by raters and others, it is not surprising that an increasing number of companies are pressing for raters to deliver more value through their work.

When asked how they would get more value from the process and results of ratings, our interviewees raised several points:

  • You need us, we need you: As we lay out in the white paper, companies and ratings depend on each other in a variety of ways. For example, sustainability professionals within companies use ratings to drive change and engage their business colleagues, and thus it is critical that they understand how and why they are being evaluated and that the processes and outputs of ratings are of high quality. Conversely, ratings rely on companies for the inputs for their work, and thus need it (e.g. reported information) to be robust. Thus, raters and companies have an incentive to work together to ensure that the ratings process is valuable for both sides.
  • Get to know my business: Companies want to be challenged by raters, albeit on the right (i.e. the most material) issues. They see less value in the final scores or rankings than they do in good questions and constructive engagement – both of which require raters to better understand the companies and their sectors.
  • Show us the value: With companies spending significant time and attention to a growing number of ratings – some involve dozens of individuals in the ratings process – they have sincere questions about the benefits of participating in and responding to ratings. They want to know who specifically is using the ratings and how, both to help justify their participation and to be better able to respond to the questions.
  • Show us the big picture: In phase four, we called for raters to spend more time assessing the future prospects of companies. To this point, our interviewees want raters to better articulate the key trends affecting their sectors, and put their performance in competitive context. Raters have at their disposal an enormous trove of data, and they should use it to educate and engage companies.

Next Up: the Investor and Rater Perspective

In the coming weeks, we will share the mainstream investor view of sustainability ratings, and will make public raters’ responses to our questionnaire. With this, we will also share the investor and rater perspective on how companies can better contribute to the ratings process. As always, we welcome your constructive feedback and questions.

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