Now Is the Time to Get Ratings Right

01 Oct 2010 – Michael Sadowski

As ratings of corporate sustainability are announced this fall, we see all-too-familiar claims and critiques. One blogger refers to a particular rating – The Global1000 Sustainable Performance Leader Ranking – as “the most credible and authoritative sustainability performance ranking available” while another laments the addition of Halliburton to the Dow Jones Sustainability Index. We’ve seen the same critiques since SustainAbility first wrote about ratings in Screening of Screening Companies (2001) and again in Values for Money (2004) – raters don’t disclose their methodologies, ratings are not industry-specific, research teams lack sufficient understanding of the industries they evaluate, etc.

However, we sense a greater degree of interest and angst this fall amongst companies and others who follow and use ratings. This may be driven in part by the proliferation of ratings and the continued opacity of the raters’ methodologies and selection processes. Yet we believe there is something more profound and promising happening: ratings are being taken more seriously. Companies are starting to link executive compensation to their standing in ratings. Mainstream asset managers are switching on to the ESG agenda. And citizens and consumers are starting to pay attention to sustainability issues. While this is good news, it is more important than ever that we get ratings right.

We launched our Rate the Raters research project because we see this promise, yet we also see too few ratings that get it right. The problems we diagnosed in Values for Money remain today – albeit on a larger scale given the growth and diversification of ratings. We believe we can play a constructive role in addressing these challenges by identifying best practices across ratings and by bringing together key stakeholders – raters, companies, investors, sustainability experts and others – to learn from these practices and to explore how ratings can be improved.

As we complete the second of four phases of Rate the Raters, we’ve inventoried over 100 ratings globally to better understand the ratings universe and further probe the themes we identified in phase one. We’ve also surveyed a group of sustainability experts on certain aspects of the ratings agenda. We encourage you to read our conclusions in the report – to be released next week – and share your feedback and questions.

As we push forward with Rate the Raters, we will evaluate a select number of raters to better understand how they approach their evaluation of companies. We will then convene stakeholders from across the ratings agenda to explore how to improve ratings, and we will ultimately develop a set of recommendations for all sides – raters, companies, users, etc.

Stay tuned for more – and join the conversation – in the weeks ahead.