Snowed Under Ratings

14 Oct 2010 – Alexander Nick

For a long time, we believed the urban legend that Eskimos would have an unusually large number of words for snow. While this does not seem to hold true and is probably more because of the polysynthetic nature of the Eskimo language, I experienced myself a few years back the different states snow can take. Taking part in a “snow seminar” in Norway’s mountains, we used snow to build sculptures and igloos. Depending on the outdoor conditions – e.g. temperature, wind, snow-fall – our material was very different and hence what we could build by the end of the day.

I needed to think of my time in the snow last night participating in GlobeScan’s and SustainAbility’s salon on exploring the impact of corporate responsibility ratings. One of our panellists, George Dallas, Director of Corporate Governance at F&C, made the point that ratings would be like snow to the Eskimos. There are so many out there with different aims and target groups that it is unhelpful to look at them undifferentiated. Some ratings are interactive and based on interviews, some are one-way and based entirely on data. A fair point and something that easily gets out of sight as companies and stakeholders are faced with many new ratings over the recent years. This is why we at SustainAbility launched the research project Rate the Raters assessing over 100 ratings to understand their objectives, approaches, methodologies and target groups.

The salon brought up some inherent tensions about ratings. The most insightful for me included:

• Scope: The narrower the scope of a rating is, the more credible it will be. You are then more likely to compare apples with apples and oranges with oranges. However, in our research we see that nearly 90% of the ratings in our universe are multi-industry and nearly 60% are what we call “triple bottom line” ratings, including a combination of financial, environmental, social, governance and economic issues. Mallen Baker, Founding Director, Business Respect, shared a good sports analogy here stating that if we compare performance from sport players, we would not dare to compare the Liverpool goalkeeper with Tiger Woods with Roger Federer.
• Performance: It is still very difficult to pull apart performance and a company’s skill in communications. Seb Beloe, Head of SRI Research, Henderson Global Investors made the point to challenge quite robustly the notion that the best-communicating companies should also be the best performing ones.
• People love rankings: Even if the methodology might not be transparent, the human mind loves to rank items. This is why we can see so many “top ten lists” and cooperation with media to bring the ratings to a mainstream audience.
• Access to company: Our panellists agreed that a decisive factor for the quality of a rating would be access to the company. In this way you can get information that is not in the public domain, you can contextualise identified data points and you can challenge the company. The flipside is that this eventually leads to a conflict of interest in case a commercial relationship exists with the company.
• Usefulness: Ultimately, sustainability ratings shall be a proxy for the sustainability of a company’s products and processes. In the wake of BP’s Deepwater Horizon oil spill, the question is inevitable how valuable a rating is that discontinues BP only shortly after the incident and not before. Can we expect ratings to predict operational catastrophes? Could a rating have picked up weak signals of low health and safety systems at BP?
• Organizational learning: During the discussion, my colleague Patrin Watanatada made an interesting point that the bigger value of a rating might not lie in the rating itself but what internal learning processes it provokes. We often observe in our work with companies that internal dialogue about questions posed in ratings can raise awareness and ultimately have a huge impact.

The panellists concluded that despite the inherent tensions in ratings today, they are very likely here to stay. This brings me back to my experiences in Norway’s mountains. As the days passed by I learned to listen to nature and how it changes the state of snow. Having this deciphered, it was much easier to anticipate the days with the right “snow” and hence using snow in a targeted way to build our sculptures. Similarly, in the world of ratings, it will be essential to look closer behind the ratings and to use those ratings that bring valuable insights into a company’s current and future sustainability performance. In this spirit, a rating will be a powerful tool to indicate a company’s potential to support the transformative changes we need to see over the coming years.