The Necessary Future of Ratings

14 Jul 2011 – Michael Sadowski

Sustainability challenges are enormous. Ratings can help drive attention and capital (financial, human, consumer) to those companies best positioned to address these challenges. Rate the Raters is a project that aims to make sense of the expanding universe of corporate sustainability ratings and rankings and to improve the quality and transparency of such ratings.

Yet, with so many ratings – we found 108 in phase two and more are popping up every month – those who they are meant to help are left perplexed about which ratings to pay attention to, and what they all mean. We have seen numerous “most sustainable” lists populated with companies which have experienced notable ethical lapses and product recalls. There’s also a good deal of variation in how some companies perform across multiple rankings – each one offering a supposedly ‘definitive’ view. Such confusion serves as a major barrier to attracting the attention and capital that is needed.

The belief among raters that they have in some way cracked the code and built a ‘better’ or ‘different’ rating leads to its proliferation. Our research shows we need to rethink how the overall ratings system works:

• They must be financially viable. This is perhaps obvious, but many ratings are not sustainable financially and thus cannot invest adequate resources to improve and evolve their processes and products.

• They should be fewer and in greater demand, with the “winning” ratings being those driven by quality and transparency. We may see an uptick in ratings in the short-term, but the number will decline to reflect what the market can bear.

• Ratings should add value to all players, and companies and users will pay most attention to the raters who bring the freshest insights and ideas (re-packaging and selling company-disclosed information is not value-adding).

• They should be predictive and forward looking, telling us about how a company is positioned to compete in the future rather than how it fared in the past.

• They should be consistent yet adaptive, recognizing that users and companies require a steady goalpost but also that issues and expectations of companies evolve over time.

• They should focus on the core impacts and issues for given sectors, giving users a sound basis for judging companies’ sustainability performance.

We did not attempt to rank individual ratings, since we analyzed a variety of ratings types – consumer-focused, investor-focused, single issue. Instead we are asking raters to publicly respond to a new survey published in our phase four paper, with questions in four areas: governance and transparency, quality of inputs, research process and outputs. In making their responses public, raters will demonstrate the same sort of transparency they expect of the companies they seek to judge.

This article was first published on the Guardian Sustainable Business blog. SustainAbility and Guardian Sustainable Business will co-host a seminar on how to get greater value out of sustainability ratings on Setpember 8th in London. Sign up here.

To learn more from us about our research and how your organization can better navigate sustainability ratings and rankings, please contact Michael Sadowski at sadowski@sustainability.com or +1 718-210-3630.