Environment performance ratings are ‘confusing’

Investors are confused by the proliferation of products that measure the environmental impact of business and lack confidence in the sector, according to the Environment Agency.

Businesses are increasingly recognising that the impact of the environment on them, and their impact on the environment, is an issue that can significantly affect their profitability, reputation, employees, and customers, and investors. The city and finance sector are also becoming aware that environmental issues linked to companies supply and distribution chains, product disposal and pollution events, and climate change risks can be important factors in their short and long term financial performance and valuation.

We carried out this study to compare and contrast the different approaches, content, robustness and credibility of the outputs of Corporate Environmental Research (CER) organisations. These organisations produce assessments, ratings, rankings, and indices that are linked to the environmental impact, risks, management and performance of companies listed on stock markets.

This report, carried out by URS Corporation Ltd (URS), which is an international environmental, sustainability and engineering consultancy

The aim of this study is to provide a clear and accessible summary of the philosophies, assessment methodologies and outputs of the various CER organisations. The research report is also intended to be a reference tool and guide for companies and users of the different products and services in the finance sector and the City, and the managers whom the Environment Agency employs to invest its own pension fund.

In total 65 CER organisations were identified. From various countries around the world which research, rate, index and invest in companies based on non-financial issues – including the environment, social factors, health and safety standards, ethical concerns and other corporate governance issues. From the long list of 65, 37 organisations were investigated (60%) which included some environmental issues. A more detailed assessment of 13 organisations (20%) which were chosen for their perceived environmental content. These organisations were of different types: ratings, rankings, indices and investment funds

Key findings

Findings based on the 37 organisations/ products

Only 30% obtained their information from companies voluntarily e.g by questionnaire and 46% involuntarily e.g from public document. Information was not available to assess this for the other organisations (24%).
60% (22 organisations) applied exclusion policies. Seventeen (46%) screened out certain industry sectors (eg weapons manufacturing) and only five (13%) included all industry sectors in their assessments.
27% of the organisations do not charge for their product or service;
35% produce publicly available annual rating, rankings or indices;
40% provide subscription-based services for their clients;
49% provide their outputs through web-interfaces;
67% provide company or sector bench-marking;
only 20% made reference to third-party verification of their processes.

Findings based on the 13 organisations/ products

The environmental content for these organisations ranged from 20 to 100%. The average was 40 to 60%.
Currently only eight of the 13 organisations selected use any of the environmental datasets provided by the Environment Agency. This is because our data is mainly stored on a site-by-site basis and not by company.
The number of companies assessed range from 105 to over 2,700 mainly from the UK, EU, USA, Japan which appear in the FTSE, MSCI, S&P, Dow Jones, Nikkei and other leading financial indices.
Five organisations had no sector exclusion policies.
The number of analysts available to perform assessments range between four and 23 in each organisation. They have environmental science, economic or finance backgrounds.
The number of environmental metrics used ranged from 16 to100.
All the organisations use a combination of internal peer review and/or external advisory panels. Only six also use a quality standard and/or external verifiers.

There is a rich diversity of tools available for users to choice from depending on ones needs. Their methods, products and services are likely to continue to evolve a result of innovation, web technology, and a strong commitment to continuous improvement of their services and products.
There is also a need for greater dialogue with the companies being assessed and the existing and potential users of the ratings, rankings and indices if they are to become more useful for benchmarking or investment decision making.
For all organisations there are opportunities to improve internal quality control and external quality assurance. Within in some organisations there is need to review controls on how individual analysts’ opinions influenced the overall assessment of companies. These aid consistency and repeatability, and increase confidence and trust in their products.
Greater collaboration and transparency over the sources of input data could be advantageous to everybody and could help to improve the consistency and quality of the outputs. This in turn would increase their value for the companies being assessed and the financial investment world who are key users of the data.

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