Are Sustainability Rankings Consistent across Ratings Agencies?

By Lin, Beixin; Romero, Silvia et al. | The CPA Journal, July 2017 | Go to article overview

Are Sustainability Rankings Consistent across Ratings Agencies?


Lin, Beixin, Romero, Silvia, Jeffers, Agatha E., DeGaetano, Laurence, Aquilino, Frank, The CPA Journal


Corporate social responsibility (CSR) has garnered attention from businesses as the public has become more aware of the environmental, social and governance (ESG) roles corporations should play. More companies have increased their capital investment in sustainability initiatives and programs and published CSR reports in addition to their annual financial reports. Various rating agencies provide analysis and ratings of CSR activities proprietarily or publicly. Several studies (see Sidebar) have examined the impact of CSR activities on a company's value using either the CSR/sustainability ratings or companies' CSR reports; however, the findings of these studies have been mixed.

Some factors that contribute to the lack of consistency in findings are the different definitions and measurements of sustainability used by the rating agencies, the actual companies examined, and the methodologies used to rate these companies. To provide some clarity, the authors systematically examined three of the leading publicly available sustainability rating providers, their rating methodologies, and their coverage. The findings analysis will help standards setters identify which sustainability metrics should be incorporated in the standard requirements. Managers and users of sustainability reports will also be better able to measure the variables utilized by corporations. Furthermore, auditors will find useful information for their assessment of the reliability of corporate financial statements.

Background

Sustainability initiatives have been around for decades, beginning with movements that focused on environmental concerns and civil rights issues. (For further reading on this subject, see the online version of this article at http://www.cpajournal.com.) As scandals involving child labor and financial fraud were revealed, the definition of sustainability broadened to include corporate governance and social issues. The new target objective is to achieve sustainable development, that is, "development that meets the needs of the present without compromising the ability of future generations to meet their own needs" (Brundtland Commission, Our Common Future, United Nations World Commisssion on Environment and Development, 1987, http://bit.ly/2tiWgNc).

With the heightened awareness of corporate behavior, there has been an emergence of independent rating agencies. A 2014 overview of rating agencies by Novethic Research lists seven international rating agencies, two nonfinancial data providers, eight specialized agencies, and more than 20 local or regional agencies (http://bit.ly/2sy9GrR). Identifying truly progressive sus- tainable organizations can therefore be challenging. Reviews of ratings/rankings have varied and can have a significant impact on how a company is perceived by stakeholders. Various authors (see Sidebar) have questioned the effectiveness of several ratings while also indicating that they have a strong impact on the company's public reputation. One recent study found that "investors see a strong link between corporate sustainability performance and financial performance-so they're using sustainability-related data as a rationale for investment decisions like never before" (Gregory Unruh, David Kiron, Nina KruschWtz, Martin Reeves, Holger Rubel, and Alexander Meyer Zum Felde, "Investing for a Sustainable Future," MIT Sloan Review, May 11, 2016, http:// bit.ly/2sofq6W).

Due to the current lack of generally accepted sustainability reporting standards, there is a risk that investors and consumers might lose confidence in the ability of socially responsible investing to promote meaningful progress. Henry Schaefer notes that the most important challenges for CSR ratings might be their ability to cope with quality standards and transparency ("Corporate Social Responsibility Rating," A Handbook of Corporate Governance and Corporate Social Responsibility, 2009, http://bit.ly/2rsGlKR). Adding to these complexities is the public availability of the information: some products are proprietary and require the payment of a subscription or a fee to access the data, while others are open to anyone. …

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