February 12, 2003
Corporate Social Responsibility Rating Agencies Balance Standardization and Differentiation
by William Baue
Corporate social responsibility (CSR) rating agencies are struggling to balance the need to
standardize CSR ratings with the need to differentiate their ratings from competitors'.
A growing body of empirical evidence shows a correlation between nonfinancial performance
indicators, such as social, environmental, and corporate governance practices, and corporate
financial performance. This evidence increases the relevance of corporate social responsibility
(CSR) rating agencies such as New York City-based Innovest Strategic Value Advisors, Boston-based KLD Research & Analytics, and Munich-based Oekom Research.
expanding importance of these agencies may also be escalating the tension between the rating
industry's need to standardize CSR ratings and the need for individual agencies to differentiate
their ratings from their competitors'.
"The reality of the survey climate is that, as
much as these groups push for standard disclosures among companies, the day they achieve that goal,
they'll lose the ability to differentiate their products," said Intel (ticker: INTC) Director of
Corporate Responsibility David Stangis. Mr. Stangis not only responds to agencies' questionnaires
and questions, he communicates with those agencies on how they could improve the relevance of their
Using standardized questionnaires or information sources, such as the Global
Reporting Initiative (GRI), would not only improve comparability of ratings; it would also reduce
the workload for companies responding to a proliferation of rating agency surveys.
"Completing surveys can be time-consuming," said McDonald's (MCD) Corporate
Responsibility Supervisor Juana Sanchez. "The survey process is not as easy as it looks. With
such a large, decentralized, franchised system, it is a challenge to collect consistent,
comprehensive information for performance in the areas that are usually asked about."
rating agencies spurn questionnaires and surveys.
"We have not, nor ever will, use
questionnaires to gather our data," said Innovest Managing Director Peter Wilkes. "A Goldman Sachs
analyst doesn't use a questionnaire to gather his or her information. An Innovest analyst doesn't
"We do not believe that a simple questionnaire can ever be sufficient enough to
provide the information that we need to do our in-depth research reports," Mr. Wilkes told
SocialFunds.com. "This is why we rely on comprehensive and exhaustive company interviews as the
cornerstone of our analysis."
Innovest, which correlates environmental performance to
market performance in many of its reports, creates comparability by following the same basic
interview agenda at all companies, differing the process only by sector.
has adopted a similar strategy.
"Oekom Research does not use questionnaires anymore," said
Oekom Manager of Corporate Communications Marnie Bammert. "Instead, we set up a draft rating based
on publicly available company documentation and information from external sources."
companies are asked to comment on the draft and to add information and data," Ms. Bammert told
SocialFunds.com. "This approach keeps expenditures at a minimum and the companies explicitly
appreciate our efforts."
Oekom gives each company assessed its own rating for free, which
allows the company to compare its CSR performance to competitors'.
"Besides that, a good
rating paves the way to sustainable investment," said Ms. Bammert. Europeans tend to prefer the
term "sustainable investment" to "socially responsible investment" (SRI). "And the companies
analyzed attach great importance to this upcoming market."
Not all CSR rating agencies
have abandoned the questionnaire format.
"Typically, we send the company a copy of our
profile with a list of specific questions," said KLD Director of Research Eric Fernald. KLD's
SOCRATES database profiles strengths and concerns for more than 1,600 companies. "We also may send
them a detailed questionnaire covering all of our ratings."
Over the years, KLD has
experimented with long and short survey formats. The firm has found that shorter, targeted
surveys, together with direct contact and discussions regarding the company profiles, achieve
better results than longer, more comprehensive questionnaires.
"Of course, the more the SRI
community could agree on common questions and standards, the easier it would be for companies to
answer all our requests," said Mr. Fernald.
Ms. Bammert concurred, but pointed out that
such standardization would not end companies' contact with CSR rating agencies.
sustainability assessments are often customized to the individual values and views of investors,
such a centralized pool of data that all rating agencies could revert to could only serve as the
basis for an assessment," said Ms. Bammert. "It would ease the rating process, but it would hardly
replace the different rating approaches."