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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.

The 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 ratings.

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."

Some 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 either."

"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.

Oekom Research 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."

"The 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.

"Since 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."

 

 
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