January 20, 2004
The Rashomon Effect: Why Do Innovest and Oekom Rate Toyota's Environmental Performance So Differently?
by William Baue
A Japanese film may help investors understand the discrepancy between the environmental ratings of
Toyota by Innovest and Oekom.
The 1950 Japanese film Rashomon, directed by Akira Kurosawa, tells the story of the ambush
of a great sumurai and his wife by a renowned bandit, who kills the samurai and rapes the wife.
The movie recounts this event four times, each from a different character's point of view, and four
significantly different stories unfold. This narrative technique tapped into a deep psychological
truth: humans' highly subjective perceptions of reality. Psychologists coined the term "the
Rashomon effect" to describe multiple different interpretations of the same phenomenon.
Last year, two agencies that rate corporate social and environmental performance
completed environmental evaluations of Toyota (ticker: TM). In its EcoValue '21
environmental rating, New York City-based Innovest Strategic Value Advisors granted Toyota an AAA
rating, the highest possible score on a scale that mimics bond rating, ranging from AAA to CCC. In
the environmental section of its Corporate Responsibility Rating (CRR), Munich-based Oekom Research gave Toyota a C on
a scale that mimics school grades, ranging from A+ to D-.
Toyota placed second of the 16
auto companies Innovest rated, while it came in 16th of the 20 auto companies Oekom rated.
What does Toyota make of such a significant disparity?
"I am sorry to say but we
would like to refrain from commenting, because we are not in the position to comment on such
issues," Monika Fujita, a Toyota spokeswoman, told SocialFunds.com.
What are investors to
make of this great a disparity? Is one shop "right" and the other "wrong"? Viewers of
Rashomon are certainly tempted to legitimize one story over another, but Kurasawa skillfully
presents each narrator as potentially reliable while also injecting reasons why all the narrators
may skew the facts to present themselves in a sympathetic light.
Innovest and Oekom are highly respected rating firms, with no obvious reason to believe one is more
reliable than the other. One difference between them is that Innovest has been making the business
case for sustainable investment for a while, finding in almost all sectors that environmentally
proactive companies fare better in the financial markets. Oekom traditionally evaluates just
corporate social and environmental performance, and has only recently begun to correlate these to
The eco-efficiency subsections of the two ratings represent the
greatest discrepancy: Oekom assigns Toyota a D-, while Innovest says that Toyota has "superior
eco-efficiency overall," a difference that makes the rating community seem schizophrenic. The
difference seems to revolve around the way each firm scores factors when the company does not
disclose the information necessary to make a proper assessment.
"In order to receive a
proper grade, we require eco-efficiency data for at least three years, since otherwise no valid
trend can be calculated," said Johannes Nikolopoulos, the Oekom analyst who performed the Toyota
rating. "Most data were available for two years only, and important data, such as energy use, were
"Of course we assume that these data are collected internally, but we
cannot give a recommendation to our customers that is based on assumptions," Mr. Nikolopoulos told
SocialFunds.com. "Lack of information automatically leads to the lowest grade in an individual
subsection, as only information that is supported by an explicit company statement or some other
form of evidence can be taken into consideration."
So in the absence of explicit
information, Oekom rates the company as if it has worst performance, even if the actual performance
may be average or even superior.
"Lack of information does not lead to an automatic
penalty in terms of the score assigned--it is more a case-by-case assessment," said Cecile Lamotte,
Innovests auto sector analyst. "For certain types of information not currently disclosed, we may
give a default score."
"On the other hand, information regarded as important in the sector
that is present in most peers' reports can lead to a lower score for the company that doesn't
report it," Ms. Lamotte told SocialFunds.com.
So Innovest also punishes companies that
lack transparency, especially in areas where their competitors disclose information, though it has
not done so in regards to Toyota's eco-efficiency.
"We have not identified any specific
shortcomings with Toyota's eco-efficiency initiatives," said Ms. Lamotte.
In the end,
Rashomon leaves viewers with the impression that the impulse to authorize one interpretation
over another is futile. Hearing the multiple different interpretations gives us greater insight,
both into the event itself and into the motives of the narrators. Similarly, investors may find it
confusing to hear seemingly contradictory reports about companies, but they may well be wiser for
the breadth and diversity of available information upon which to base their investment decisions.