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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

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.

Similarly, both 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 financial performance.

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 missing completely."

"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 "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

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.


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