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March 05, 2004
Welcome to the Jungle: CSR Questionnaire Incompatibility Hampers Applicability
    by William Baue

A Nordic Partnership report finds wide variance in questions posed in corporate social responsibility surveys, calling into question their comparability and applicability.


The primary source of corporate social responsibility (CSR) information, a lifeblood of socially responsible investing (SRI), is the companies themselves. CSR data is gathered by SRI research firms via questionnaires and surveys. These data collecting tools thus play an integral role in SRI, helping form the foundation for assessment of investment-worthy companies based on their social and environmental performance.

However, a report released late last month by the Nordic Partnership, a collaboration of Nordic corporations and the World Wide Fund for Nature (WWF) that promotes sustainability, finds a high degree of variability in questions posed on these surveys. The report, entitled Investment Stewardship: Actors and Methods for Socially and Environmentally Responsible Investments, suggests that this variability makes it hard to compare the results of questionnaires, and hence of SRI evaluations.

"This study compared questionnaires used to evaluate companies' social and environmental performance and found that whereas the subject matters were similar, the actual questions differed substantially," writes report author Emma Sjöström, a PhD candidate at the Stockholm School of Economics. "This means that even though there is consensus on what areas are most crucial, the questions for investigating them vary widely."

Variance in questions leads to variance in answers, which in turn makes apples-to-apples comparisons of performance more difficult.

"This poses a comparability issue, since the results will likely differ between evaluators, and products based on different questionnaires are not comparable, even if the same company is evaluated," states Ms. Sjöström in the report (see related SocialFunds.com article for more on this phenomenon.)

Ms. Sjöström examined 13 questionnaires on environmental and social policy and practice sent to Nordea (ticker: NDIA.CO), Novo Nordisk (NVO), and Danisco (DCO.CO). The number of questions per survey ranged from seven to eighty-eight, "which is one of the reasons for the inconsistencies," according to the report.

The report did find significant overlap in the questions. Nine of the questions on environmental issues were the same in four or more of the questionnaires, and five of the questions on social issues showed up in four or more of the questionnaires. There were also unique issues: for example, two of the questionnaires posed questions on private security and one of them asked about marketing ethics.

The growing number of questionnaires companies are expected to answer can create another problem known as "survey fatigue," whereby companies' "enthusiasm is sometimes in inverse relation to the amount of questionnaires they are faced with." Companies that cannot respond to all questionnaires due to resource constraints risk receiving unfavorable evaluations for the "lack of transparency," even if their social and environmental performance is exemplary, according to the report.

"Some companies are however not fatigued by the questionnaires, but rather perceive them as a help in understanding how they might approach the sustainability matter in their internal work," stated the report.

Another confounding aspect of the various surveys is the presence of open-ended questions, which allow SRI research firms to differentiate their assessments with individualized interpretations. While most of the questions on surveys are "closed," with fixed alternatives such as "yes" or "no" or multiple choice, open-ended questions add to the degree of subjectivity, and hence inconsistency.

Besides comparability problems, the report identifies transparency problems.

"Today, there is no independent reviewer of data submitted by companies," reads the report. "If evaluators do not verify the data, investors may base decisions on false grounds."

The transparency and comparability problems add up to an applicability problem, according to the report.

"[I]f results are hard to compare and the underlying methods not known, users may not find [assessments based on questionnaires] particularly applicable as evaluation tools."

The solution may lie in the development of standards, though Ms. Sjöström cautions that even this recommendation requires a caveat.

"Whereas it may not necessarily be beneficial to streamline criteria that are values-based (in the name of freedom of thought), standardization of methods and criteria is likely to help investors and other stakeholders to navigate in what is now often perceived as something as a jungle," opined Ms. Sjöström.

Michael Brinch-Pedersen, managing director of the Nordic Partnership, extrapolates the broader implications of standardization.

"It's clear that SRI has the potential to become a more efficient driver for sustainability," said Mr. Brinch-Pedersen. "However, the present lack of standards in the area indicates that a more clear direction is needed, perhaps led by public pensions funds, in order to mainstream SRI."

"At the Nordic Partnership, we are currently looking at further opportunities in this area," he concluded.

 

 
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