January 28, 2006
How to Determine the Top 100 Sustainable Companies in the World
by Bill Baue
Innovest Strategic Value Advisors and Corporate Knights announce the Global 100 Most Sustainable
Companies at the World Economic Forum, documenting financial outpeformance.
The "Big Debate," an interactive dialogue amongst 600 attendees of this week's World Economic
Forum (WEF) meeting in Davos, Switzerland on
questions like the economic emergence of China and India, identified sustainability as the key
issue requiring creative responses. One such response came today from Corporate Knights, a Canadian magazine on
corporate social responsibility (CSR), and Innovest Strategic Value Advisors, a socially responsible
investing (SRI) research firm, who announced the Global 100 Most Sustainable Companies in Davos.
Distinguishing this year's list from last year's inaugural compilation is the accompaniment
of a study back testing a
portfolio evenly weighted with this year's 100 companies over the past five years. The back test
shows 7.11 percent outperformance compared to the MSCI World Index.
"Global companies' performance on
ESG (environmental, social, and governance) issues is rapidly becoming more critical to
their competitiveness, profitability, and share price," said Matthew Kiernan, chief executive of
Innovest. "The Global 100 companies showcased here today have already demonstrated that
sustainability premium, and we believe that they are positioned to reward their investors
even more heavily in the future."
The first Global 100 list faced criticism last year in
an AlterNet.org article by Paul Hawken, who helped introduce the notion
of sustainability into the US in the early 1990s through such initiatives as the Natural Step. Focusing on some of the first companies on
the list, Mr. Hawken cited a litany of unsustainable business practices of ABB (ticker: ABB) and Bristol
Myers Squibb (BMY).
"Some of the
companies I targeted then are on the list again," Mr. Hawken told SocialFunds.com.
made the list again this year, but Bristol Myers Squibb joined the ranks of those dropped from the list. Also
dropped were Pepsico (PEP--which Mr. Hawken also
criticized last year), Shell (RD), Weyerhaeuser (WY), and Xerox (XRX). Companies
added to the list this year include Coca-Cola (KO--which Mr. Hawken has criticized
Johnson & Johnson (JNJ), and Nike (NKE). These changes have not
altered the premise of Mr. Hawken's critique.
"My main point is that the criteria employed
have little to do with sustainability as it is understood from a thermodynamic, biological point of
view, that the term 'sustainable' is not defined by Corporate Knights or Innovest, and that
the methodology is not transparent," Mr. Hawken says. "The list does not advance sustainability
because it cannot define, measure, or recognize it."
The Global 100 website contains a
page explaining the selection methodology, with a link to a longer document describing how
Innovest identifies and measures corporate sustainability, as well as a link to the "frequently
asked questions" page that further
explains the rationale.
"Debates have been raging in various circles (e.g. academia,
business, government, the UN, etc...) for a number of years over exactly how to define
sustainability, and more importantly over what it should look like in practice," the faq states.
"We do not have the pretence to know how to resolve this dispute, let alone be able to produce an
authoritative blue-print for 'sustainable behavior.'"
"What we do know is that social,
environmental and governance factors are increasingly relevant to financial performance, and that
companies which show superior management of these issues are fast gaining an edge over their
competitors--an edge which we believe will translate into outperformance in the long haul," it
continues. "The Global 100 companies are therefore sustainable in the sense that they have
displayed a better ability than most of their industry peers to identify and effectively manage
material environmental, social, and governance factors impacting the up (opportunity) and down
(risk) sides of their business."
Dr. Kiernan explained it more bluntly to SocialFunds.com
"Are there imperfect companies in our universes?--Absolutely!" he said. "I
personally have never run into a company that is perfect; if you're looking for perfection, you're
going to have an extremely small--like, nonexistent--portfolio."
"So we're trying to avoid
having perfection be the enemy of the good or the excellent," he continued. "What we are trying to
do with all our products is to raise the saliency and the profile of sustainability issues as
legitimate investment issues, and send that message both to other investors and to corporates."
This message has also made its way to academics. For example, researchers from Erasmus University in the Netherlands gave
the Innovest methodology the stamp of approval by publishing a paper based on Innovest
research in the peer-reviewed Financial Analyst Journal that won the 2005
Moskowitz Prize for SRI
Lloyd Kurtz, an SRI portfolio manager for Nelson Capital Management, founder of the
Moskowitz Prize, and bibliographer of the SRIStudies.org website, places the issue of corporate
sustainability ratings and arguments against them in a broader context.
"It's an ongoing
philosophical battle between idealists and relativists, and most social investors are at some level
idealists, so the people who implement their portfolio decisions have to be relativists--we have to
look at the stocks and decide where we are going to draw the line, and right above the line will be
a company that is a little better than a company that's right below the line," Mr. Kurtz told
SocialFunds.com. "And wherever you draw the line, someone will criticize you for not being pure