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February 16, 2010
2010 Sees the Publication of Two Lists of Most Sustainable Companies
    by Robert Kropp

Following its 2009 purchase of Innovest, RiskMetrics uses for its Global ESG 100 the ESG research previously supplied to Corporate Knights, while Corporate Knights turns to three research providers, including a startup of Innovest cofounder, for its Global 100.


Since 2005, Corporate Knights, a Canadian magazine that focuses on sustainable development, has been publishing the Global 100 Most Sustainable Corporations in the World, its list of global corporations determined to be the most proactive in managing environmental, social and governance (ESG) issues. Until this year, the data underpinning the Global 100 was provided by Innovest Strategic Value Advisors, an ESG investment research firm founded in 1995 by Hewson Baltzell and Matthew Kiernan.

Corporate Knights’ arrangement with Innovest ended after last year’s list, when RiskMetrics Group made Innovest one of its several acquisitions of ESG investment firms, and decided to publish its own list of top sustainable corporations, which it named the Global ESG 100 Top-Rated Corporations. In a sense, then, the list by RiskMetrics of the top 100 sustainable corporations represents a continuation of the list that Global Knights compiled until this year.

As a result of the RiskMetrics acquisition of Innovest, Corporate Knights retained the services of not one but three ESG research providers for its 2010 list: Global Currents Investment Management, Phoenix Global Advisors, and Inflection Point Capital Management, an asset management firm founded by Kiernan after he left RiskMetrics last November.

Corporate Knights did retain the benchmark against which it has measured the performance of the companies in its list since 2005, the MSCI All Country World Index. The MSCI Index represents both developed and emerging markets.

In all likelihood because of another of its acquisitions, that of KLD Research & Analytics in November 2009, RiskMetrics used the FTSE All World Developed Index as the benchmark for its list. Since 2008, a strategic partnership of KLD and FTSE has offered a suite of ESG indexes.

According to Corporate Knights, its Global 100 Most Sustainable Corporations has achieved a total return of 23.67% between February 2005 and January 2010, outperforming its MSCI benchmark by 334 basis points annually. RiskMetrics reports that its Global ESG 100 has outperformed its FTSE benchmark by 116 basis points between February 2005 and the end of 2009.

In compiling its list, RiskMetrics used the Intangible Value Assessment (IVA) methodology developed by Innovest. Companies considered for the Global ESG 100 had to be constituents of the FTSE AWD index as well.

A total of 154 companies were given AAA ratings in the RiskMetrics evaluation. SocialFunds.com spoke with Hewson Baltzell, currently head of the Sustainability Solutions Team at RiskMetrics, about the factors that were given the most weight by the IVA methodology.

“The four pillars under our Intangible Value Assessment (IVA) rating system are human capital, stakeholder capital, strategic governance, and the environment,” Baltzell said.

“There are a lot of differences in the definition of sustainability,” he continued. “What we’re trying to do is figure out best in class, using the sustainability issues that are most relevant for each company.”

The one hundred companies in this year’s list represent ten industry sectors, including consumer goods, consumer services, financials, industrials, and technology. From a pool of 2,000 firms in more than 50 countries, the list includes 35 companies that were not on it last year. Of the 35 companies who were on in 2009 but are not on in 2010, 12 are no longer rated AAA by the IVA methodology. Twenty are still rated AAA, but were edged out by companies that performed better according to industry and supersector distribution.

“We don’t differentiate among the 100 companies on our list,” Baltzell said, “Which is consistent with a fairly equal industry representation.”

The Corporate Knights list, on the other hand, does rank the 100 companies on its list, and Baltzell questioned a methodology that ranks GE first.

“I’m curious about GE ranking first in the Corporate Knights list, because half of GE is a finance company that screwed up in a lot of ways,” Baltzell said.

According to Corporate Knights, GE gained the top rank overall due to its industry-leading ratio of sales to waste, board gender diversity, and carbon productivity. Between 2006 and 2008, GE reduced its total carbon emissions from 10.8 million tons to 6.5 million tons, while increasing sales from $150 billion to $181 billion.

SocialFunds.com also spoke with Matthew Kiernan, about the methodology used by Corporate Knights for the first time this year.

“Our methodology includes four major improvements. We use a pool of diverse research providers, whose input helped reduce the universe of about 3,000 companies down to an alpha pool of about 300,” Kiernan said, “And we explicitly integrated traditional financial metrics.”

Asked for an example of how financial metrics were employed in the Global 100 rankings, Kiernan said, “As an example of financial considerations, we liked Royal Dutch Shell a lot more at $100 a share than at $1000.” As the example of GE indicates, the sustainability practices of companies were compared with financial performance metrics.

“We significantly enhanced the model we used at Innovest by adding qualitatively new factors such as adaptability and responsiveness,” Kiernan continued. “As critical as ESG is, it’s not the whole story.”

Kiernan attributed the fourth improvement, attempting to introduce transparency and objectivity into the process, to input from Toby Heaps, Editor-in-Chief of Corporate Knights Magazine and a former journalist.

“What indicators have the best data for measuring sustainability in companies?” Kiernan asked.

Kiernan noted that the Global 100 has much more of an explicit weight toward companies in emerging markets than does the Global ESG 100. “The center of gravity is shifting,” he said, “And it’s in the emerging markets where the sustainability battle is going to be won or lost.”

Reflecting on his transition from a research provider to an asset manager, Kiernan said, “Inflection Point will turn the Global 100 into an investment product, subject to client demand.”

Baltzell also emphasized the importance of selecting the most important indicators from a universe that some say has grown too large.

“All of the Global Reporting Initiative (GRI) indicators are great in theory,” he said, “But in practice you have to decide which of them are important for each company.”

What level of comparability exists between the two lists, given their different methodologies and the fact that the companies included in each were drawn from different indexes? Baltzell was kind enough to do the math for SocialFunds.com, and determined that a total of 46 companies appeared on both lists.

In a sense, the different methodologies and the results of their application can be seen as a reflection of the trend toward consolidation in the ESG research field, which in large part gained momentum in 2009 through the several acquisitions made by RiskMetrics. At this point in time, however, it would be an important victory for advocates of sustainability if the appearance of the two lists encouraged companies further along that road.

Kiernan could have been speaking for all the organizations involved when he said, “Part of this exercise was to prompt more and better disclosure.”


 

 
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