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October 15, 2002
SRI Ratings Need Greater Independence and Standardization, Says New Dutch Guide
    by William Baue

A new guide from Holland profiles 28 SRI rating agencies from around the world and recommends greater independence, standardization, and transparency in SRI research.


Late last month, the Triple P Performance Center of the Vrije Universiteit Amsterdam published a guide to 28 different SRI rating agencies from around the world (the term "triple p" refers to the prioritization of "people, planet, and profits"). The guide, entitled Screening and Rating Sustainability, provides concise descriptions of each agency's structure and staffing, strategic partnerships and clientele, products and services, and rating methodology and monitoring. The guide also gives brief overviews of SRI rating systems and of recent developments in the SRI industry.

While this compilation of information is valuable in and of itself, the guide also recommends that SRI research achieve greater independence, standardization, and transparency. Currently, there are some rating systems that are not associated with financial services firms, but there are many rating agencies that also have investment management divisions. This creates a potential conflict of interest for the agency.

"I am convinced that SRI research should be independent because SRI analysts should represent all stakeholders," said the guide's author Timo van den Brink, a research fellow at the Vrije Universiteit Amsterdam. Mr. van den Brink is also a former management consultant for KPMG, the major international accounting and consulting firm.

Stakeholders include environmental and social advocacy groups, governments, regulatory agencies, company management, employees, and shareowners, among others.

As corporate governance advocates are intensifying their calls for the separation of accounting and auditing services in response to recent accounting scandals, the guide echoes this concern regarding separating SRI research from financial services. The intermingling of the two spheres could compromise the integrity of both. Only truly independent, objective information about corporate social and environmental performance will allow all stakeholders to ascertain the true value of companies.

The guide also argues for the standardization of SRI rating methods in order to allow users to compare different companies' ratings. As things stand, the same company can be rated differently by different SRI research agencies, which calls into question the validity and relevance of the ratings. It may not be reasonable to expect a broad audience to discern why different rating methodologies create divergent ratings.

From a purely practical perspective, the divergence in rating mechanisms may overwhelm companies if they are asked to fill out a different questionnaire for each rating agency. The guide recommends using the Global Reporting Initiative (GRI) as a standard information-gathering mechanism, as GRI guidelines address 85 percent of the questions on SRI rating agency questionnaires.

In addition to recommending more independence and standardization, the guide recommends that SRI rating methods be more transparent. The guide promotes transparency by explaining the SRI rating process step by step. Moreover, the guide urges SRI research agencies to take the next step and inform the public if their rating processes differ from the norm.

The introductory materials end with a chapter by Initiative for Fiduciary Responsibility cofounder Stephen Viederman, who encourages change outside the SRI research industry.

"We need to revoke corporate charters where corporate behavior is egregious," Mr. Viederman writes. He points out that many U.S. states have the statutory power to revoke corporate charters, a weapon that could encourage more responsible corporate practices. However, these laws languish largely unused.

The majority of the book is devoted to the SRI rating agency profiles. Profiled agencies include France-based Arese, Italy-based Avanzi, Germany-based Oekom Research, and Canada-based Michael Jantzi Research Associates (MJRA). U.S.-based Innovest Strategic Value Advisors, Investor Responsibility Research Center (IRRC) and KLD Research and Analytics are also profiled. These encapsulated profiles offer a bird's eye view not only of each individual agency but also of the SRI research industry as a whole.

The booklet ends with a brief overview of recent trends and developments in the SRI industry. Interested individuals from within and without the SRI community should find this synopsis very useful because it provides information about the major developments around the globe.

On a final note, the author's periodic struggles with proper English syntax sometimes obscure his meaning, but this minor problem is more than redeemed by the usefulness of the information compiled. But what really sets this document apart is its advocacy to move the SRI research community forward.

 

 
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