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
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
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
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.