For more than a decade, sustainability ratings have measured the social equity and environmental stewardship of companies and their major investors.
But the proliferation of sustainability ratings providers has also spawned inconsistent and often opaque approaches.
As a result, Ceres and Tellus Institute have launched an initiative to create and bring to widespread adoption a single standard for rating the sustainability performance of companies.
The two organizations, known for their advocacy work wih companies and investors, say the moment is right for creation of an independent, non-commercial framework that builds on the current system’s strengths and, corrects its shortcomings.
Such a system, they say, will unleash the full power of ratings to drive sustainability deep into capital, procurement and consumer markets
"We need a new powerful instrument to steer capital – financial, human, social and natural – toward sustainability leaders and away from the laggards," said Ceres President Mindy Lubber, in announcing the new Global Initiative for Sustainability Ratings (GISR) today. "With global sustainability crises from climate change to water shortages, resource pressures and population growth more evident every day, it’s time to build a ratings system that distinguishes between those companies that clearly see and act upon sustainability opportunities and risks and those that don’t."
Company ratings already play a pivotal role in determining access to capital – and its cost – for everything from public company stocks to all types of bonds.
But in some instances, conflicts of interest have developed among raters and rated companies. Plus, a recent study noted widespread "survey fatigue" among companies responding to information requests by multiple raters. These conditions have led some companies to "cherry pick" results that are most favorable while sidestepping less favorable ratings.
The recent financial-sector meltdown that spawned a deep global recession, plus disasters like the BP oil spill and the Massey Energy coal mine collapse, are sobering examples of the severe economic and human consequences of a failure to identify unsustainable corporate practices.
Founding partners of the new coalition, the Global Initiative for Sustainability Ratings, include leading investors and businesses like TIAA-CREF, the Calvert Group and Bloomberg. The initiative will be modeled on the Global Reporting Initiative, which has become the de facto global standard used by 2,000 companies worldwide for corporate reporting on environmental, social and economic performance.
Currently proposed SEC rules to revamp financial ratings agencies – through stronger internal controls, elimination of conflicts between raters and rated entities and periodic tests of rater professional competencies – attest to the shortcomings in the current business model for financial raters. GISR aims to create a benchmark standard rooted in "technical excellence, impeccable integrity, and continuous improvement, via a process involving multiple stakeholders", the group says.
"The GISR initiative is about creating a world-class, transparent ratings system," said Tellus Institute Senior Fellow Allen White. "GISR will help drive capital, procurement and consumer markets toward companies committed to continuously higher standards of sustainability excellence."
"Getting this right matters," said White. "If we aren’t infusing sustainability into all ratings frameworks, both financial and non-financial, we are losing precious time in the race toward shifting markets to sustainable outcomes. That’s why GISR is an idea whose time has come."
White and Lubber see a future where the GISR system is embedded in the listing requirements of stock markets, in disclosure requirements of securities regulation, in the contractual relationships between asset owners and managers, and in government procurement programs worth hundreds of billions of dollars.
"The simply-stated goal of this system is to avoid the next BP disaster," Lubber said, "that company is a case in point concerning the current system’s failings." Prior to last year’s Gulf oil spill – and well after BP’s fatal Texas oil refinery disaster and a slew of other major violations – there were no credible ratings that flagged BP as a material risk to investors. Even investor screens like the Dow Jones Sustainability Index held BP’s stock for a long time before divesting at a significant loss to shareholders.
GISR plans to break its mission into two phases over the next year, each convening a broad group of stakeholders. The first will systematically evaluate the quality of existing ratings programs from both a process and content standpoint. Then the group will design a best-practice ratings framework as a benchmark for use by raters and ratings users. The two activities will be conducted through an independent and non-commercial process.
As the newly-developed ratings framework enters the market, a GISR Board of Directors will evolve with the expectation that GISR will gradually morph into a stand-alone, non-profit, global organization.
This framework is modeled on the highly successful Global Reporting Initiative (GRI) pioneered by Ceres and Tellus. Now a stand-alone organization based in Amsterdam, the GRI has become an internationally recognized and widely-adopted standard for corporations wishing to disclose their sustainability risks and practices as part of their normal public disclosures.
Ceres and Tellus have long maintained that sustainability risks are normal material risks in the business sense, and as such are a necessary part of disclosure if investors are to accurately assess a company’s long-term prospects and global impacts.
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