What sustainability rankings say, and don’t, about oil and gas
Rating agencies are vying to be the arbiters of good
There is value in these lists. Research shows that embracing environmental and social best practices, which might land a company on something like Newsweek’s Green Rankings, can enhance corporate profitability. A study conducted by the London and Harvard Business Schools compared 90 high-sustainability companies with 90 others considered to have low regard for environmentally and socially responsible practises. It found that, over 18 years, the environmentally friendly firms financially outperformed the others.
Social media is but one factor at play. Witness the recent smack-down of Apple Inc. It miffed hundreds of thousands of customers, and provoked a digital revolt, when it released an annual supplier responsibility report revealing that many of the components in popular gadgets like the iPhone were made by underpaid workers in onerous conditions. “The public’s reaction to these events is all evidence of the fact that people have a much greater interest in what lies upstream of their retail purchase than was the case 30 years ago,” says Peter Hunt, national energy practise director with public relations firm Hill+Knowlton Strategies.
Even institutional investors regard environmental performance as one of the key factors in whether or not to invest in a company, Hunt says. “They recognize that if a company is not seen as having its act together in those areas, that could well prejudice the value of the investment.”
Several companies in the energy sector, including Suncor, Enbridge and Encana, have been listed favorably in 2011 on such ratings as the Corporate Knights’ Global 100 Most Sustainable Companies. Companies that find themselves unexpectedly at the bottom or absent from such ratings should seek a dialogue with both the ratings agency and the stakeholders affected by those ratings, Hunt says, if only to understand how they reached those conclusions and to reveal what, if anything, can be done to improve them. “It’s important that people take these seriously because we are in a society that takes this part of companies’ performance increasingly seriously,” he says.
Seriously enough, in fact, that Bostonian David Poritz has spent considerable time and money establishing Equitable Origin, the first stakeholder-based, market-driven sustainable certification program specifically tailored for the oil and gas industry.
Poritz, president and CEO of Equitable Origin, says his involvement in Ecuador helping the legal team that recently won for Amazon’s indigenous peoples an $18-billion decision against widespread pollution and health problems caused by Chevron (Chevron has appealed the decision), taught him that taking an adversarial approach against oil and gas operations is a lengthy and ineffective way to get industry players to address their social and environmental failures. His firm is set to begin issuing what it calls EO certifications this year, starting with operators in Colombia, Mexico and Ecuador.
Poritz says the designations his company has established will rigorously and independently certify the safety, social and environmental performance of individual well sites, helping good companies legitimately assure shareholders and those who buy their energy products that they’re committed to the cleanest, most responsible production possible.
The oil and gas sector currently lacks any kind of industry-specific environmental rating or certification system, unlike forestry or fishing. If adopted, the EO 100 certifications, Poritz contends, will give certified companies the “social license” they now badly need to operate in communities around the world. And it will also create financial incentives for companies to improve extraction processes.
Equitable Origin will issue EO certificates for each barrel of oil produced from certified wells. Those certificates can be bought through Mission Markets, which brings various environmental credits (now a $155-billion market) together in one online trading platform for governments, institutions and companies to purchase to offset their own emissions. By purchasing an EO certificate – whereby a portion of the sale is remitted back to the good oil companies – buyers illustrate a commitment to supporting ethical oil production. (Equitable Origin will also derive some of its income through brokerage fees for the certificates.)
But Poritz acknowledges it will be an uphill battle for his firm to gain acceptance with both industry and consumers. “To put it bluntly, the market is totally saturated. These eco labels are losing their power because there are so many of them,” he says. “Consumers are unable to determine which ones have validity and which ones don’t.”
Corporate Knights, a Canadian media, research and financial products company founded in 2002, has managed to earn a reputation for validity. Its annual Global 100 rating of the most sustainable companies on the planet has such mainstream authority it’s announced each year at the World Economic Forum in Davos, Switzerland. The magazine also publishes the Best 50 Corporate Citizens and the annual Cleantech 10 and Next 10 list of Canada’s best clean technology companies.
Corporate Knights president Toby Heaps says in the past five years he’s been seeing a “general evolution and professionalization of ratings in the corporate social and environmental space” thanks to a revolution in the kind of corporate data available to rating firms.
For instance, both Bloomberg and Thomson Reuters have made copious and, thanks to widening adoption of GRI standards, relatively homogenized financial and environmental, social and governance data easily available to subscribers. This has reduced the burden on corporations to fill out varied and intensive surveys from raters on non-financial qualitative information such as their negative or positive visibility in the media, or, say, their social contributions to the communities where they operate.
“With any type of rating system that relies on qualitative metrics, you are going to have different scores for the same company, depending on who does it,” Heaps says. He adds that many ratings are now shifting to more scientifically measurable quantitative factors that can provide insight into social and environmental performance.
A pressing question for those wanting to use ratings and sustainable indices to guide their investment, business or consumer decisions is the sometimes murky relationship between raters and the rated. There have been increased calls by industry – and even some raters – for outside governance and possibly even certification of the raters themselves. But for now, no such body exists.
Some non-profit rating firms operate off foundational funds and are completely untethered financially from the companies they examine. But for many of the for-profit rating agencies there are financial interactions that can quickly assume the whiff of a conflict of interest.
Several models of revenue generation exist for raters. Some raters develop proprietary methods for analyzing data, and sell that research to investment firms. Many magazines that create or host rankings pursue listed companies for advertising. That’s the model followed by Corporate Knights, which publishes a quarterly magazine. Heaps says the organization follows a strict policy of only selling ad space after the ratings have been announced, so as to avoid any suggestion of conflict.
Like other raters, Corporate Knights sells customized benchmarking reports that rated companies can use to improve their best practices in ESG areas and potentially elevate their subsequent ratings and thus enhance their public image. It also sells subscriptions to its sustainability reports to U.S. and Canadian libraries for $2,500 per year, and collects revenue from hosting special events. So how would Heaps suggest industry and the public pick which ratings to trust? “Do they open their kimono or do they hide behind the curtain like the Wizard of Oz?” he asks. “Because if they don’t have transparency, then maybe there’s something they are trying to hide.”
And, he adds, a lack of transparency in one rating system can debase them all in the public consciousness. “It’s a poison to the currency of social and environmental sustainability.”
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