An airline, an oil giant, a leading car maker, gambling and tobacco firms have all been named as ‘sustainability leaders’ in the latest yearbook published by a pioneering green investment fund, Swiss-based Sustainable Asset Management (SAM).1
Many will struggle to understand how a corporation like British American Tobacco, whose main business is making and marketing a dangerous, highly addictive drug, could ever be identified as a sustainability leader. How does its business contribute to social progress, one of the supports holding up the three-legged stool of sustainable development?
Protecting and enhancing the environment is another of those three legs. And, here too, SAM’s identification of an airline (the Air France KLM group) and an oil producer (Norway’s Statoil ASA) as sustainability leaders will furrow some brows. The profitability of both are locked into very large carbon dioxide emissions, now and into the future.
Yet SAM is an established leader among fund managers specialising in sustainability investments, managing €5.4 billion worth of assets at the end of last year for pension funds, insurance firms and others. Its research underpins the Dow Jones Sustainability Indices. Leading accountancy group PricewaterhouseCoopers signs off the yearbook and puts its name on the cover. SAM claims the publication is "the world’s most comprehensive reference work" for assessing major firms "according to their economic, ecological and societal success factors".
Big firms focused entirely on unsustainable activities are praised as ‘sustainability leaders’ by SAM because it analyses the entire spectrum of manufacturing and services industries, examining major corporations in 57 different sectors, from aerospace and defence through to water. In each sector it identifies a leader, based on its combined economic, environmental and social performance.
Two main ideas underlie this approach. First, corporations which address the big risks and the opportunities arising from social and environmental problems will offer better investment performance in the long term. There is some evidence, as yet inconclusive, for this.
Second, investors who want to change the world for the better whilst still making a good return should seek to influence all businesses by identifying and supporting best sustainability practice in all sectors. This idea rejects the exclusionary approach which underlies much existing ethical, green or ‘socially responsible’ investment. SRI avoids particular problem sectors - such as gambling, tobacco, alcohol and now airlines (ENDS Report 397, p 10 ).
SAM argues that companies in these problem sectors can readily obtain finance from investors who are not interested in sustainability issues but only seek the best combination of low risks and high return. Better, then, to try to bring such companies into the debate, by inviting them to have their sustainability assessed and by identifying and publicising the leaders.
"For some sectors it is very difficult to justify a best-in-class approach," said Cristophe Churet, a Zurich-based equity analyst for SAM. "It can be a little bit futile."
Each year, SAM asks the world’s 2,500 largest firms (based on the Dow Jones Global Index) to be assessed. For the 2008 yearbook, it examined some 1,200 of these. The assessment is based on firms completing a web-based questionnaire that runs to several dozen pages. Each sector has its own questionnaire, although some elements apply to all sectors. SAM’s analysts ‘mark’ the questionnaires and seek further information and clarifications, then give each firm a total score expressed as a percentage. The assessment is under three headings - eco-efficiency, environmental reporting and environmental policy and management.
Sector leaders with a score of at least 75% are given ‘gold class’ status, leaders with a score of 70-75% are classified ‘silver’ while leaders in the 65-70% range are ‘bronze class’ (see table).
Other firms in each sector are also classed as gold, silver or bronze depending on how close their score is to the leader’s. One outcome of this classification scheme is that in several sectors - including biotechnology, house construction and software - none of the companies, not even the sector leader, are gold, silver or bronze class. Only firms within the top 15% of scores in every sector are named in the yearbook. They include several dozen UK corporations.
For the 2008 yearbook, 526 corporations completed the questionnaire. SAM also assessed more than 600 which declined to do so, on the basis of published information. It says these non-cooperating companies are at a disadvantage, because they in effect lose marks for the missing information SAM cannot obtain.
The assessment process produces some counter-intuitive results. While none of the healthcare providers assessed are classed as gold, silver or bronze, one of the two tobacco companies assessed gets a gold for its sustainability performance whilst the other gets a bronze.
In the food retail sector, J Sainsbury was the leader ahead of Tesco. In automobiles, BMW emerged as the top scorer ahead of both Toyota - which has tried to position itself as the sector’s global environmental leader - and Peugeot and Renault, whose cars have lower overall CO2 emissions per kilometre than BMW’s.
The scores and rankings can only be understood through a full disclosure of SAM’s complex assessment method, and then seeing how it is applied to every firm assessed. SAM discloses the questionnaires it has developed, but it will not reveal the way it weights all of their different components in each sector to give a final score - either to the public or the companies themselves. It leaves it to corporations to decide if they want to publicise their completed questionnaires; only a few choose to do so.