Agency toys with role for OPRA in corporate ratings

Site-level performance data compiled by the Environment Agency could help improve the robustness of assessments made by corporate rating agencies in the investment community, according to a new report.1 The report also highlights the wide variation in approach taken by rating agencies, and calls for more transparent methodologies.

The Environment Agency commissioned consultancy URS to conduct a survey of environmental rating organisations to investigate the robustness and consistency of their analysis.

The Agency also wanted to inform thinking in the management of its own pension fund, and to explore opportunities to increase the compatibility of its own rating projects such as the operator and pollution risk appraisal scheme (EP OPRA) and the Pollution Inventory. Eight of the 13 agencies examined used data provided by the Environment Agency.

Through the OPRA scheme, increasingly comprehensive and sensitive information about management performance and environmental impacts is now available on the Agency's website (ENDS Reports 355, pp 25-28  and 331, pp 19-23 ).

URS sees a "great opportunity" for the Agency to link its data with those of commercial rating agencies. The biggest obstacle is that the Agency's data tend to be site-specific while rating organisations are usually looking for corporate information.

But URS says that the Agency's independently collated site-level performance data could provide a useful boost to the robustness of the assessments being made by organisations.

The number of organisations offering ethical rating services for investors is rapidly increasing. An important factor is evidence of a link between the robustness of companies' environmental management and their financial performance - itself the subject of a recent Agency study (ENDS Report 358, p 5 ).

However, rating agencies employ varying approaches, leading to companies scoring highly in some indices but poorly in others. This has fuelled scepticism about agencies' robustness and value (ENDS Report 313, pp 19-22 ).

URS analysed the approaches of 37 organisations or environmental rating "products". It examined 13 of these in depth, including: Business in the Environment, FTSE4Good, Dow Jones Sustainability Indices, Ethical Investment Research Service, Ethibel, Innovest, oekom research, SERM, Trucost and Morley.

It found widespread variation in approach. The environmental content of the ranking ranged from 20% to 100%, with other issues covered including social, ethical, health and safety and corporate governance topics. Organisations used between 16 and 100 environmental indicators. The number of analysts employed varied from four to 23.

One-third of the bodies obtained their data from company questionnaires returned voluntarily. Others trawled a wide range of publicly available data including company reports, websites, media sources, stakeholder campaigns, academic journals and UN agency surveys. In some cases, this raised questions about the consistency and reliability of data used.

However, URS also points out that the organisations are set up for different purposes. Most charge for their services, some are in-house, others offer information to clients on a subscription basis. Most operate policies to exclude whole sectors deemed inherently unethical by clients, sometimes including companies dealing in tobacco, arms and vivisection. A few offer benchmarking of firms, others simply provide intelligence on companies or sectors.

The consultancy acknowledges calls for standardisation among ethical rating agencies. But it argues that the great diversity in approach allows users to choose the service that best meets their needs. "Such choice is characteristic of a thriving marketplace," the report concludes. "It also encourages a broad range of views, values and priorities in the investment community."

One consequence of having such a choice, URS warns, is that potential users of the information need to be clear about the agencies' objectives and methodologies.It offers a list of suggested questions and criteria against which users can assess rating organisations to find those that best meet their needs. Key issues include the sample sizes used by organisations, the extent to which they validate their results and have them externally verified, and the balance of quantitative and qualitative information they use.

While supporting diversity, the report also argues that rating agencies could do with improving quality assurance and becoming more transparent about their methodologies. It also suggests that agencies should build their assessments upon quantitative, comparable data and then add value with qualitative information. It suggests ways to improve the robustness of subjective information.

The report points to several recent initiatives that could help improve the credibility of the environmental ratings business. It cites a European Commission-backed voluntary quality standard for corporate sustainability and responsibility research (CSRR-QS 1.0) and the association set up last year to promote and police a responsible approach to research.2

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