A puzzling list of sustainable companies

Canada's oil sands: Sustainable?

Canada’s oil sands: Sustainable?

Here comes a new list of the “most sustainable corporations in the world,” and it’s a doozy.

Two of the top five companies on the 2013 Global 100 list are oil and gas companies:

3. Norway’s Statoil ASA

4. Finland’s Neste Oil.

Read farther down and you find:

No. 81. Suncor Energy,

which was the first company to develop Canada’s oil sands, source of some of the dirtiest fossil fuels on the planet.

A notch below is:

No. 82. Unilever

the consumer products giant whose sustainable living plan embodies the broadest and deepest commitment to corporate responsibility of any big, global company.

This is….er….puzzling.

So what’s going here? And what does this tell us about corporate sustainability rankings and their meaning, a topic that never seems to go away? [See my blogpost Corporate sustainability: Who’s up, who’s down, who cares?]

global100_websiteThe first thing to know is that this list comes from Corporate Knights, a Toronto-based publication that calls itself “the magazine for clean capitalism.” I’m an occasional contributor to the magazine. In fact, I profiled the No. 1 company on this year’s list, a Belgian firm called Umicore, which we’ll get to in a moment. Last year, I wrote about the 2012 Global 100 list in GreenBiz under the headline: Is This the World’s Best ‘Greenest Companies’ List? I wrote then, and I still believe, that unlike some other rankings, this is a well-conceived list with integrity, transparency and clear metrics.

The second thing to know is that, taken as a group, these companies may well be more sustainable than the universe of companies from which they are drawn–a global group of about 4,000 companies. Interestingly, Corporate Knights has backtested the Global 100 against its benchmark, the MSCI All Country World Index (ACWI), and found that it outperformed the benchmark since 2005, when the list began. The company says:

Over this period, the Global 100 offered investors a 59.89% total return, compared to 50.39% for the MSCI ACWI, resulting in 9.5% outperformance.

So there’s at least an indication, although by no means proof, that the Global 100 companies are better managed and more forward-looking than their counterparts.

So what’s the problem with the list? The trouble, as best as I can tell, is that this list, like the others, tries to do something that’s difficult if not impossible to do with any rigor–that is, to compare companies across industry groups that are so radically different that meaningful comparison is all but impossible.

Think about it: How can you measure the sustainability of technology firm, a retailer, a bank, a mining company and a manufacturer against one another?

I called Doug Morrow, vice president of research at Corporate Knights Capital, to ask about this, and he acknowledged that the cross-industry problem is a tough one. Corporate Knights addresses this problem by measuring each company within its own industry, and then doing the 1-100 ranking based on how they measure up against their industry peers.

“Banks are not mathematically compared against oil companies,” he told me. “They’re competing against each other in silos.”

The perverse effect is to reward not-so-good performers in laggard industries and penalize the leaders  in industries that, as a whole, are taking sustainability seriously.

As Doug put it: “In some industries, the industry mean is going to be lower than others. If you happen to be a company with outstanding performance and your peers are way behind, you’re going to come out like a star.”

This may explain why the Norwegian and Finnish oil companies rank so highly; evidently, they are doing a lot better than, say, ExxonMobil or Chevron. By contrast, Unilever faces tough competition from the likes of Danone and Campbell Soup (which made the list) and Procter & Gamble (which didn’t).

But, just to show you how crazily inconsistent this list-making business has become, only one of the top 4 companies on Newsweek’s 2012 green global rankings — Santander Brasil, Wipro, Bradesco and IBM — made it onto Corporate Knights’ Global 100. And not one of the top 5 on the Corporate Knights’ list made the Newsweek rankings. (National Australia Bank, No. 5 on Newsweek’s list, did make both rankings.).

So what’s the point? Well, assuming the lists have some validity–and I trust that they do–they provide internal and external rewards to sustainability professionals in big companies. Press releases were flying today from Cisco, Prologis, Ricoh, SunLife Financial, which made the Corporate Knights list.

The rankings can also call attention to little-known sustainability leaders like Umicore, the Belgian company that has a remarkable turnaround story to tell. Here’s how my story about Umicore begins:

For much of the 20th century, a company known as Union Minière du Haut Katanga exploited the rich mineral resources of Belgium’s colony in the Congo. The company mined copper, tin, cobalt and precious metals, and shipped them to its silver and lead refineries in the Hoboken section of Antwerp, Europe’s second biggest port. This dirty business took a hit when Union Minière’s assets in central Africa were seized by the government of Zaire in 1968, forcing the company to seek new mines.

The company, now called Umicore, is still mining and refining – but instead of extracting metals from the earth, it recovers them from the discards of the industrial economy: electronic waste, catalytic converters, rechargeable batteries, and residues from copper and zinc smelters. The Hoboken refineries have been shuttered, and in their place is what Umicore calls “the world’s most advanced, largest (116 hectares) and cleanest precious and specialty metals refining, recycling and recovery operation.”

The extreme makeover in Hoboken has helped Umicore reach the top of Corporate Knights2013 list of the Global 100 Most Sustainable Companies. It’s part of Umicore’s top-to-bottom transformation from traditional mining company into an innovative technology firm that operates at the frontier of metallurgy, chemistry and materials science. Today, the company focuses on clean technologies, including emission-control catalysts, materials for rechargeable batteries and photovoltaics, and advanced recycling.

You can read the rest here.

Comments

  1. Very good point, Marc! Are you suggesting that the Corporate Knights release their list in a more nuanced way? I would like that very much. It would be great to see the top companies from each industry, or even to see the list for each industry of all the companies that are exceptional. It would also be useful to be given some understanding of how any single industry ranks against all other industries, say by knowing the mean for each industry. That figure would be even more useful if it was accompanies by a brief summary of the unique challenges facing the industry. That would add clarity as to why some whole industries have a harder/slower time advancing. Do you foresee anything like this happening? Is it done on any other lists?

    • Marc Gunther says:

      Thanks, Tom, I wasn’t aware that Neste does not do extraction and I agree with your point.

      Chaim, I think it would be more useful for the raters and rankers to provide a series of industry lists–and thereby acknowledge that comparing a retailer to an oil company to a soup company is kind of nuts! Of course, that would not get as much media attention. Many of us in the press prefer simpler stories, so it’s easier to get attention for a Top 10 or Top 100 list.

  2. IMO, Neste is of a different breed than the other oil companies you mention. Neste does no extraction, only refining, including the refining of biofuels.

    When it comes to fossil fuels, the truly unsustainable part is extraction. After that, I consider a company sustainable even if it uses fossil fuels – so long as it uses less fossil fuels than its competitors to deliver the same products and services.

    If we ruled out all companies that use fossil fuels as an input, we probably could not even find 100 companies for the list.

  3. Even something as as apparently straightforward as “benchmarking” one company in a specific industry against another is complicated by the differences between the specific markets they serve. Benchmarking across industries is little better than a
    “crap shoot”. There is far too much opportunity for subjective judgements to skew the results, as your owm observations indicate all too clearly.

  4. Amy Longsworth says:

    Hi Marc –

    Did you talk with Doug Morrow about the idea of developing industry rankings and weighting each company by its industry before comparing them across industries? You could still get a “top ten” list, but it would be a more nuanced approach, given than some industries are inherently heavier-impact. Seems like Corporate Knights is going to have to think of something to do differently, because Unilever trailing Suncor throws the whole exercise into question, as you say.

    Amy

    • Marc Gunther says:

      I didn’t ask Doug Morrow or Corporate Knights about applying industry weightings to the rankings, and I’m not sure how that could be done.

      Having thought about this more since writing and getting other comments and emails, I think the best approach for these rankings would be to identify “industry leaders” and “industry laggards” and give up on the idea of the Top 100 or Top 10. I know this would make the list less press-friendly, but so it goes. Some things are unavoidably complicated.

  5. Marc, I have come to the view that it is possible to do reasonably credible rankings across a broad range of issues on companies within a narrow sector OR a on a narrow issue across a broad range of sectors. But, if you try and combine both, the results become meaningless. Even with those caveats we take the detailed scores and rankings too far. As you note in your comment, more meaning comes from identifying broad categories of leading and lagging performers. As the education and medical fields know only too well though at some cost, individuals and the press love quantitative measures. Some would say this is one of the broader challenges of integrating sustainability into business – companies and managers are drawn to the quantifiable too. But, in the words attributed to Einstein, not everything that counts can be counted and not everything that can be counted counts.

  6. I think the fundamental problem with the Global100 is the criteria used. Less than half the criteria Corporate Knights has anything to do with environmental sustainability. And, unless I’m grossly mistaken, just about everyone (aside from a few consultants) believes that sustainability is fundamentally an environmental notion.

    And for those who use “sustainability” in a broader sense, as a grab-bag notion referring to all sorts of positive stuff — well, then there’s much less surprising about the list.

    You can see my own blog entry on the problem with their criteria, here: http://www.canadianbusiness.com/companies-and-industries/corporate-knights-gets-sustainability-wrong/

    • Thanks Chris,
      Sustainability means many things to many different people beyond the original root of sustainable development defined by the Bundtland Report (“Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs”). At Corporate Knights, we accept it as self-evident that no form of wealth producing capital (including social capital) exists in isolation from other forms of capital. This means that it is not sustainable to have leadership structures that do not reflect the diversity of the marketplace in which they operate, or to benefit from the social capital of a civilized society necessary to sustain the modern marketplace without paying the price in the form of a fair share of taxes.
      A system of clean capitalism (which meets the conditions of sustainable development) must optimally manage a portfolio that consists of five forms of capital:
      Financial – funds which are available to acquire real capital;
      Produced – such as roads, railroad tracks, electrical grids, and machines;
      Human – including levels of education, knowledge, and creativity;
      Social – robustness of our institutions; and
      Natural – the earth’s natural assets (e.g., oil, minerals, land) and ecosystem services resulting from them
      On balance, when we enhance our various forms of capital on a net basis, we enhance our overall wealth. Our system must not deplete any particular type of capital past a danger point. This is the essence of clean capitalism.

  7. Thanks Marc,
    Nothing focuses the mind like a top 100 ranking. We noticed this year in our analysis and communications with companies that the Global 100 is a significant lever of influence. In several instances among Fortune 100 companies, the prospect of receiving a zero for not disclosing a certain metric (such as pay roll or employee turnover or water use), was enough of a motivator to cause companies to change the disclosure practices in real time and post such information on their web site for the marketplace to digest. We also noted in our analysis of the sustainability paylink indicator that companies are beginning to make executive bonuses partially contingent on being included among certain top-tier rankings, including those done by Corporate Knights.
    Regarding your thoughtful suggestion on breaking out the best performers by industry, we agree and do this in-house already for the capital allocation model we have developed for investors. We will be making this information public in the future.
    We have carefully thought through the best way to do a comprehensive corporate sustainability ranking, and are always looking for how to enhance our approach while respecting our bedrock principles of objectivity (in so far as that is bounded within a quantitative approach) and transparency.

    Toby

Trackbacks

  1. […] it is biased towards companies that do relatively well in a sector where many others lag behind. As Doug Morrow, VP of research at Corporate Knights Capital told Marc Gunther: “In some industries, the industry mean is going to be lower than others. If you happen to be a […]

  2. […] were released by Toronto-based media and investment research company Corporate Knights (CK), some attention was paid to the optics of two oil companies making the top five of what is arguably the most […]

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