Are “Corporate Social Responsibility” rankings really useful tools?

Some days ago, Corporate Knights, the magazine for clean capitalism, announced its seventh annual Global 100 list of the most sustainable large corporations in the world.

The Global 100 includes companies from 22 countries, encompassing all sectors of the economy, with collective annual sales in excess of $US 3 trillion, and five million employees.

Among the 22 countries, Japan led the way with 19 Global 100 companies (14 more than they had in 2010). The United States followed with 13 (one more than in 2010). The UK (11 companies, down from 21 in 2010) and Canada (8 companies, down from 9 in 2010) took third and fourth place respectively. Rounding out the top ten scoring countries with the most listed were: Australia (six), France (five), Switzerland (five), Denmark (four), Finland (four), while Brazil, Germany, India, Norway and Spain each registered three Global 100 listed. Sixty-six per cent of the 2010 companies remained on the list in 2011.

With increasing frequency, analysts are monitoring, evaluating, and ranking company performance. Thus, Corporate Social Responsibility (CSR) lists – ranging from Corporate Knight’s “Global 100” to Ethisphere Institute’s “Most Ethical Companies” and Corporate Responsibility magazine’s “100 Best Corporate Citizens”, as well as Dow Jones “Sustainability Index” and its Canadian peers such as “FTSE4GOOD” or “Jantzi Social Index” (JSI) – constitute a stamp of approval.

Certainly, environmental performance is all the rage in today’s investment environment. Nearly one out of every nine dollars of professionally managed assets in the United States – valued at an estimated $2.71 trillion – has been invested in companies that perform well in CSR rankings.

Company stakeholders, from investors to customers to employees to regulators, watch the 100 Best Corporate Citizens List closely, and are using it now more than ever to make important decisions. As a consequence, making the list is worth millions or even billions in increased shareholder and brand value.

However, there are some voices against rankings. Some specialists have said that these CSR lists are just nonsense. It is almost impossible to compare Campbell’s Soup with Hess. They say the whole idea is like comparing a horse with a butterfly. Also, it is true that some rankings are suspicious when ranked companies financially support the organization ranking them, especially without disclosing such information. In this case, input from external stakeholders would make the methodology much more robust and credible.

A number of blogs and discussion boards across the web, as well as a growing number of specialists, are frustrated by CSR industry lists, and with the manner in which they are constructed. Some even perceive a pattern of favoritism. For instance, some Corporate Responsibility magazines make money from the companies that it rates in its annual list (through sponsorship, registration fees for events, and brand licensing arrangements). This, in any industry, would be seen as a conflict of interest, but in the realm of CSR and business ethics it would be purely hypocritical.

So back to the question: Are CSR rankings really useful tools? Certainly, sustainability indices can be useful tools for recognizing company achievements, and for separating out the leaders from the laggards based on past performance. They become dangerous when investors take them at face value, assuming that a portfolio that tracks these indexes faces little environmental and social risk and/or is protected from future embarrassment.

Sustainability is a work in progress. Investors who seek to invest in sustainable companies need to be partners in developing and promoting sustainable corporate practices. The real investors´ social responsibility is to encourage all companies, leaders and laggards to innovate and find ways to operate with an ever-smaller impact on the planet, and a greater contribution to human well-being.