Understanding Newsweek's 2014 Green Rankings

Reed Saxon/AP

The good news is that disclosure of the most important environmental metrics by the biggest companies has become table stakes: 88 percent of the 100 largest US companies now disclose their greenhouse gas and energy metrics, while 65 percent disclose water use. Across the entire ranking universe, if a company is not disclosing greenhouse gases, energy, water or waste, it is now offside, playing catch-up with its peers. This is remarkable considering that most of these metrics are not subject to mandatory disclosure in most countries. Two likely reasons why disclosure is so significant: pressure from investor groups (most notably CDP, a not-for-profit dedicated to environmental disclosure, which sends questionnaires to companies across the world on behalf of investors with $87 trillion in assets), and the growing number of jurisdictions that require environmental disclosure, which companies generally then adopt across their global operations.

This level of disclosure on metrics such as greenhouse gases now makes it possible for investors to incorporate this information into their investment strategies. And early returns on the data show that greener investment is smarter investment. For example, Corporate Knights Capital (the research partner for Newsweek's Green Rankings), reports that an investment of $100 equally spread across U.S. companies that performed better than average on greenhouse gas emissions would have returned $220 dollars over the past five years, versus $160 by investing in the S&P 500. Investing into these green companies also led to 93% fewer emissions than an equal investment in the S&P 500.

There are a number of other positive findings that can be gleaned from the research that went into the rankings. For example, it is notable that one-third of U.S. 500 companies and over half of Global 500 companies now disclose greenhouse gas emissions beyond their own operations into their supply chain, which is where the lion's share of impact is in many industries such as food products and consumer goods. For example, sport lifestyle company PUMA reports that its supply chain is responsible for 94 percent (or $187 million worth) of its total environmental impact, with the biggest chunk coming from the production of raw materials (including leather, cotton and rubber). As a result of this analysis, PUMA is committed to finding alternatives to leather.

Many will also be surprised that over a third of U.S. 500 companies and 71 percent of Global 500 companies have their environmental numbers audited or reviewed by an environmental consultant or accounting firm, which inspires more confidence in the numbers and increases the chance that other marketplace actors (like investors and consumers) will use that information when considering whether to buy a stock or product.

Perhaps the most interesting result is that almost a quarter of companies in the U.S. 500 and 39 percent of the Global 500 now link executive bonuses to environmental targets. Pay is one of the most powerful motivators: when a CEO's bonus is a function of delivering on an environmental target, the targets tend to get hit.

Like any rankings system, the Newsweek Green Rankings are imperfect. The goal is to grade the largest corporations on the most important publicly available environmental metrics in a clear rules-based way. But there are constraints of a "publicly available" and "rules-based" approach. We've identified six main weaknesses.

1. They are product and service agnostic.

The rankings do not take into account the impact of a company's products or services, which is a big chunk of the impact for car, oil and technology companies. Only a small handful of companies (including Hewlett Packard, BASF, Toyota) disclose their product carbon footprints. Some ratings agencies employ complex models to estimate the carbon impact of a company's product, but due to the wide range of factors, the probability of these estimates being arbitrary is high.

2. It is nearly impossible to take into account supply chain impacts.

Only a minor portion of the scoring considers a company's supply chain, which is the majority of the impact for many food companies (think about the cows grazing what used to be Brazilian rain forests to provide fodder for Big Macs). Currently, most companies do not disclose supply chain impacts. The most widely disclosed supply chain impact is greenhouse gas emissions. One-third of U.S. 500 and half of Global 500 companies disclose Scope 3 greenhouse gas emissions, but in many cases the number only covers a portion of the company's operations in one region, so we elected to reward companies with 5 percent of their greenhouse gas emissions score, simply for reporting some part of Scope 3 emissions.

3. In some cases, there is an inherent lack of context.

The four main environmental impact metrics are normalized by sales, showing little regard for the context (for example: using a lot of water matters a lot more when you are in Arizona compared to the Great Lakes). Things are beginning to improve on this front, but currently only two companies (Dominion Resources and BASF) provide a detailed breakdown of their water use across specific locations and sources, which enables contextual analysis.

4. Companies do not report complete data.

Data for even the most basic environmental metrics is not disclosed by many companies. While there are some ways to impute environmental data that work well for sectors or countries, their predictive power is less reliable and can be arbitrary at the level of a specific company. In cases where companies do not disclose standard data-points such as greenhouse gases, water, waste or energy use, they are assigned a score of zero.

5. Not all data is created equal.

Environmental data is often not audited or disclosed in a timely manner, and sometimes the data available pertains only to a portion a company's operations. This skews analysis when it is normalized by a metric like sales, which covers 100 percent of operations. We use statistical techniques to identify potential bad apples, and manually verify these cases.

6. There are still some missing categories.

Biodiversity impact and political lobbying are two key categories not factored into the rankings. While there is data available for some types of biodiversity impacts for some industries and a portion of political donations and political lobbying information is in the public domain in some countries (notably the U.S.), we have not yet figured out how to assign rules-based scores to companies with global remits.

The art of any ranking is to take a fair snapshot of reality. The bane of any ranking is to miss the forest for the trees. The 2014 Newsweek Green Rankings is certainly missing some important trees (and some branches), but it does shed light on important parts of the forest and enables a higher standard of corporate accountability for their impacts on the planet.

Toby A.A. Heaps is the CEO of Corporate Knights Capital.

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