Which companies are the best corporate citizens?
Every year, Corporate Responsibility magazine, operated by 3BL Association, publishes a report on the 100 best corporate citizens. A more careful look shows that we shouldn’t be celebrating all of them.
If you look through the results of the report, you might be surprised that some companies aren’t there (i.e. Patagonia, Lego, Danone). This should give you an immediate pause. A deeper look shows that companies like Philip Morris International (yes, the cigarette company), Gap (the fast fashion brand), and ConocoPhillips (the oil and gas company) are amongst the best-performing companies in the US on factors related to Environmental and Social Good (ESG).
How is this possible? The report only analyzes US companies that are on the Russell 1000 index, which is comprised of the highest-performing 1000 stocks listed on the Russell 3000 index, a “market-capitalization-weighted equity index maintained by the FTSE Russell that provides exposure to the entire U.S. stock market. The index tracks the performance of the 3,000 largest U.S.-traded stocks which represent about 98% of all U.S incorporated equity securities.“
In other words, this report looks at some of the largest US-based companies, takes the highest performing 1000 out of that limited list, and then ranks those on 134 ESG (environmental and social good) factors determined by the responsible investment research arm of Institutional Shareholder Services.
But what are these 134 ESG factors that inform this report?
It’s not easy to find this full list which should give readers another pause. In fact, according to the ISS: “ISS ESG’s scientifically based rating concept places a clear, sector-specific focus on the materiality of non-financial information“. Simply put, ISS reporting helps determine whether factors are material for investors to know about, and NOT whether they are good for the world. Per the actual report, companies get a positive score by simply answering “True” to this question: “Does the company disclose the total amount of energy conserved through its energy conversation programs?“.
Here’s another way to think about this. Companies will rank higher on this list for actions like reporting on carbon emissions, reporting on income inequality issues, and if they are compliant with laws or not. So this means companies will be rewarded for reporting on these issues, regardless of performance. In other words, you get rewarded for reporting, even if you are breaking laws or increasing your carbon footprint. This is why a company that makes over 70 Billion dollars selling cigarettes is on this list, while companies that actually exist for the greater good are not even mentioned.
Measuring companies on ESG factors has real potential, and in fact, is critical if we want to achieve the Sustainable Development Goals. But this type of fanfare is exactly the “Elite Charade of Changing the World” that Anand Giridharadas is warning us about.
So if this report isn’t good, what should we look at?
It’s a hard question and the industry has a lot of improving to do. There is also some competition amongst groups like 3BL to try and be the leaders in the space (Dow Jones Sustainability Index, RepTrack). Other institutions, like the Global Reporting Initiative, provide more holistic measurement and guidance on real ESG factors and performance of them. But more is needed, and perhaps the best assessment might be the Benefit Corporation assessment which actually measures your performances on factors and challenges companies to exist for public benefit, not for investor benefits.