Sustainability cannot be a marketing opportunity anymore. Soon, customers will buy from brands that can prove their commitment to the environment and to the civic duty
Cynthia Figge started being concerned with sustainability before it was trendy, before it was considered necessary and inevitable. In 1996 she had already founded EKOS International, a sustainability consultancy: back then, Figge says, she used to travel to Europe often to gather data and best practices from firms and companies. Europe was, and is, ahead of the US in terms of understanding and practicing sustainability as well as the regulatory apparatus that makes it possible. Today, CSRHub is the largest aggregator of EGS data sources – Environment, Social, and Governance.
Figge had met Bahar Gidwani, the co-founding partner of CSRHub, at Harvard Business School. Gidwani was a pioneer in systems to digitize stock photos to bring them online, developing big data techniques that CSRHub still uses to this day. Combined with Figge’s expertise and interest for sustainable development (she had also worked for and advised large corporations like Boeing, Coca-Cola, REA, BNSF), they started building what would become the data aggregator, resulting in the most balanced and widely encompassing rating for companies of all industries based on their ESG performance.
«There was already a rich array of sources from what we would call Wall Street analysts, and actually many of the analysts were in Europe. We started working with them, one by one, to convince them to allow us to use their data. This may not sound very radical at the moment, but at the time none of the sources were allowing their data to be combined with any other source. These were direct competitors to each-other so bringing them together to create a consensus scores was unusual». The resulting landscape was thus confusing– contrasting or diverging sources would not always work in the interest of full transparency.
CSRHub’s business intelligence system measures the ESG impact of companies and assigns each an overall rating on a scale from 0 to 100. Sources now include investor facing analysts, customer Intelligence analytics, activists, special interest groups as well as public government data. The company provides transparent access to the ESG performance of 19,000 companies from 134 industries in 143 countries. Its platform uses algorithms to aggregate, normalize and weight ESG metrics from 680+ sources, making them the largest aggregator available, encompassing 280 million data points with monthly data history extending back to December 2008. All of this is distilled down to the rating, which is the result of lower level scores on twelve key subcategories: Environment (energy and climate change / environmental policy and reporting / resource management), Employees (compensation / diversity / training and health), Community (philanthropy / products / human rights and supply chain), and Governance (board / leadership / transparency).
Figges’ company has strict agreements with their sources to keep the data confidential: it is only through CSRHub’s vast correlation analysis and granular statistical work that such a vast array of input can be made meaning of, so that comparison and ranking is possible within industries and across geographies. The challenge with ESG is that it covers diverse and often conflicting areas within a single company, hard and soft factors, from employee wellbeing to supply chain efficiency. Progress is not a single facet concept: it can be measured and viewed under different angles, so harmonization and normalization are essential tools for ultimate transparency.
It started at the initiative of pioneers like Figge and her partner and, on the companies’ side, of a few illuminated CEOs. In the space of a few years the pressure multiplied manifolds to include pushes from external stakeholders, regulatory institutions and, most importantly, employees. «There were all sorts of awakenings and pressure in consumer-facing companies like Nike and Coca-Cola or retailers to disclose more, to be conscious. These were times when students on campuses were boycotting companies like Coca-Cola because of the water table drawdown in India [2000-2005]. There was a rising understanding at the consumer level that issues like the scarcity of resources were part of their consideration in terms of brand loyalty. Companies in their own self-interest were beginning to understand the implications of this kind of issues and that there was some cost-advantage to that»
But even back in the ‘early days’ – around the turn of the century – there were already companies, like Hp or Dell in the tech arena, where the implications of sustainability were felt at every level of the organization: even lower level employees and product managers were engaged in recycling and making a difference, long before it became a popular trend. Sustainability gradually but steadily became a factor of innovation, whether it was because of enlightened founders or pure market opportunism.
A virtous example in an industry as controversial as fashion, is Patagonia, created in 1973 by Yvon Chouinart. As early as 1985, the company has started devolving 1% of their revenues to environmental protection organisations, for a cumulative total of 89 million euros between cash and material donations. On the product and sourcing front, Patagonia has worked to reduce its environmental impact: in 1993, it devised a fleece material made from plastic bottles. As it won the Circular Economy Multinational Award in Davos in 2017, it launched an e-commerce platform for its Worn Wear initiative, which sells used Patagonia clothing and equipment online, sourced from its customers, in an attempt to show how it is possible to manufacture, repair and recycle products that will last a lifetime. The brand, under the leadership of CEO Rose Marcario (Marcario exits Patagonia in June 2020) has also vocally advocated against the Trump campaign and administration on a number of environmental issues, and went as far as threatening to sue the president in a controversy over Bears Ears National Monument in Utah in 2017. As a result, the company scores an overall rating of 64 which puts it in the top 2% overall, and the top 1% within its industry and country, mainly driven by Environment and Governance scores, solidly in the mid 70s.
Not all companies are disposed to share, be transparent, and embark on a journey to improve on parameters that they might not recognize as crucial in the first place, regardless of the pressure they receive from outside or inside. One of the key issues in the field is that there are industries that have traditionally not disclosed very much at all. The fashion and apparel industry is reported to be responsible for 8% of the global greenhouse gas emissions (Quantis, 2018); this is not surprising when one takes into account that 70% of the 114 billions of items of clothing produced in 2019 will end up in landfill or incinerated (Euromonitor, BCG, Fashion For Good). One of the most authoritative sources on fashion, the Fashion Transparency Index, which is one of the raters used by CSRHub, has repeatedly highlighted the societal and environmental risks linked to the business of making, selling and disposing clothes and accessories, resulting in one of the most laborious and inefficient chains of production and supply. Transparency in fashion is so low that it is hard to even get a clear picture of where companies are at in their progress towards sustainability. The scarce but growing amount of information that has been coming out of the fashion industry then gets muddled by ‘information dumping’. This seems to be a deliberate strategy for some fashion brands that aim at greenwashing and confusing the audience by repeating the same content with little substance or relevance across their CSR webpages, press releases or annual reports. That is where Marketing and Communications departments, instead of watering down data, should to do their due diligence to unclog a tenuous and farraginous stream of information. Fashion has a long way to go before it understands what it really means to be a great company at a holistic level.
So, while CSRHub in provides ratings as balanced as possible about all industries, quis custodiet custodes? In other words: does CSRHub get monitored in turn? CSRHub is indeed a for-profit B Corp in the US, which means it is itself rated and certified. B Corporations are businesses that balance purpose and profit. On the business side, CSRHub sells its expertise via a subscription-based model as well as strategic tools to companies, investors and academics around the world. It also signed distribution agreements of their data with financial platforms like Bloomberg.
In addition to pure ratings, CSRHub tags companies against 17 ‘Special Issues’: «what we find is that people are interested in very specific issues, like Gender Diversity, Animal Testing, Fracking, Child Labour, etc. that are driving world concerns». While some issues are universally non-controversial, like Child Labour, on the whole «we have tried to stay very neutral because we understand that people feel differently about different issues. For example, [doctors and scientists] who do cancer research run tests on animals so I suppose you could say that makes their companies ‘pro Animal Testing’? Take things like ‘being involved in a country’: there are absolutely two sides to that». The Special Issue ‘Burma’ is a case in point: some consider interaction with the country to be negative, as it may support the Burmese regime. Others may consider it as positive, as it may increase interaction with Burmese society and improve its welfare. Notably, one of the latest Special Issues to be introduced is an association to the Trump family, namely a tag for companies that market Trump-brand related products, which is an issue unquestionably related to one’s political views. To avoid bias CSRHub just tags the company against the issue, they don’t evaluate whether they consider it to be a “good” or “bad” trait; every user of the database can then set their profile parameters to easily check against issues that are important to them one way or the other.
So, is there a specific industry that seems particularly virtuous? When you average out data points a lot of companies end us hovering in the vicinity of 50 out of 100 score, though you end up having leaders and laggards in almost every industry. However, when aggregating by countries data tends to show significant statistical difference between geographies like North America (48/100 overall average) and Europe (54/100 overall average): just like a couple of decades ago, some areas of the world are ahead of others.
A conspicuous example of how the ESG data can influence the business community at large and help shift perceptions is the annual Harvard Business Review of the 100 Best-Performing CEOs in the world. Since 2015 their ranking has been based not only on financial performance but also on ESG ratings. In 2019 they have changed the weighting of ESG scores to account for 30% of each CEO’s final ranking, increased from the 20% of the previous four years. The shift reflects the fact that, also thanks to the work of Figge and her peers, a rapidly growing number of funds and individuals started focusing on far more than bottom-line metrics. The change in ESG weighting created one noteworthy casualty: Amazon CEO Jeff Bezos. Bezos had been the top CEO every year since 2014, but he failed to make the 2019 list owing to Amazon’s relatively low ESG scores, which reflect risks created by working conditions and employment policies, data security, and antitrust issues. Figge is adamant that this is a clear sign of the growing consciousness at the intersection of social and environmental issues: «That’s where I see us going. ESG data is driving our understanding of value. ESG rating is a very legitimate part of how we value companies and businesses».
To reinforce its mission and show that external scrutiny is in fact a booster for the value of a company, CSRHub has proven that there is a positive correlation between the number of sources used to evaluate a company and its rating: the more the scrutiny, the higher the rating. Conversely, overtime downgrading has in fact been linked to lack of transparency. According to Figge the virtue of the rating system lies in its multi-stakeholder premise, the combination of pressure from attentive investors, employees who want to work for companies that matter, customers who are getting more aware and sophisticated, and ultimately regulators and legislators. In the long term, companies of all industries will inevitably be pushed towards wanting to be part of the solution and they will perform better because of it: «There are two parts to this virtuous circle: having a story and telling a story. If you don’t have a story you better develop one and once you have one you need to tell it well».