Newsweek's Green Rankings: A Look at the Methodology — International Institute for Analytics

Analytics and Sustainability, Part II

Finding the right way to measure a company’s “green”-ness remains a challenge. Consistent metrics are just emerging though there are still many apples-to-oranges-to avocados issues when you try to compare a service company to a product company or a company in extractives vs. one software.

As companies seek to create competitive advantage through their environmental and other sustainability initiatives or simply evaluate which criteria to use in making decisions on which efforts to pursue and investments to make, being able to put forth analysis that is as accepted in the board room as it is in Wall Street and the offices of the Environmental Defense Fund is a complex undertaking.

Newsweek magazine has waded into the fray with its rankings of the 500 largest companies in the U.S. What is interesting for us is that they’ve been transparent about their methodolgy. They’ve taken data from three independent sources with expertise in specific subsets of the equation: KLD Research & Analytics, TruCost, and the Corporate Register. They’ve done some normalization for revenue, converted the information to Zscores, weighted those scores for impact, policies, and reputation, and come up with a rank.

“Our goal was to assess each company’s actual resource use and emissions and its policies and strategies, along with its reputation among its peers. The 500 companies included in the ranking are the largest U.S. companies as measured by revenue, market capitalization and number of employees. The companies are broken out into 15 sectors, based on the FTSE/Dow Jones Industry Classification Benchmark (ICB).”

We aren’t privvy to the various data sets; they seem reputable but it would be fun to have some other experts muck around a bit. Tech companies rank highly overall. Does the data accurately account for all of the e-waste that winds up in developing countries?

On the surface, it is interesting that the weighting is 45% for impact, 45% for policies, and 10% for reputation. I think that I would have pushed for more emphasis on impact. After all, isn’t impact the ultimate goal? My guess is that the scores will be used most to burnish reputations (it would be interesting to see how many press releases, newsletter stories, and other froth is the result of this effort). I’d like to see some competitive teams take a crack at alternative analysis of the data set to see if the methodology used is indeed the best one.

I’d also like to see a longitudinal study looking at the results of decisions made based on the information revealed by the rankings. Will some companies slide a bit if they find they are far above the norm? Or will they push forward with greater vigor in order to increase the differentiation? Is there a correlation between green rank and share price, profitability, customer and employee attraction/retention, or other key driver over time?

While there are many questions to be answered, we have them to ponder because Newsweek undertook this effort and for that I am grateful.

What do you think? Are the Newsweek green rankings a credible emerging standard or just fancy greenwashing? What’s your take on their methodology and what questions would you like to see answered next?

http://www.montarosasearch.com Rupert Davis, Head of Sustainability, MontaRosa

That Newsweek is making such an effort speaks to the major cultural shift that has been happening over the last few years in the States. As you say the difficulty is each company has its own metrics, goals and performance tracking systems and these are hard to compare. A measurement which simply doesn’t happen yet(with the notable exception of Johnson and Johnson and a very few others), and it’s a shame, is the actual internal rate of return on environmnetal investments. In other words measuring the earnings equivalents[cost savings] created over time against the cost of the sustainability investment – much as a VC or project financier would measure the return on a potential new investment. These are actually rather compelling from a business value perspective and make the case much more strongly. That’s why some major private equity firms like KKR have been rolling out sustainability across their portfolio companies – they see an operating performance return which matches up to their benchmarks.
http://www.interconnectedworld.typepad.com Kathrin

Eric,

You raise a few interesting questions. A longitudinal study would be interesting. Will companies at the bottom lose motivation? Alternatively, could companies in the top half, in the phenomenon Robert Cialdini refers to as the “magnetic middle”, gravitate toward the aveage? Knowing the companies that were at the top of the list, I am confident that won’t happen. Still, the only real way to understand the impact of the ratings themselves is to measure them over time, and to do so transparently.

Note that transparency, as with systems, is more of a relative term than absolute. On the one hand, these rankings were certainly more transparent than usual in explaining the components of the ranking. On the other hand, the transparency isn’t granular enough for me to directly trace my company’s actions and results to the component scores.

As Rupert points out, consistent metrics would make measuring a company’s contribution to its own and the planet’s sustainability would be a giant step forward. In the meantime, though, I’d really like to see specifically how the data from the listed companies were “normalized”.

And you’re dead on with regard to impact – that is, after all, the whole point!

Kathrin
Eric McNulty

Nicholas Eisenberger also took on this topic over on the HBR blog: http://blogs.hbr.org/cs/2009/10/the_right_green_metrics.html. His thoughts are interesting.

Analytics and Sustainability, Part II

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