Journal of Environmental Sustainability
Volume 1 | Issue 1 Article 5
Assessing Corporate Sustainability Through
Ratings: Challenges and Their Causes
Sarah Elena Windolph
Leuphana University Lüneburg, firstname.lastname@example.org
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Windolph, Sarah Elena (2011) "Assessing Corporate Sustainability Through Ratings: Challenges and Their Causes," Journal ofEnvironmental Sustainability: Vol. 1: Iss. 1, Article 5.DOI: 10.14448/jes.Available at: scholarworks.rit/jes/vol1/iss1/
Environmental sustainability and supply chain management - A framework of cross-functional integration... 37
Assessing Corporate Sustainability
Challenges and Their Causes
Sarah Elena WindolphLeuphana University Lüneburgwindolph@uni.leuphana
ABSTRACT: Assessing corporate sustainability is increasingly practice-relevant, not least becausethe capital market and other markets have been paying growing attention to the topic. Recently,ratings have become an important assessment approach and nowadays a variety of organizationsand financial service providers conduct their own ratings. Yet, despite their growing popularity,ratings are criticized in research and practice. Thus, the purpose of this paper is to systematize thechallenges that corporate sustainability ratings face: lack of standardization, lack of credibilityof information, bias, tradeoffs, lack of transparency, and lack of independence. Furthermore,the paper discusses the causes of these challenges and suggests possible ways to improve thereliability of ratings.
corporate sustainability assessment, corporate
sustainability measurement, ratings, socially
responsible investment (SRI)
Sustainability is a topic of growing significance
for companies just like the contribution of
companies is becoming essential for sustainable
development (Dunphy, Griffiths, and Benn;
Dyllick and Hockerts; Epstein; Schaltegger
and Burritt).Corporate sustainability (CS) is
understood here as an approach to systematically
consider environmental and social issues and to
integrate them into the economic management
of a company (Dunphy, Griffiths, and Benn;
Shrivastava and Hart). Increasingly, the demand
for CS is not only driven by societal or political
expectations, i. push factors, but also by the
potential for internal organizational improvements
(e. g., cost reduction), as well as the demand of
consumers and investors, i. pull factors (Dyllick,
Belz, and Schneidewind; Meffert and Kirchgeorg;
Schaltegger and Wagner). Examples of this latter
market pull are the rising demand for organic food
(Wier and Calverley) and the growing significance
of socially responsible investment (SRI) (Beloe,
Scherer, and Knoepfel; Moskowitz; Sparkes
Assessing Corporate Sustainability Through Ratings: Challenges and Their Causes 39
Against this background, the research question ofthis paper is what challenges CS ratings face andwhat their causes are. The paper is structured asfollows. Firstly, after a short introduction to therelevance of ratings, it displays and systematizesthe challenges for CS ratings based on a literaturereview. Several ratings are included for illustrationpurposes. Secondly, the paper determines the causesof these challenges by reviewing more generalliterature on CS and CS assessment. Thereupon,the paper identifies ways to improve the reliabilityof CS ratings.
II. BACKGROUND: RELEVANCE
OF RATINGS IN THEORY AND
This section elaborates on the relevance of external CSassessment from a theoretical perspective, and thenhighlights the practical importance of ratings in particular.
II RELEVANCE OF RATINGS FROM A THEORETICAL PERSPECTIVE
CS assessment approach ExamplesSRI research(‘in-house’)
Sarasin’s Corporate Sustainability Rating (Bank Sarasin & Co Ltd.)ZKB Sustainability Research (ZKB)
Ratings MSCI (formerly KLD) Environmental, Social and Governance (ESG) Ratings (MSCI Inc.)
oekom’s Corporate Responsibility Rating (oekom research, oekom CorporateRating)
Indices Dow Jones Sustainability Indexes (DJSI) (SAM’s Corporate Sustainability Assessment and Dow Jones Indexes; SAM; SAM Indexes GmbH; SAM and PwC)
FTSE4Good (EIRIS’ sustainability research and Financial Times StockExchange Group, EIRIS)
Ethibel Sustainability Indices (ESI) (Vigeo’s sustainability research andStandard and Poor’s, Vigeo and Forum Ethibel)
Rankings Good Company Ranking (Balzer et al.) Global 100 Most Sustainable Companies in the World (Corporate Knights Inc.)Awards German Sustainability Award (Stiftung Deutscher Nachhaltigkeitspreis e.)
Assessments by NGOs,consultants, andresearch organizations
Guide to Greener Electronics (Greenpeace)Carbon Disclosure Project (Carbon Disclosure Project)
Table 1: Prevalent approaches to externally assess CS.
40 Journal of Environmental Sustainability – Volume 1
An important difficulty when assessing CS externallylies in information asymmetries (Lyon and Maxwell;Rischkowsky and Döring). Consumers, investors,and other stakeholders are not able to verify thesustainability claims made by companies, becausethey do not have access to the relevant information(Ramus and Montiel). This not only affectsproducts (Jahn, Schramm, and Spiller) but alsoprocesses inside companies and along supply chains(Chatterji and Levine; Epstein). Reliable third partyinstitutions with resources to gather the neededinformation become important players (Healy andPalepu; Lee and Cho; Rischkowsky and Döring).Ratings or rating organizations are one example ofsuch information intermediaries. Another important aspect is that CS issocially desired (de Boer;Epstein). Ongoingdiscussions in the media as well as the increasingmeaning of sustainability-oriented products, forexample in the financial market, illustrate thatsociety and markets are increasingly concerned withthe topic (Hansen, Große-Dunker, and Reichwald;Meffert and Kirchgeorg; Sparkes and Cowton; Wierand Calverley). This fact may not only motivatecompanies to get involved with sustainabilityissues and to communicate about them, but also toexclusively communicate positive and leave outnegative information. In an extreme case, companiesmay even perceive an incentive to pass on falseinformation in order to improve their reputation ormarket share (Darby and Karni; Laufer, Rischkowskyand Döring). The risk of such opportunistic behavior,known as greenwashing, is increased by the lack ofa definition of CS and the large scope of differentinterpretations (van Marrewijk). The outcome of such a situation may be a“market for (organic) lemons”: stakeholders cannotidentify sustainability-oriented companies (hiddencharacteristics) because of a lack of information orof trust in the offered information. This leads to adiminished willingness to pay for the companies’
products or a lower readiness to invest. Ultimately,sustainability-oriented companies may be crowdedout of the market (adverse selection) (Akerlof;Rischkowsky and Döring). This market failureprobably causes negative effects on the environmentand society when sustainability-oriented companiesare replaced by exclusively economically-orientedones. Accordingly, the contribution of companiesto sustainable development of the economy andsociety will diminish even more. Both Economics of Information (e. g.,Shapiro; Stigler; Stiglitz) as well as the principal-agent theory (Jensen and Meckling) (and relatedapproaches like the stakeholder-agency theory,see Hill and Jones) deal with ways to overcomeasymmetric information or adverse selection inmarkets. They offer two basic approaches to thisproblem. The first approach is signaling (Spence).Signaling in this context means that companiesemit credible signals indicating their sustainabilityorientation. Examples are the publication ofsustainability reports offering stakeholdersinformation on sustainability efforts, and theestablishment and use of brands or labels transportingand substantiating sustainability related messagesabout products or companies (de Boer; Finch; Kolk).However, these signals only fulfill their function ifthe addressees perceive them as reliable (Müller;Rischkowsky and Döring). Yet, reliability is notalways given due to the “climate of general distrusttowards social organizations” (Renn and Levine 212)and the risk of opportunistic behavior. Therefore,signaling may be insufficient in the context of CS. An alternative approach to overcomeinformation asymmetries is screening, whichhere means that consumers, investors, or otherstakeholders actively search for and evaluateinformation on the sustainability performance ofcompanies (Rischkowsky and Döring; see alsoStiglitz). Compared to earlier times, the Internetallows for much more transparency and information
42 Journal of Environmental Sustainability – Volume 1
Scherer, and Knoepfel; Chatterji and Levine; Chatterji,Levine, and Toffel; Delmas and Doctori-Blass;Dillenburg, Greene, and Erekson; Fowler and Hope,Graafland, Eijffinger, and Smid; Hansen; Sadowski,Whitaker, and Buckingham, Rate the Raters. PhaseOne; Schäfer, Beer, Zenker, and Fernandes). Hence,Beloe, Scherer, and Knoepfel (29) conclude that manyresearch organizations “will have to fundamentallyreview many aspects of their research methodologyand approach,” and Sadowski, Whitaker, Lee, andAyars (5) conclude that “the market will settle ona few “winners”.” The challenges that come alongwith CS ratings will be discussed in the following.Several practice-relevant ratings are drawn upon forillustration purposes.
III. CHALLENGES FOR CS RATINGS AND THEIR CAUSES
CS ratings are dealt with in research and practice.Although a certain amount of literature deals with
the challenges for CS ratings, they have not beensystematized so far. In section 3 six importantaspects will be identified and elaborated:lack of standardization, lack of credibility ofinformation, bias, tradeoffs, lack of transparency,and lack of independence. The synthesis buildson a review of academic literature as well aspractice-relevant publications on ratings,indices, and related assessments of CS andidentifies those aspects that are discussed inseveral publications. Table 2 offers an overviewof the challenges and their meaning. Buildingon this, section 3 identifies the causes of thechallenges and discusses them on the basis ofmore general CS literature.
III CHALLENGES FOR CS RATINGSIII.I. LACK OF STANDARDIZATION
Although CS ratings have spread, littlestandardization has been achieved. This is the result
Rating challenges MeaningLack of standardization Diversity of approaches and results, no evaluation of approaches, no comparability (Beloe, Scherer, and Knoepfel; Chatterji, Levine, and Toffel; Graafland, Eijffinger, and Smid)
Lack of transparency Rarely full disclosure of methodology, criteria, threshold values, etc. (Chatterji, Levine, and Toffel; Delmas and Doctori-Blass; Dillenburg, Greene, and Erekson; Fowler and Hope)
Bias Emphasis on economic, environmental, or social dimension; focus on investors’ needs; focus on larger companies (Beloe, Scherer, and Knoepfel; Chatterji and Toffel; Fowler and Hope)
Tradeoffs Aim at single score, possible compensation of unsatisfactory partial results (Delmas and Doctori-Blass; Graafland, Eijffinger, and Smid)Lack of credibility ofinformation
Companies can influence rating results, missing information verification(Beloe, Scherer, and Knoepfel; Fowler and Hope; Healy and Palepu)
Lack of independence Relation between rating organizations and companies (AI CSRR; Beloe, Scherer, and Knoepfel; Healy and Palepu)
Table 2: Challenges for ratings assessing CS.
Assessing Corporate Sustainability Through Ratings: Challenges and Their Causes 43
of the varying interests and perceptions that ratersand stakeholders have in terms of CS. Beyond that,even those ratings that actually do address the sameissues and interests apply varying measures and usetheir own methodology (Sadowski, Whitaker, Lee,and Ayars). The competing approaches have rarelybeen evaluated in academic research so far, althoughthis is regarded as crucial for the construction ofratings (Chatterji, Levine, and Toffel; Sharfman)and indices (Fowler and Hope). Exceptions are forexample works by Chatterji and Levine; Chatterji,Levine, and Toffel; Chatterji and Toffel; Knoepfel;and Sharfman. Furthermore, whereas the assessedcompanies may aim at standardization wherepossible (econsense), this is not desirable fromthe stakeholders’ point of view because of theirdifferent perception of and interest in CS (Beloe,Scherer, and Knoepfel; Dillenburg, Greene, andErekson; Graafland, Eijffinger, and Smid). Hence,standardization of ratings and the establishment ofbest practices are unlikely for the time being.Another cause for the lack of rating standardizationis company-internal CS accounting and reporting(Schaltegger). Ratings use publicly availableinformation as well as data disclosed by companies.Yet, the ways that companies gather and communicateinformation are typically very different. Especiallythe measurement of social issues as well as theevaluation of the influence of CS on companies’success is difficult and not organized systematically.Therefore, the data that ratings build upon is notnecessarily comparable and quality might differ.This fact can distort the rating result.
III.I. LACK OF CREDIBILITY OF INFORMATION
In order to assess CS, ratings depend on suitableinformation. As already discussed earlier, thereis a significant lack of data availability. Thus,
besides publicly available data (like company ormedia reports), raters at least partially depend onself-disclosure of companies. A lot of companiesacknowledge the signaling function of ratingsand take part in surveys (Dillenburg, Greene, andErekson; Fowler and Hope; Schäfer, Beer, Zenker,and Fernandes), for example through investorrelations departments which communicate withanalysts and investors (Healy and Palepu). Forinstance, inclusion in the DJSI requires companiesto “fill in a detailed questionnaire covering a widerange of weighted economic, environmental, andsocial factors” (Fowler and Hope). Yet, the credibility of company informationmay be questioned, “[b]ecause managers haveincentives to make self-serving voluntary disclosures”that will not negatively affect their competitive position(Healy and Palepu 425; see also Laufer). That is onereason why many rating organizations use additionalpublicly available information to verify data (Beloe,Scherer, and Knoepfel). For example, EIRIS refersto the information of “government and regulatoryagencies, industry organizations, trade publications,campaigning bodies, academic and specialists’ reports,and the output of other research bodies” (Schäfer, Beer,Zenker, and Fernandes 72). However, this informationdoes not necessarily have to be credible either. Theverification of information remains a “significantchallenge” for research organizations (Beloe, Scherer,and Knoepfel 29; see also Laufer; Ramus and Montiel). Additionally, Beloe, Scherer, and Knoepfel(29) observe that companies are still “by far themost important source of information” for researchorganizations. SAM states that their companyquestionnaire is “the most important source ofinformation for the assessment” leading to theDow Jones Sustainability Index (DJSI) (SAMIndexes GmbH). EIRIS declares that their surveyserves to provide “the most recent and accurateinformation available.” During the oekom ratingprocedure “considerable importance” is attached to
Assessing Corporate Sustainability Through Ratings: Challenges and Their Causes 45
sustainability-oriented companies. For example, theDow Jones Indexes (DJI) serve as parent indices forthe DJSI (SAM Indexes GmbH) and several MSCIindices for the MSCI ESG Indices (MSCI Inc.),whereas the oekom universe also contains smallercompanies and “significant non-listed bond issuers”(oekom research, oekom universe).
Closely connected to biases are tradeoffs. Mostratings ultimately aim at producing one singlescore that is a number or letter as result of therating process. For example, oekom’s rating usescategories between A+ and D- (oekom research,oekom Corporate Rating), and SAM’s rating workswith percentages (SAM and PwC). Expressing theperformance of companies in such a simple waymakes it easy to understand companies’ positionsand to compare them (Graafland, Eijffinger, andSmid). Nonetheless, when creating a single scoreof the individual measures across the triple bottomline, raters assume that “values can be reduced to onedimension” (Graafland, Eijffinger, and Smid 151)although they are “pluralistic in nature” (Graafland,Eijffinger, and Smid 140). Aiming at one singlescore means that shortcomings in one dimensionmay be compensated by a better performance inanother (Delmas and Doctori-Blass). Hence, singlescores probably result in a distorted picture of theactual sustainability performance of a companybecause it is hardly taking into account all facets ofCS. Companies are required to embed sustainabilitymanagement in conventional management insteadof dealing with it in parallel. This implies that CShas to be linked to the strategy, core business, andday-to-day processes in all organizational units(Stubbs and Cocklin). This integration challengecomplicates the assessment of CS, since activities,outcomes, and budgets are the more difficult toidentify as sustainability-oriented the better they are
integrated. One single score is hardly able to reflectthese interdependencies properly. Furthermore, CS is not a state to be reached(de Ron; Epstein; Schaltegger and Burritt). Instead,the concept occupies the demand for continuousimprovement which shows its process character.Hence, an evaluation of CS should be carried outin relative terms and requires the comparison to abenchmark. One single score can only accomplishthis by relating to other scores, for example of othercompanies or earlier ratings of the same company.Graafland, Eijffinger, and Smid even demand notto conduct cross-sector benchmarking but to limitcomparisons to one industry. In fact, rating resultsoften consist of an additional comparative score. Forexample, SAM translates sustainability scores into arelative industry measure (SAM and PwC). Vigeoand Forum Ethibel state in their rulebook on theEthibel Sustainability Indices that they intentionallydo not calculate a global company score or compilea ranking based on the results of the individualresearch fields. Still, especially rankings normallyoversimplify CS assessment.
III.I. LACK OF TRANSPARENCY
When discussing the lack of transparency it has tobe pointed out positively that most of the criteriaaccounted for in ratings are not determined by theraters alone but together with third parties likeNGOs or academia. This first step in the directionof “tripartism” (Laufer 259) serves to ensure thatratings are more balanced and accepted and increasestransparency and accountability (Fowler and Hope).Nonetheless, the research components leadingto rating results are rarely made fully available,sometimes except for key clients (Beloe, Scherer,and Knoepfel). This refers to the way informationis collected, the methodology, assumptions,calculations, weightings, threshold values, and thespecific criteria of the analysis (Beloe, Scherer, and
46 Journal of Environmental Sustainability – Volume 1
Knoepfel; Chatterji and Levine; Chatterji, Levine,and Toffel; Delmas and Doctori-Blass; Dillenburg,Greene, and Erekson; Fowler and Hope; Graafland,Eijffinger, and Smid). Of course, this does not applyfor all ratings to the same extent, but, generally,academics as well as companies criticize these“black box” approaches (AI CSRR; Delmas andDoctori-Blass; econsense). For example, the generalpart of the questionnaire used for SAM’s CorporateSustainability Assessment rating is open to thepublic, while the sector-specific questions are not(SAM and PwC; Boms). Graafland, Eijffinger, andSmid point to the importance of disclosing methodsand assumptions of benchmarks to stakeholders.Dillenburg, Greene, and Erekson (169) criticize themissing transparency of ratings as “troubling.” Aslong as rating processes are not transparent, theirreliability may be questioned just like the reliabilityof the companies to be examined. This is especiallyimportant for solicited ratings where ratings’customers, for example institutional investors,choose their own criteria and weightings (Finch).
III.I. LACK OF INDEPENDENCE
The relationship between companies and ratersestablished in order to get the necessary informationraises the question whether ratings are independent.Research organizations increasingly depend onthe personal interaction with companies (Beloe,Scherer, and Knoepfel). This is especially true whenthe rating process is carried out repeatedly overtime, which is usually the case. For example, oekomemphasizes the importance of the cooperation withcompanies during their rating (oekom research,oekom Corporate Rating) and SAM describes to“proactively engage with companies” (SAM andPwC 21). The close relationship to companies mightcall for even more criticism in cases where ratingsare conducted by financial service providers which
already have or intend to establish further businessrelations with the companies (e. g., consultancy,financial analysis, or mandated risks assessments)(AI CSRR; Beloe, Scherer, and Knoepfel). Theseaspects might create conflicts of interest. They arediscussed in the European Corporate Sustainabilityand Responsibility Research Quality Standard(CSRR-QS), a quality standard for CS and SRIresearch (see csrr-qs). Another potentialconflict brought up by Healy and Palepu is thepersonal interest of financial analysts in screeningoutcomes: “analysts are rewarded for providinginformation that generates trading volume andinvestment banking fees for their brokerage houses”(Healy & Palepu 417). This may encourage upwardbiases of rating results. One more relevant aspect in this contextis the distinction between solicited and unsolicitedratings. Solicited ratings are carried out for aparticular client and paid for (Finch). This fact alsoputs into question the independence of the ratings.So far the paper has identified six importantchallenges that come along with CS ratings. Ofcourse, more challenges can be found in the literature,for example in the “Rate the Raters” publications(Sadowski, Whitaker, and Buckingham, Rate theRaters Phase One) or from a philosophical point ofview (Graafland, Eijffinger, and Smid). Still, the sixchallenges described here together form the mostprominently discussed aspects. In the following, thepaper analyzes the causes of these challenges andsuggests ways to tackle them.
III. WHAT ARE THE CAUSES OF THE IDENTIFIED CHALLENGES?
The six challenges that CS ratings face have beenidentified as lack of standardization, lack of credibilityof information, bias, tradeoffs, lack of transparency,and lack of independence. In the following, the paper
48 Journal of Environmental Sustainability – Volume 1
result of the increasing interest of conventionalanalysts in sustainability. These actors probablyhave only little interest in the mutual considerationand integration of the economic, environmental, andsocial dimension because of their finance-orientedbackground. Investor-focused ratings rather regardenvironmental and social issues as add-on. Other CS assessment approaches may facedifferent biases. For example, organic food labelsand consumer-focused ratings may mainly considerenvironmental aspects. Thus, biases opposingthe integrative assessment of CS are a challengethat other assessment approaches have to facealike. Still, the bias to the financial dimension isa problem that affects ratings in particular becauseof their use within the financial market and theirstakeholders’ demands.
III.II. RATING TRADEOFFS AND THE DEMAND OF RATINGS’ USERS
Tradeoffs also result from the demands of ratings’users. Most ratings are designed to primarily fulfillthe needs of their main users, investors, who focuson traditional financial analysis (Beloe, Scherer, andKnoepfel; Delmas and Doctori-Blass; Dillenburg,Greene, and Erekson; econsense). Presenting therating results in form of single scores makes themeasy to compare and communicate, and thus,suitable for investment decisions. Additionally, many ratings also serve forrankings and indices which makes it inevitable tohave a single, comparable figure. Beyond that, thecommunication of the results of CS assessments in acomprehensive, and at the same time, complete manneris challenging for other approaches, too.
III.II. LACK OF RATING TRANSPARENCY AND THEIR COMMERCIAL USE
A widely discussed challenge for ratings is theirlack of transparency. When rating organizations donot disclose their methodology, weightings, etc.,stakeholders cannot tell what it is that they measure.As long as ratings lack transparency, their credibilityand reliability may be questioned just like thereliability of the companies to be examined. This particular challenge results primarilyfrom the young, dynamic, and competitive ratingmarket and the aim to maintain commercialadvantage (Beloe, Scherer, and Knoepfel;econsense). Since it can be expected that only a few“winners” will remain in the market (Sadowski,Whitaker, Lee, and Ayars 5), raters try to generateand maintain unique selling propositions, andundisclosed methodologies are hard to imitate.However, it has to be pointed out that some ratingorganizations are already more transparent thanothers. For example, Beloe, Scherer, and Knoepfelrefer to Ethibel, SAM Research, and Vigeo as bestpractice organizations, and Sadowski, Whitaker,and Buckingham (Rate the Raters. Phase One)point to Corporate Knights Inc. Furthermore,transparency does not only affect ratings, but is alsodiscussed with regard to other “quality assurancesand the substantiation of socially relevant claims”(de Boer 261), for instance certification processesfor labels and audits (de Boer; Jahn, Schramm, andSpiller; Müller). III.II. LACK OF RATING INDEPENDENCE AND THE INTERMINGLED BUSINESS OF RATERS
The last aspect is the missing independence ofratings. Contact between raters and companiesmay be unavoidable, but in order to guarantee anobjective assessment the relation should not becloser than necessary. In order to reliably assessCS, rating organizations should especially not have
Assessing Corporate Sustainability Through Ratings: Challenges and Their Causes 49
further bonds with companies because that mayin the worst case offer an incentive to manipulaterating results. Graafland, Eijffinger, and Smid (139)argue that researchers should carry out the analysisin a “disinterested way.” This problem is a matterof governance. As rating organizations often do notonly carry out ratings but have intermingled relationsto the assessed companies, their independence andobjectivity have to be questioned. This aspect is reflected in a recentsurvey conducted among sustainability expertsby Globescan. The survey shows that amongdifferent raters, NGOs are most trusted, followedby companies’ employees. Rating and rankingorganizations come only in the third place,mainstream investors even later. When asked aboutthe trust in particular ratings and rankings, thehighest ranked approach, the DJSI, was classified as“highly trusted” by not more than 48 per cent of therespondents (Sadowski, Whitaker, and Buckingham,Rate the Raters. Phase Two). This lack of belief in the credibility ofratings is incompatible with their purpose to increasetransparency and reliably reduce informationasymmetries. The situation is comparable to thatof certifiers and auditors (Epstein; Finch). Epstein(246) states that “some observers have wonderedwhether, as with financial auditors, verifiers shouldact as both consultants and auditors [...].” Finch(17) finds that “the provision by auditors of non-audit advisory services to companies underminesthe independence of the audit.” In the context of thefood market, Jahn, Schramm, and Spiller describethe necessity of reducing auditors’ dependency onthe companies to be certified with regard to qualitylabels. The challenge of independence particularlyaffects organizations or businesses that have furtherrelations to companies. The six challenges identified and describedmay have different causes, but combined theydiminish the reliability of ratings. Against the
background of their causes, the upcoming sectiondiscusses possible improvements for each challenge.
IV. WAYS TO IMPROVE CS ASSESSMENT THROUGH RATINGS
In summary, and as Table 3 shows, the identifiedchallenges have different causes and thus haveto be tackled differently. Some of the challengescan be ascribed to the concept of cs itself andconstitute general challenges when assessing CS(lack of standardization and lack of credibility ofinformation). Furthermore, some challenges for CSratings result from the financial background anddemands of the ratings’ users (bias and tradeoffs),whereas other challenges result from the commercialuse of ratings and the intermingled businessrelations of raters (lack of transparency and lack ofindependence). In the following, recommendationsare given to improve the reliability of ratings.
IV. GENERAL CHALLENGES WHEN ASSESSING CS
The lack of standardization and the lack ofcredibility of information of ratings are results ofthe complexity of CS and the lack of availability ofCS data. Meeting these general challenges requiresthe contribution of various disciplines and actors inresearch and practice. On the one hand, the conceptof CS itself still is hard to grasp. It can be expectedand is desirable for the various actors involved tocome to an agreement on a basic common definitionin the near future. Furthermore, a more preciseunderstanding of CS could be generated within therealm of ratings in particular, ideally in collaborationwith third parties to include various perspectiveson CS. A common understanding could enablecoordinated research like the one of the SustainableInvestment Research International Group (SIRI)
Assessing Corporate Sustainability Through Ratings: Challenges and Their Causes 51
and labels, too. A further possibility to increase thereliability of ratings is to make use of independentassurance to verify commitments, ideally withan NGO due to their higher credibility (Laufer;Ramus and Montiel). Additionally, in order toprovide reliable information and to enhance theircredibility, rating organizations could, at least,disclose potential conflicts and how they arehandled. At best, of course, those conflicts shouldbe avoided and analysts completely independent.This applies for other intermediaries carrying outaudits or assessments, too, be it on the generalcapital market (Healy and Palepu) or regarding CSin particular. Besides self-imposed principles, theestablishment of standards, such as the CSRR-QS(AI CSRR), might help to increase trust in thoseresearch organizations. Further research in this areashould be a sound combination of practice demandsand theoretical contributions. Table 3 offers a summary of the aspectsdiscussed in this part.
Fostering sustainable development and CS in
particular depends on suitable CS assessmentapproaches. The paper has shown that ratings, onthe one hand, are a practice-relevant approach toassess CS externally. On the other hand, severalcharacteristics of ratings are criticized in researchand practice. This paper served to assemble andsystematize the main rating challenges describedin the literature: lack of standardization, lack ofcredibility of information, bias, tradeoffs, lack oftransparency, and lack of independence. An analysis of these challenges reveals thatthey have different causes. Some general challengeswhen assessing CS result from the concept of CSitself (lack of standardization and lack of credibilityof information). Other challenges result from thedemand side of ratings and show the financialbackground and demands of the ratings’ users (biasand tradeoffs). Last but not least, some challengesresult from the supply side of ratings, namely thecommercial use of ratings and the intermingledbusiness relations of raters (lack of transparencyand lack of independence). They also affect otherCS assessment approaches like audits and labels.Improving the reliability of CS ratings is relevant,since they fulfill an important function with regard to
Rating challenge Cause Possible improvementsLack of standardization Complexity of CS Find a common CS understanding including several perspectives, coordinate researchLack of credibility ofinformation
Lack of data availability Include NGOs and third parties for external verificationBias Financial background ofratings’ users
Sensitize ratings’ users for the integrativecharacter of CS, open ratings for a wideraudienceTradeoffs Demand of ratings’ users See aboveLack of transparency Commercial use of ratings Disclose methodologyLack of independence Intermingled business ofraters
Avoid business relations to companies, includeindependent third parties
Table 3: Rating challenges, causes, and possible improvements
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overcoming the information asymmetry in the contextof CS. Beyond that, ratings are able to positivelyinfluence companies’ sustainability efforts, fosterthe institutionalization of information management,and stimulate competition between companies(Chatterji and Levine; Dillenburg, Greene, andErekson; Fowler and Hope; Graafland, Eijffinger,and Smid). And despite the somewhat negativeeffects that it may have on the understanding of CS,“[t]he financial industry is in a unique position tomove corporations towards corporate sustainability”(Delmas and Doctori-Blass 245). What is needednow is a “second generation” of ratings and relatedresearch (Beloe, Scherer, and Knoepfel 3) includingNGOs and thereby other perspectives (Laufer).Especially those challenges resulting from thesupplier side of ratings (see 4) should be tackledproactively in order to increase the reliability andacceptance of ratings as CS assessment approach.Overcoming CS assessment hurdles can be achievedby several first improvements suggested in thispaper. But, due to the interdisciplinary character ofCS, these problems cannot be entirely solved by oneactor, like raters, but require further research andcontributions from several disciplines in researchand practice. CS assessment is a process in its ownright – just like CS itself.
Acknowledgment: I would like to thank StefanSchaltegger, Erik Hansen, Jan-Hendrik Lübben,two anonymous reviewers, as well as StefanoPogutz, John Morelli, and the other participantsat the Environmental Management LeadershipSymposium 2011 for their helpful comments on thispaper.
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