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Business

A Love Affair With Sustainability

Firms use indexes of responsible behavior to cultivate public acceptance

by Marc S. Reisch
November 1, 2010 | A version of this story appeared in Volume 88, Issue 44

POWER PUSH
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Credit: Accolade Photography/Air Products
Air Products develops materials for sustainable power sources such as these thin-film photovoltaic modules.
Credit: Accolade Photography/Air Products
Air Products develops materials for sustainable power sources such as these thin-film photovoltaic modules.

The 2010 Dow Jones Sustainability World Index, released in September, ranked AkzoNobel as the chemical industry's leader. It was a triumph for the firm, not the least because it regained the number one spot it had first achieved in 2007.

DJSWI is one of more than 100 indexes that use various criteria to measure companies' environmental, social, and economic performance. Similar indexes include the Carbon Disclosure Project's Leadership Index (CDPLI), the FTSE4Good Index Series, and the Maplecroft Climate Innovation Indexes. Investors have taken notice: Investment funds based on the DJSWI family of indexes have attracted more than $8 billion.

Hans Wijers, Akzo's chief executive officer, says the lead position on the DJSWI affirms the link between the firm's business practices and its success in serving the needs of its customers. Akzo now ties 50% of 600 senior executives' long-term-performance pay to how well the firm does on the DJSWI. This year, DJSWI included 318 firms chosen from the Dow Jones World Index of 2,500 corporations. Twenty of them are from the chemical industry.

Besides Akzo, major chemical firms such as Dow Chemical, Bayer, BASF, DuPont, and Air Products & Chemicals have earned spots on DJSWI and similar indexes. The consulting firm SustainAbility counts 108 such indexes now in existence, up from 21 in 2000. Companies appearing on the most prominent ones haven't been shy about broadcasting their accomplishments. Many say placement affirms their sustainability efforts and enhances their reputation with investors, customers, employees, job seekers, and government officials.

Some critics find sustainability indexes confusing, however, because each index has its own set of eligibility criteria. They also question why some companies with less than stellar environmental credentials appear on some indexes. BP, whose Deepwater Horizon well spilled millions of gallons of oil into the Gulf of Mexico, appeared on DJSWI until June, much to the chagrin of critics. And some investors question the value of the indexes because they are not necessarily predictors of future economic performance.

Akzo spokesman Oskar Bosson says climate change, raw material scarcity, and the world's growing population all make a good business case for sustainability. Companies that ignore such trends are unlikely to survive in the long term, he says. That conviction is why Akzo so eagerly uses DJSWI as a motivational tool for managers and as a way to benchmark performance relative to its peers, he adds.

Dow Jones Indexes works with Sustainable Asset Management, a Swiss investment group, to produce its sustainability index. SAM provides Akzo with a confidential report that helps the Dutch company compare its performance with those of other chemical firms on such criteria as water management and energy use. Publicly sharing the relative rankings would be counterproductive, says François Vetri, SAM's head of communications. "It is our aim to help them do better," he adds.

Neil C. Hawkins, Dow Chemical's vice president of sustainability and environment, health, and safety, says placement on what he considers the leading indexes—DJSWI and CDPLI—"is a validation from the investment community on what we do in sustainability." However, he points out, "we don't use the indexes to set our internal goals."

Criteria for a DJSWI listing—including environmental performance, human resources policy, and social commitment—change from year to year, Hawkins points out. In 2010, for example, the index placed a greater emphasis on innovation management than it did in the past.

Dow, however, focuses on its own 2015 sustainability goals, Hawkins notes. They include specific targets to reduce injury and process-safety incidents, trim energy use, and ratchet down greenhouse gas emissions per pound of product made.

Getting on the indexes is no walk in the park. Nicola Kimm, a senior sustainability manager at BASF, says she submitted a 60-page application for CDPLI that took three months to prepare. The Carbon Disclosure Project is a nonprofit organization that is supported by major investment firms and is focused on the reporting of carbon dioxide emissions and reduction. The effort won BASF the top spot among materials companies on the index, which measures transparency in climate protection reporting.

BASF's application is posted on the Carbon Disclosure Project's website along with those of other applicants. BASF also made the Carbon Disclosure Project's Carbon Performance Leadership Index, which assesses companies' management of climate-change risks.

All told, three people in BASF's Ludwigshafen, Germany, sustainability center work full time compiling data for various third-party indexes, Kimm says. The center also includes a group of about 15 scientists who conduct so-called eco-efficiency analyses on products made by BASF and its competitors. Developed by BASF, the analyses determine which of several products provide the greatest economic benefit with the least damage to the environment.

Bayer spokesman Dirk Frenzel says his firm's listing on DJSWI and CDPLI is proof of its standing as an international sustainability leader. "It matters to our customers, our investors, and to society, and it is crucial to our reputation," he says.

Julie O'Brien, Air Products' corporate sustainability manager, adds that employees and new recruits are interested in sustainability. The firm is on a number of indexes, including a Maplecroft Climate Innovation Index that measures carbon management programs at about 400 large U.S. companies.

O'Brien says Air Products has also been working hard to make innovation a key to sustainability. A new Sustainable Technology Center within the company's R∓D unit is working to assess new technology the firm develops from a sustainability perspective.

The environmental group Greenpeace, a critic of big business's environmental behavior, says sustainability indexes are a step in the right direction. But Kyle Ash, a senior legislative representative for the group, is concerned that the indexes can be used to scrub clean, or "greenwash," corporations that might be bad actors. For example, Shell appears on CDPLI even though only 1% of the firm's investments go to renewable products, Ash says.

And then there is the case of BP. Until the Gulf spill, SAM's Vetri argues, BP deserved its spot on DJSWI because it "achieved high scores in a number of categories, including economic, ecological, and social criteria." In addition, the company had "a well-developed climate protection strategy, including formulated targets and operational data on eco-efficiency that are subject to third-party audits." SAM dropped BP from the index in June because of the extent of the spill, its environmental impact, and its long-term damage to BP's reputation.

BP was a prominent member of the now 11-year-old DJSWI, going back to 1999. The firm remained on the index even after a March 2005 explosion at its Texas City, Texas, refinery killed 15 people and injured 170 workers. Since 1999, Vetri says, BP "scored in the top 10% of companies in the oil and gas sector in our sustainability survey."

Although not admitting to any significant problems in its ranking system, SAM says it has identified a "software issue" that could lead to "limited adjustments" to its proprietary scores. On Nov. 4, it will reveal whether any changes will have to be made to 2010's DJSWI.

Consulting firm SustainAbility says many indexes are so inscrutable that "companies some consider pariahs have been ranked among those deemed most sustainable." In "Rate the Raters," a study the firm released last month, SustainAbility reports that "we observe too many ratings failing to live up to expectations."

SustainAbility charges that many of the indexes depend partially or entirely on information that companies submit directly to the ratings organizations. This practice rewards firms that respond to requests and not necessarily those with the best sustainability performance. Firms C&EN contacted say that responding to requests for information is a labor-intensive exercise, and for that reason they tend to respond to questions from the most prominent index providers.

Some investors say they pay no attention to the sustainability indexes. Lewis E. Gasorek, president of Listowel, a private investment firm, acknowledges that "we have to figure out a way to be sustainable over the long term, otherwise we won't survive." But he doesn't invest according to what the sustainability indexes show, partly because he thinks they can be manipulated, but more important, because "they are not predictive of a company's future performance." When Gasorek makes an investment, what matters are a firm's financial position, cash flow, business performance, and strategy, he says.

Others counter that, for a certain class of investor, sustainability matters. David Kathman, a mutual-fund analyst with investment research firm Morningstar, notes that "sustainability" is the new buzzword among socially responsible mutual funds. Management companies such as Vanguard, Calvert Investments, and Domini Social Investments do pay attention. Individuals who want to invest according to their values can put their money into a socially responsible mutual fund that, history shows, won't perform any better or worse than other mutual funds, "but they get the social screening for free," Kathman says.

Still, even the harshest critics of the sustainability indexes agree that a focus on economic and environmental performance is valuable. Because of these indexes, Greenpeace's Ash says, "people in corporations are paying attention to carbon and realize it affects their bottom line."

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