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May 25, 2006

Listmania! Corporate Sustainability and Responsibility Lists Drive Improved Performance
    by Bill Baue

CSR lists take the old adage--what gets measured gets managed--one step further by spotlighting the ranking process, thereby encouraging better corporate social and environmental performance.

SocialFunds.com -- Lists are playing an increasing role in defining and driving corporate sustainability and responsibility (CSR)--and the list of CSR-related lists is growing. For example, Business Ethics magazine recently released its eighth annual list of the "100 Best Corporate Citizens," based on rankings by KLD Research & Analytics. Canada-based Corporate Knights magazine teamed up with Innovest Strategic Value Advisors to produce the "Global 100Most Sustainable Corporations in the World" starting last year. Even Fortune magazine assesses social responsibility in its annual "Most Admired Companies" as well as in the "100 Best Companies to Work For."

On the other side of the coin, the Political Economy Research Institute (PERI) of the University of Massachusetts launched the "Toxic 100" last year based on data from the Environmental Protection Agency (EPA) Toxics Release Inventory (TRI). Instead of applauding best practice, as the other lists do, this list identifies the companies with the greatest environmental impact. Yet all of these lists tap into the innate human yearning to order and rank, thereby leveraging "listmania" to advance understanding and practice of corporate sustainability and responsibility.

"People love lists--when I was a kid growing up, we used to sit around the radio waiting for the Top 40 to get announced and write them down," said Michael Connor, executive editor of Business Ethics. "A list is a wonderful device for focusing people's attention, particularly on abstract concepts and ideas--it helps crystallize them."

"Corporate citizenship is a complicated and fairly abstract notion--by applying metrics and ranking companies and putting names to the concept of corporate citizenship, we help create a framework for what corporate citizenship is about, not just in theory but in particulars," Mr. Connor told SocialFunds.com. "Lists help people look at how a particular company (whether they're number one on the list or number 50) is doing in certain categories and how they're doing relative to their peers--lists give fact-based experience to discuss, and so it's open for discussion as to whether the best on the list is the ideal."

Business Ethics Founding Editor Marjorie Kelly and KLD chose not to rate companies on a scale with the top score being the ideal. Rather, they chose to rank by standard deviation from the mean (compared to the universe of companies under consideration--the Russell 1000, S&P 500, and Domini 400 Social Index.) This methodology avoids setting a ceiling for the ideal and instead rates companies relative to each other, thus not defining the ideal nor placing a cap on progress toward sustainability and responsibility.

For example, list-topper Green Mountain Coffee Roasters (ticker: GMCR) earned an average score of 1.775 (about one and three-quarters points above the mean) across eight stakeholder categories, including human rights, environment, corporate governance, and total return. The Global 100 list takes a different approach--it simply lists 100 leaders and refrains from assigning any ranking to companies in recognition that sustainability issues impacting corporate performance vary widely from sector-to-sector.

Companies now take much more notice of their presence or absence--and position--on CSR lists than they did eight years ago, according to Mr. Connor. High-rankers trumpet their achievements, and those spurned seek ways to improve their CSR performance.

"Many of the companies work on these issues with an eye to the fact that we and others are going publicize their performance in these areas, so the lists become a way of spotlighting their performance so it doesn't happen in secret," said Mr. Connor. "They're an annual report cards of sorts--as much as we all hate report cards, they've always played a healthy role in keeping you accountable, and that's what these lists are all about: accountability."

Just as companies seek to move "up" the laudatory lists, they are actively engaging on how to move "down" the more damning lists. For example, the Business & Human Rights Resource Centre, a UK-based website that seeks to represent critical accounts of corporate human rights practices as well as company perspectives, invited the top 10 of the Toxic 100 to respond to their ranking. GE, Fortune's Most Admired Company and a constituent of the Global 100 but not the Business Ethics or Fortune Best Companies to Work For lists, was one of seven companies to respond (ConocoPhillips and ExxonMobil declined.)

"Since 1987, GE has reduced its emissions by more than 85 percent despite greatly expanding its production," GE responded. "The US Environmental Protection Agency has stated that the model used by PERI is properly used for screening purposes only and it is not a quantitative risk assessment model and thus not independently meaningful."

Despite GE's assertion, its aggregate toxic emissions (based on the data the company itself submits to the TRI) are very meaningful to those who assess corporate sustainability and responsibility by these lists. In the Citizenship Report it released this week, GE crowed that its vast size positions it well to help solve global social and environmental problems--the Toxic 100 simply exposes that its hugeness also translates into a heck of a lot of toxic emissions. To descend on this list, GE will have to reduce its emissions even further.

The fact that the lists measure different metrics and use different standards makes apples-to-apples comparisons difficult if not impossible. However, this also drives more comprehensive improvement in CSR performance, because companies need to attend to a broad spectrum of different sustainability issues and metrics.

"I don't think these lists compete with one another--we reinforce one another," explained Mr. Connor. "As with any kind of information, readers or investors need to put all these lists in context by comparing and contrasting them to each other and drawing their own conclusions about what are the best companies from their own personal points of view."

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