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October 18, 2011

Why the Newsweek Green Rankings are Important
    by Robert Kropp

SocialFunds.com talks with Cary Krosinsky of Trucost about the methodology and the significance of the findings of this year's results.

SocialFunds.com -- The year's most highly anticipated Green Rankings of large global companies were published yesterday by Newsweek, and media outlets everywhere—including here on SocialFunds.com—have rushed to spread the news on what those companies are doing to address the crisis of climate change.

When Newsweek's first Green Rankings were published in 2009, I wrote that as significant as the rankings themselves was the fact that a mainstream publication sought out the environmental research conducted by Trucost to contribute to the methodology.

Joined for the first time this year by Sustainalytics, Trucost continues to provide environmental impact assessments by quantifying publicly disclosed environmental data and putting a dollar figure on that impact. Sustainalytics determines the rankings' environmental management score by focusing on company operations, contractors and suppliers, and products and services.

Besides the fact of Newsweek's broad penetration, what gives this particular set of rankings such visibility? SocialFunds.com posed the question to Cary Krosinsky, Senior Vice President for Trucost.

"We seem to have emerged, for whatever reason, with the most relevant ranking of its kind," Krosinsky said. "Our data is not perfect—no data is perfect—but I think the reason the Green Rankings are gaining traction is because it's clear what we're all trying to do."

"Social risks are important," he continued. "But strictly looking at environmental sustainability, combining the quantitative perspective that only we have with the work of Sustainalytics, we provide enough of the E side of ESG (environmental, social, and corporate governance) to get a sense of where we are."

In an article in Newsweek, Krosinsky wrote, "Companies that actively manage environmental risks—and take advantage of associated opportunities—increasingly seem to outperform those who don’t in the stock market."

"Companies that ranked in the top 100 of the 2009 ranking, weighted equally, outperformed the S&P 500 by 4.8 percent over the last two years," he continued.

In his article, Krosinsky cited a recently published academic paper which found that Newsweek's 2009 rankings had a significant impact on shareowner value.

For example, the stock price of IBM, which finished first in the US rankings and second to Munich Re in the global rankings, has increased more than 100% in the last five years while growth of the S&P 500 has been flat, Krosinsky observed. He pointed to initiatives focusing on energy and water efficiency and smarter cities "as categories of opportunity to drive future revenue."

"IBM not only looks for such environmentally focused revenue opportunities, they are also now demanding environmental reductions from their suppliers," the article continues.

Asked about the response to the rankings by companies, Krosinsky told Social Funds.com, "We've had unprecedented levels of response this year. It's a fairly laborious research process in which we share our data with companies and have dialogues with over half of the 800 global companies."

"Companies are paying serious attention," he continued. "The sustainability folks are not usually in the C-suite, but the large companies in our rankings are getting a lot of questions. They're very keen on how they're perceived compared to their peers, which is very motivating for them."

"Companies are going to compete with one another, and now they have to compete on sustainability as well," he said.

Looking at the worst performers among the 500 US companies in the rankings, one might be surprised to learn that of the bottom 25, seven are financial firms.

"The bottom company in the US is not a coal-burning utility, but T. Rowe Price," Krosinsky said.

Reasons for the poor performance of US-based financial firms can be found in a report Trucost wrote for the United Nations' Principles for Responsible Investment (PRI), in which the responsibilities of universal ownership, or portfolios that reflect the makeup of the global economy, are explored.

Finding that the estimated annual environmental costs from global human activity reached $6.6 trillion in 2008, the report concluded the portfolios of universal owners such as institutional investors "are inevitably exposed to growing and widespread costs from environmental damage caused by companies."

"The largest financial services companies are actually universal owners," Krosinsky said.

In addition to the Trucost report, the Greenhouse Gas (GHG) Protocol recently published standards for corporate reporting of Scope 3 emissions, or emissions from indirect sources such as supply chains.

The Scope 3 standards, Krosinsky said, include "what financial services companies need to account for in their Scope 3. We factored that in as much as we could, and that changed the equation for that sector. If you just look at the financial sector in the US, we find that none of these companies actually measure this."

In contrast to the US results, four of the top five global finishers were in the financials sector. The top financial ranking in the US went to Hartford Financial Services, which finished 12th.

Asked what actions he hoped companies would take in response to the rankings, Krosinsky said, "We have to know where we are before we know what we should do. If we shine a little light on where we are, something like 40% of the global footprint comes from corporate activity. What companies can do is be as efficient as they possibly can, and if this helps clarify where we are then we've achieved something."

In his article, Krosinsky wrote, "High rankings now indicate which companies are best positioned for the changing world through new offerings as well as efficiencies and cost savings that they find through best-practice supply chain management. This should open the door to a new means of investing according to corporate environmental performance—what you might call sustainable investing— in addition to more traditional financial criteria."

Krosinsky told SocialFunds.com, "I'd like to see growing recognition by mainstream investors that companies that are acting on these things are outperforming. If they put their money that way, then a positive dynamic is created to lift things in the direction we'd all like to see."

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