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November 22, 2004
Rating Corporate Sustainability: Behind the Scenes at Oekom Research
by William Baue
SocialFunds.com visits Oekom Research to get a more in-depth look at corporate social and
environmental sustainability research.
Walking down Goethe Street from Munich's train station past flashing red neon lights, it is easy to
miss the small engraved sign pointing into a courtyard that leads to the upstairs offices of the
sustainability rating firm Oekom
Research. The cryptic location mirrors the mysterious activities taking place inside: how
exactly are corporate sustainability ratings, the information that underpins sustainable and
responsible investment, produced?
Entering its unassuming offices offers no answer.
They appear similar to many businesses except perhaps that the desks huddle together facing each
other, so analysts can consult when not accessing Oekom's newly-customized computer database. A
clearer picture materializes only after spending time around their large conference table chatting
with Matthias Bönning, Oekom's head of research, and Marnie Bammert, head of corporate
Mr. Bönning tells the story of Oekom's roots, which begin with Oekom
Publishing’s concept to launch a magazine examining companies' environmental performance. That
strategy died for lack of financing; however, funding materialized from a group of investors who
realized that such information could aid their investment decisions. Born in 1993, Oekom became
one of the pioneers in Europe in rating corporate environmental performance, focusing at first on
approximately one small German company per month. Its first client was BfG Bank (later taken over
by SEB Bank).
Ms. Bammert walks over to the bookshelves and returns to drop a tome onto
the conference table with a thunk. The book, written by a group of academics headed by Johannes
Hoffman of the University of
Frankfurt, contains some 800 different criteria for assessing corporate social and
environmental activities. Named the Frankfurt-Hohenheim Guidelines, these form the basis of
Oekom's ratings, which the firm considers to be the most comprehensive and scientifically rigorous
in the field.
It would be prohibitive to apply all 800 criteria to every company, Mr.
Bönning explains. Furthermore, not all criteria pertain to all industries, so Oekom distilled the
criteria into a set of approximately 200 sector-specific indicators. In other words, while there
is significant overlap of indicators that apply to all companies, there are also a substantial
number of indicators that apply only to certain industries.
"We believe that the questions
we ask are really material to the industry, so we also think it should be possible for companies to
answer these questions," says Mr. Bönning. "If a company does not respond on a certain issue, it
receives the lowest grade because we do not want to punish companies that are transparent."
This approach raises concern for some in that it does not rate the actual practice of the
company, but essentially rates the company's opacity.
"What would be the alternative to
our approach?" Mr. Bönning asks. Oekom gives companies many opportunities to provide the
information, but in the absence of corporate cooperation, Oekom has no way of obtaining the
information and hence no way of rating the company on the indicator in question. "I don't see why
companies are able to collect every cent from every sale all over the world but they are not able
to tell us how many people work for them in Africa or what their position is on genetic
engineering--they certainly should be able to produce this information for us."
Apparently, incentive drives improvement: since Oekom first issued its ratings that punish
opacity, transparency has increased dramatically according to Mr. Bönning. This suggests that its
downgrading for nondisclosure functions similar to the
FTSE4Good theory of driving better corporate sustainability performance by incrementally
raising the bar on social and environmental criteria for inclusion in its indexes.
Bönning sees other similarities and synergies between Oekom and its competitors.
"When Sustainable Asset Management
launched the Dow Jones
Sustainability Indexes, of course this was competition, but it also opened the market for us,"
he explains. For example, many investors enter the sustainability market through passive indexes
such as those provided by DJSI and FTSE4Good, but eventually desire more sophisticated and
individualized sustainability research, so they turn to Oekom. "In Germany, we speak of having a
one percent market share for sustainability investing, so there's a lot of room for growth."
Oekom is positioning itself to capitalize on this growth by broadening its research beyond
corporate environmental and social performance by correlating these to companies' financial
performance, much as Innovest Strategic
Value Advisors does. Oekom has an ongoing research relationship with Morgan Stanley that resulted late last year in a report
finding that higher Oekom corporate sustainability ratings correlated with stronger financial
Delving deeper, Oekom has partnered with researchers in the department of
work psychology at the University of Munich on
a project seeking to identify which specific sustainability criteria correlate with better
financial performance. The statistical evaluations cut across a number of economic indicators
including stock price as well as revenues, among others. The project is slated to finish in April
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