This is a printer friendly version of the article. To print, please use your browser Print function.


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.

SocialFunds.com -- 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 communications.

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.

Mr. 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 performance.

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 2005.

© SRI World Group, Inc. All Rights Reserved.

Order reprints | Print it | Save it

Related Articles

Top


Home | Individual Investors | Institutional Investors | Financial Professionals | Media Center
Do your own Research | Work with a Professional | News | Learning Center
home | about | search | register | login | contact

© 1998-2017 SRI World Group, Inc. All Rights Reserved.
Terms of Use
| Privacy Statement| Reprint Policy | OneReportTM Network

Do your own research Work with an advisor SRI News SRI Learning Center Home