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May 06, 2004

Number of US Retail Firms That Oekom Recommends for Sustainable Investment: Zero
    by William Baue

Oekom Research finds 15 US-based retail companies insufficiently transparent to recommend for sustainable investment, while five of the top six firms recommended hail from the UK. -- None of the US-based retail companies assessed in the latest corporate responsibility report from Oekom Research, a Munich-based sustainability rating firm, qualified for "Inside Ratings," the first hurdle to attaining recommendation for sustainable investment. In contrast, UK-based retail companies comprised five of the nine recommended by Oekom for investment. Oekom analyzed 41 companies from 10 countries for the report.

Oekom’s recommendation list influences the decisions of institutional investors managing 20 funds with about one billion euros in assets. Of the 41 companies Oekom assessed in the global retail sector, 25 failed to provide sufficient information and therefore received more cursory "Outside Ratings," which disqualify them from Oekom's sustainable investment recommendation (see related article for an explanation of Inside and Outside Ratings).

Topping the recommendation list were three UK-based companies: Boots Group (ticker: BOOT.L), which earned a B (on a scale from A+ to D-), and Safeway (SFW.L) and Marks & Spenser (MKS.L), which both received a B-. Other UK-based companies on the recommendation list include fifth-ranking J Sainsbury (ILSBRY), which rated a B-, and sixth-ranking Tesco (TSCO.L), which earned a C+.

Companies that lag on social and environmental performance do not even qualify for letter grades and instead receive numeric scores in the Oekom rating system. Take, for example, US-based retail giant Wal-Mart (WMT), which sinks to the bottom of the barrel with a 19.1 score (on a scale from 1 to 100). Wal-Mart thus was more than 50 points below the minimum threshold of 70 required to even enter into consideration for sustainable investment.

What specific factors differentiate companies that qualify for sustainable investment according to Oekom's 200 social and environmental indicators from those that do not? Supply chain management is a key criterion. All three UK-based companies that top Oekom's recommendation list belong to the Ethical Trading Initiative (ETI), which promotes implementation of corporate codes of practice that meet or exceed international labor standards along the whole supply chain. Wal-Mart, on the other hand, is embroiled in controversy over its supply chain management.

"Wal-Mart has a Code of Conduct for suppliers regarding child labor, compensation, local/national laws, forced labor, compensation, working hours, discrimination, workplace health & safety, and environmental concerns," states the report. "However, external research disclosed violation of Human and Labor Rights by various suppliers, including human trafficking, forced labor, locking in at stores, denying of union involvement, healthcare support, discrimination, low wages, child-labor, and exploiting of undocumented workers."

For example, a Wal-Mart supplier in Samoa was found guilty of human trafficking in 2003, according to the report.

"When companies are constantly associated with allegations of this nature, it has a negative effect on the company's image and can in the long term jeopardize its economic performance," said Maike Hiltner, an Oekom analyst.

Kathi Paul of Wal-Mart's investor relations department did not respond to's requests for commentary.

Oekom particularly downgrades companies for lack of transparency, reasoning that investors need to have access to information in order to assess how well companies perform on social and environmental issues. For example, Oekom confirms that Wal-Mart has policies regarding diversity, community involvement, and ethics.

"The ethics statement, however, is not publicly available," the report states.

So, too, with Wal-Mart's environmental guidelines, which are limited to issues of energy control and efficiency and environmental fundraising, according to the report.

"No other issues of environmental relevance are approached and no environmental policy is available," the report states.

Similarly, the other US-based retailers fared poorly on the evaluation in large part due to lack of sufficient transparency. Other US-based companies that failed to provide sufficient information to qualify for an in-depth "Inside Rating" include Costco (COST), Target (TGT), and Toys 'R' Us (TOY).

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