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June 13, 2011

Study Compares Perception and Reality of Corporate ESG Risk Management
    by Robert Kropp

A report from Brandlogic and CRD Analytics warns that companies whose reputations exceed actual performance risk loss of value due to inaccurate assumptions by key stakeholders.

SocialFunds.com -- Environmental, social, and corporate governance (ESG) risks pose as much of a challenge to corporate brands as they do to companies in emissions-intensive industries, although for somewhat different reasons. If key stakeholders conclude that sustainability issues are important factors in corporate performance, but conclude that a high-profile brand is not managing its ESG risks sufficiently, then that company may find itself with considerable reputational risk on its hands.

Alternatively, if a company enjoys an underserved reputation as a sustainability leader, then the potential for an eventual loss of confidence on the part of investors and others is high.

A new report provides an interesting perspective on the gap that can exist between actual corporate performance on sustainability issues and the perception of such performance by key stakeholders. Entitled Sustai ability leadership report: Measuring perception vs. reality, the report was conducted by Brandlogic, an employee-owned brand consultancy, and CRD Analytics, a sustainable investment research firm.

"The role played by sustainable practices in stakeholder decisions represents a new and valuable input for both brand investment guidance and reporting compliance," the report states. The study seeks to provide "executives with new tools for managing corporate reputations and brands in a business environment that increasingly values good corporate citizenship."

To arrive at an analysis of the gap between perception and reality, Brandlogic conducted a survey of the perception of the ESG performance of 100 major corporations among purchasing and supply managers, investment professionals, and graduating university students. According to the survey results, 88% of respondents consider good corporate citizenship to be important, and 45% consider it to be extremely important. Brandlogic's survey also found that of the three ESG pillars, social factors were considered by respondents to be the most significant.

Meanwhile, CRD Analytics measured corporate ESG performance according to 175 quantitative financial, environmental and social performance indicators. According to the report, 93 of the metrics utilized by CRD Analytics were derived from the G3.1 Guidelines of the Global Reporting Initiative (GRI). Five key performance indicators (KPIs) were provided for each ESG pillar.

A matrix provides a comparison of reality and perception. Companies with high ESG performance were divided into challengers—those who receive insufficient credit for their performance—and leaders, while companies with poor ESG performance were either laggards or promoters. Promoters are those companies "that are credited with ESG performance ahead of their actual achievements," according to the report.

Companies whose actual performance exceeds perception "may be able to secure unrealized ROI (return on investment) from sustainability investments," according to the report, as knowledge by key constituents of their actual performance increases.

"The reverse also applies," the report continued. "Those with high perception scores relative to reality may have significant value at risk if this gap persists," because of "ESG vulnerability based on inaccurate assumptions of performance." Several high tech companies fall into the category of promoters, including Google, Apple, and Yahoo.

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