Hello and Welcome to Dr.Aruna Sankar's website dedicated to promote Corporate Environmental Sustainability!
Why CEPR scorecard?
- To measure/ rate Corporate
- To inform stakeholders of how
green companies are,
- For environmental supplier
- To strive towards better
- To inform risks and liabilities to
- To unify different perspectives of
people, planet and companies towards
the definition of "green"!
By: Dr. Aruna Ram
Everyone knows we need to strive toward environmental sustainability but how can we encourage companies to strive for the same? This is the first article in a series to review of currently existing environmental performance rating/measuring methodologies, drawbacks and potential solutions. Most current rating schemes warn investors of laggards in the industry instead of evaluating the environmental performance and improving the intrinsic ethical worth of a company on grounds of value based sustainability and environmental quality.
Currently, only 2 methodologies exist for rating corporate environmental performance, both of which are generalized, incomplete and lack clear directions for companies to improve their performance and hence improve ratings. These include:
Other existing popular rating schemes in the US are all proprietary, common ones include:
A scorecard that not only measures but promotes corporate environmental performance, informs the public clearly of how green companies are with a transparent methodology and justification with criteria, data / units specified for clearer reporting, acts as mode for sharing best practices, informs investors and insurance companies of risks/ liabilities, helps screen suppliers environmentally, to name a few reasons.The next article of this series will constitute of issues and drawbacks of the abovesaid rating schemes in detail.
By Dr. Aruna Ram
My previous article reviewed the drawbacks of current environmental rating schemes, why we need a good environmental scorecard and what functions it needs to fulfill. This article details issues in the rating schemes, potential solutions and introduction to a new methodology to address these issues.
Below is a good example of how a narrow range of indicators chosen
can distort the bigger picture. Figure 1.1 shows the energy intensity
graph for various companies analyzed. IKEA data is unavailable. All
data were acquired from publicly available records. Finally, this is
not to make any company look bad but to let companies know about how
they can improve their environmental performance.
Figure 1.1 Normalized Energy Intensity for companies
From above, the normalized energy intensity is highest for JCPenney’s (JCP) followed by Kohl’s. However, Kohl’s has recently targeted to become carbon neutral by year end 2010. If so, Kohl’s non-renewable energy intensity will be zero, the first general retailer to do so in the US. The above graph shows that though JCP is claimed one of the greenest companies due to its tremendous efforts in greening which is highly commendable, its normalized energy intensity is still very high compared to its peers. JCP’s energy intensity is almost twice that of Walmart. JCP has invested heavily in energy efficiency projects which makes sense, since its energy usage itself is very high. However, if one looks only at the efforts and brands a company green, it is a mistaken identity since the load itself may be higher. Also, JCP has invested less than its peers like Kohl’s, Walmart or Macy’s in renewable power, which should affect its GHG as well. Hence, JCP needs to seriously look at its energy usage, reason why its intensity is so high in the first place, despite investing heavily in energy efficiency programs.
UK’s Marks and Spencer’s and France’s Carrefour energy data were used to compare global grades for the same. Carrefour has one of the lowest energy intensities in the industry of 63.6403 while JCP has the highest of 122.7956, almost twice the usage of Carrefour.
To understand the load verses efforts to mitigate the load matrix better, Figure 1.2 is a good visual aid. In any category, the desirable quadrant in the matrix below is the 2nd quadrant of high efforts/ low load or where the efforts are high enough to mitigate the load. JCP’s energy use lies in the first quadrant, where its energy usage is very high despite its high efforts. Thus, the conclusion is that its efforts are not high enough to mitigate the load.
Thus, we can see how a narrow range of measures like Newsweek’s which has awarded JCP the greenest in its industry, or an absolute system like ULE 880 that rewards for net % reduction, (Assuming JCP gets the maximum 6 points by making the required 12% reduction in energy usage compared to the baseline energy usage, its reduced energy intensity will still be one of the highest in the industry) can eclipse a more complete picture.
Potential solutions to the above issue are to choose a
complete range of indicators that will promote higher efforts, lower
load among other reasons for choosing indicators in relevant categories
and rate with respect to “Best in class” globally to promote
environmental sustainability. The reality is that even the
most leading companies have a long way to go before they reach true
sustainability. Hence, in time, raising “the Best of” bar to an
absolute scale with zero impact such as zero energy buildings, etc,
would more stimulate continuous improvement and tell you how much work
remains to be done, where the scale will not change from year to year.
By: Dr Aruna Ram
My previous article reviewed the first issue in current environmental performance rating schemes, narrow range of indicators, with a detailed example. This article deals with other issues, insights, potential solutions captured in the new Corporate Environmental Performance Rating (CEPR) methodology that was developed to address such issues.
a) Lack of transparency/ clarity in justification of rating process is true with most current schemes. Since most proprietary methodologies are not transparent, there is no way the public and other stakeholders can verify such schemes. Either the methodologies are not fully transparent being proprietary or are not clearly weight justified. For instance, percentages allotted in partially transparent Newsweek’s or points allocated in fully transparent ULE880 schemes are not clearly justified for the weight allocations. The weight justification in both, follow the Delphi system, which is based more on experience rather than clear weight justification based on sound sustainability principles and empirical data wherever possible. A potential solution as captured in CEPR is, to write standardized and fully transparent grading rules to promote environmental sustainability across industries, by minimizing environmental risks as the top priority, progressively reducing it to those environmental activities that contribute least to sustainability, which are clearly based on sound sustainability principles and empirical data analysis wherever possible.Weight allocations based on empirical data should be encouraged wherever possible, which can be more accurate than a Delphi system based only on experience, esp., where we have public data available from government sources such as the EPA.
b) An insight provided by the analysis of retail industry using CEPR scheme, is that balanced greening is more important than focused greening. A clear example of focused greening is that of Kohl’s. They intend to become the leading environmental retailer through focused resource stewardship. Kohl’s environmental load from in house processes is one of the lowest in the industry and was awarded the greenest in its industry by Newsweek. However, when it comes to environmental load from products, Kohl’s lags far behind its peers, Walmart or Target. Load from products is a major portion of the net environmental load as well on people, plant, habitat and buildings. Hence, the net environmental load of Kohl’s is much higher than its peers, IKEA or Walmart which serve the green customer better. Practically, if a customer wants to shop for eco friendly products, Kohl’s stocks almost none except for ban on animal tested cosmetics. This will confuse the customer, whether to buy an eco friendly product or to buy an ordinary product from an eco friendly store. Ideally, IKEA serves the green customer the best in its industry, since it offers a fine balance of both. A potential solution is to understand the importance of balanced greening or cradle to grave measures as prescribed in the CEPR, that also serves to unify the various perspectives such as a) company, b) planet and c) people, instead of them being different.
c) Currently, there are some guidelines offered by the Global Reporting Initiative (GRI) for CSR reporting. However, this is voluntary, does not include the full range of indicators nor does it prescribe clearly defined units for the same. Hence, difficulty in reporting uniformly for companies and in data collection for analysis, comparisons and interpretation of reports for both stakeholders and analysts. CSR reports are rewarded for their creativity in report writing instead of effective communication. Most reports are verbose, though not necessarily adequate or transparent in effectively communicating what they should. An example of how reporting can be fuzzy is as follows: J C Penney disclosed that its energy usage was almost the same as last year despite opening new stores. This looks very promising. However, when its energy intensity which is net usage per sales $ was calculated, it had in fact increased in 2008 by 8%. Neither GRI, Newsweek nor ULE880 clearly prescribe which units to follow in the different categories. Another example of fuzzzy reporting is as follows.G3 in GRI prescribes Waste indicator as total amount of waste by type and disposal method. Now, lack of clearly defined units or data on what % of waste is recycled by GRI, leave companies reporting a whole range of materials like paper, plastic, electronics, CFLs, bottles, cans, glass, etc without disclosing how much is actually recycled, a key indicator in sustainability. Standardizing the report format with relevant range of indicators, with clearly defined units as prescribed in CEPR along with freedom of being creative can help analysts gather data quickly, help companies communicate their data effectively and also help stakeholders understand clearly.
The following articles will bring out other issues in the current environmental rating schemes.
By: Dr. Aruna Ram
My previous articles in this series reviewed the first four issues in current environmental rating schemes, certain insights and a new methodology, Corporate Environmental Performance Rating (CEPR) scheme that offers potential solutions to address these issues. This article will detail four more issues, insights and potential solutions for the same.
Credibility exists in the form of external verification of reports, data collected, product, material, other certifications and standards. EU and Japan are way ahead in external verifications of data reported. However, very few companies in the US, especially in the retail industry, are externally verified other than a few for GHG and energy data alone. An example of lack of credibility is that most companies analyzed have conducted environmental audits for their supplier factories but have not disclosed information about their brand owned factories. Walmart dictates suppliers to reveal if they have been audited environmentally but provides no information about its own environmental audit as a company by a 3rd party. External verification is necessary both to give credibility to the data reported by companies and to prevent green washing. However, there is no evidence if Newsweek promotes this, while ULE 880 allots points only for GHG verification. CEPR addresses the above issue and promotes credibility by allocating a substantial weight to external verification of the report as well as the complete range of indicators, so companies are encouraged to verify them externally.
In Newsweek’s scheme, a company’s total green score is derived from its environmental impact score (45%), green policies score (45%), and reputation score (10%). However, it is highly recommended not to aggregate scores like the Newsweek’s. This is because companies that wish to improve their score might easily choose to focus their sustainability efforts more on marketing and policy adoption instead of actually reducing their environmental impact, which is what matters the most. However, companies need to understand that without a sound management, it is difficult to manage environmental initiatives that help lower the environmental impact load, which in turn minimizes their liabilities and controversies. For instance, product controversies and Superfund sites can be avoided right at the source, by complying with REACH and reducing hazardous waste like what DELL does. CEPR offers a potential solution by using the Environmental Impact Score as the key grade for comparison with Management and other relevant scores as a reference lookups, with the insight that if companies work to reduce their environmental load and a sound management, their liability score should improve as well. Also, Newsweek talks about product impact in Green policies, while this should rightfully be included in the Environmental Impact score as in CEPR.
None of the current schemes expose risks and liabilities to the public clearly. They either act only as investor information guide or give more weight to overall reputation such as the Newsweek’s, than sharing leading environmental risks/liabilities such as environmental controversies through products or Superfund /hazardous waste sites. Currently, ULE 880 has this section empty for stakeholder feedback as Environmental Legacies, yet to be filled in. CEPR addresses this issue with a dedicated variable for Compliance, Litigations and Controversies and captures leading risks and liabilities of a company, which supercedes the environmental score in case of a disaster, such as the BP oil spill. This is to make companies aware that their risks and liabilities are being measured, so they can work on what drives this score. Also, manufacturing-related environmental issues will be much less significant for companies that do not engage in manufacturing. These in turn depend if subcontracted or not. If so, then supplier screening for environmental criteria takes priority in ratings. Again, having only a firm take back policy in place to earn 2 points in ULE880 does not capture the environmental damage caused by those disposed, especially that of non biodegradable waste or hazardous waste. CEPR promotes this by capturing the issue at its roots by encouraging companies to reduce such waste in the first place.
It is also observed that companies make more efforts and lock better targets in countries where public demand is more for environmental efforts or if it is foreseen to have tighter regulations such as the EU. Walmart, in its international operations has made much more efforts and locked better targets worldwide than domestic , while IKEA has been consistent in all its operations, targets and efforts worldwide. Consistency in operations worldwide makes its reputation consistent worldwide as well. Walmart has better energy usage initiatives in the UK and Canada. While Wal-Mart Canada is aiming for an 85% recycling rate, Wal-Mart UK (ASDA) has already removed shopping bags from near the counter to discourage customers to use them. Wal-Mart Mexico and China are way ahead in water conservation than the US, where no specific targets have been set. Wal-Mart, UK has reduced packaging by 25%, while the goal for US is a low 5% by 2013. Inconsistency, as in the case of Walmart, gives rise to questions why the better international efforts/targets cannot be made in the US too. Hence, CEPR allocates weights to encourage operations in both domestic and overseas and not just the latter alone.
The next article will detail remaining issues and a snapshot look at the differences between CEPR, Newsweek’s and ULE 880.