The Corporate Sustainability Assessment (CSA) opens tomorrow (April 5th) and as in previous years, RobecoSAM has modified portions of the CSA to better align with performance outcomes and recent industry trends. For those not familiar, the CSA is the survey conducted annually by the Switzerland-based
RobecoSAM, an investment agency specializing in sustainable investing. The first CSA was conducted in 1999 and is now considered the most robust and reputable gauge of sustainability performance. A number of investment vehicles utilize the results from this annual survey, most notably the Dow Jones Sustainability Indexes.
Over the past month, RobecoSAM has released details on the changes to this year's CSA and I endeavor to summarize below:
UNIVERSE OF INVITED COMPANIES
The CSA utilizes the GICS classification system for allocating companies to the now 60 RobecoSAM industries. In our world of mergers, spin-offs, and business restructuring, verifying the status of your industry should be the first step. Having worked with the CSA for the past four years, I have seen significant movement of companies, including industry leaders, in and out of industries. The last thing you want to have happened is to be hit with a surprise in September because a high performing company jumped into your industry and knocked you out of a world or regional index position. An excel file with the 2016 universe of invited companies is linked HERE.
In 2016, the Oil & Gas industry is divided into two distinct industries - Upstream Oil & Gas and Downstream Oil & Gas (refining + marketing) due to the expansion of the downstream side with the majors spinning off those assets. The individual business models and long-term strategies of each type are now significantly different and need their own set of evaluation criteria (think stranded assets).
CRITERIA STRUCTURE CHANGES
The next item to review is major changes to the structure of the CSA. After each materiality review, RobecoSAM may deem certain criteria no longer relevant to financial performance and eliminates the category outright. In one industry I work in, 3 criteria were eliminated from the previous year. The ultimate impact to you may be positive or negative depending on your performance compared to the industry for those criteria. As you begin your internal outreach efforts, knowing which topics are no longer included will save you time to focus on the next topic. 2016 criteria structure is linked HERE.
MAJOR ASSESSMENT CHANGES
A few weeks ago RobecoSAM presented the most important methodology changes in a morning webinar. This section will summarize the salient points made during that presentation. For reference, the hour long replay of the webinar can be found here (REPLAY) and a copy of the slides here (SLIDES).
Overall messaging for methodology changes:
- Reduce the number of criteria
- Focus on financially relevant criteria
- Incorporate new sustainability trends
MATERIALITY (NEW to all Industries)
This is a new criterion that is extracted from Environmental Reporting and Social Reporting. The reasoning was to apply additional focus towards connecting a company's top 3 material issues to its business strategy. The top 3 material issues can be either environmental, social or economic in nature, with NO scoring preference towards one dimension or another. Responders will need to explicitly state how the issue impacts your business, strategies to manage, and long-term targets to measure progress, and if the target is used for determining executive compensation. Note that RobecoSAM defines long-term as greater than 3 years.
Public reporting of the materiality analysis process, top issues, and metrics no longer need to be included in the Annual Report for full credit as long as they are included in another public disclosure such as the sustainability report.
RobecoSAM indicated that in collaboration with the Canada Pension Plan Investment Board, a new investment vehicle, the S&P Long-Term Value Creation Global Index, was developed and will use this criterion to help weigh its components.
LABOR PRACTICE INDICATORS AND HUMAN RIGHTS (UPDATE to all Industries)
The final two questions in this criteria from last year are replaced with four new questions focused on the UN Guiding Principles on Business and Human Rights (UNGP). This is an example of the bar being raised with the expectation shifting from a written commitment to demonstrable action. Overall the message here is we expect your company to have a public policy, due diligence, and assessment process that is in-line with the UNGP. Documents provided to RobecoSAM should be no more than 2 years old. If your processes were conducted prior to that, documentation indicates the process has been updated / re-evaluated is expected.
What about companies with low human rights risks due to operations entirely within the USA / EU? This question came up and RobecoSAM indicated that every company should go through the series of steps outlined in the UNGP. If at the end of the day, there are no high risks then that's fine - although a process for corrective actions must be in place in the event there was.
IMPACT MEASUREMENT AND VALUATION (NEW to Consumer Discretionary, Materials & Energy, and Food & Beverage industries)
This is an interesting addition that was noted by RobecoSAM as a leading edge topic. The questions, as a result, are more open-ended and anticipated to evolve with the topic over the next few years. The idea is for companies to create programs that provide benefits to both the company and society and then measure the total impact (including both direct financial and the social/environmental externality). Example methodologies for this total impact valuation, as noted by RobecoSAM, include True Value, True Cost, True Profit, and Environmental Profit and Loss. I have not conducted much work in this area, but seems like an internal prices on carbon or natural capital valuation would be relevant fits.
RobecoSAM noted this was new territory and scoring would not evaluate the quality of the program, rather confirm that a program capable of measuring progress had been developed. Non-public documentation appears to be sufficient for full credit. In many cases, the societal benefit can be connected to the Sustainability Development Goals.
Lastly, this is a criterion that is likely to be expanded to other industries as the concept matures, so something to think about for everyone else.
BRAND MANAGEMENT (UPDATE to Airlines, Automobiles, Household Products, Retail)
RobecoSAM collaborated with Interbrand, a global brand consultancy, to shift the focus from spend and specific metrics to how companies are using sustainability as a business advantage when positioning their brands. The updated questions relate to brand strategy, metrics, and alignment with sustainability initiatives.
INFORMATION SECURITY + CYBERSECURITY (NEW to Banks, Utilities, Media, Diversified Consumer Services, and Food & Staples Retailing)
This topic is likely the result of Target and other high-profile information breaches. The expectation here is for companies to be aware of security risks, have resources dedicated to this issue, and processes in place to implement necessary prevention steps as well as recovery if incidents do occur. There is also an expectation to provide the number of breaches and their financial impact over the past few years.
- The Innovation Management criteria were shortened with the stage/gate questions removed in favor of open product/process innovation questions.
- Scoring in the Eco-Efficiency criteria is based on the direction of the normalized trend, so make sure the data is comparable year-on-year. Adjust data if needed due to organizational changes. Coverage is also an important item as coverage is used as a second normalizer, where if you report 0.8 MTCO2e/$ with an 80% coverage, the evaluated number in the trend will be 1.0 MTCO2e/$. RobecoSAM also expects a minimum coverage of 80% to obtain full credit. Targets is another area with scoring impact, where 'realistic' annual targets must be provided and achieved. If your company uses long-term targets, interpolate what the annual target would be. The annual target does not need to be public and I do not have a definition for 'realistic'.
- Various other questions and/or their guidance notes were slightly modified, so be sure to read each question before copying last year's response and moving on.
The final weight of each criterion will be released on April 5th with the release of the 2016 CSA [UPDATE: 2016 weights provided HERE]. Of the items to review, this is a low priority one. Weights are generally static from year to year with a few being bumped a point or two up or down. The largest changes are with recently added criteria as it is RobecoSAM's tradition to start new criteria with low weight and raising them as the topic matures and RobecoSAM gains a better understanding of how companies can respond. As an example, we may see the Tax Policy criteria jump in weight this year after being released last year while the new Impact Measurement + Valuation criteria will likely start at a low weight of 2.
A pet peeve of RobecoSAM is the general overuse of the comment boxes. They mention this issue every webinar and I've heard one horror story from an analyst about how a company provided all their responses in the comment sections rather than the provided spaces. Here is their message: the comment boxes do not provide extra credit, please only use the space to state a) why data may have changed from one year to another, b) why a question is not applicable, or c) to provide additional context to the provided response.
Good luck to everyone in responding this year.