This past Friday, Newsweek released its annual Green Rankings list of the top 500 companies (based on market capitalization) in the US and World based on market cap. Overall, there were a few new faces in the bunch and a lot of familiar ones. This is not all that surprising as the scoring methodology and manager of the rankings, Corporate Knights, remained constant from the previous year.
The scope of the Newsweek Green Rankings is primarily limited to environmental performance with the addition of a few qualitative measures. For those not familiar with the methodology, below is summary (find the full details at Newsweek Green Ranking FAQ):
- Energy, Greenhouse Gas, Water, and Waste Productivity (each with a 15% weight), where productivity is the metric value / annual revenue. Unlike other rankings, performance is measured against industry peers, which creates some interesting results as discussed further on.
- Green Revenue Score determined by HIP Investor (20% weight). Green revenue is a measure of how positively revenue contributes to the world from an environmental and social perspective - so healthcare good, tobacco bad. This criterion is interesting since it essentially places a cap on the scoring potential of an oil and gas company, something that other popular rankings such as DJSI and CDP do not consider.
- Governance-related criteria including a pay link between executive compensation and environmental performance, the existence of a board committee specifically responsible for corporate sustainability, and whether environmental performance is verified by an independent third-party.
While the scope of the methodology is limited, it can be applauded for its ambitious take on the 'greenness' of revenue and attempting to compare performance between companies. Environmental comparisons are fraught with challenges given the underlying difference between subindustries and operating margins (i.e. the amount of product or service needed to generate $1 of revenue can be significantly different from one company to another all else equal). I did identify a weakness in the methodology specific to the greenhouse gas productivity metric. Over the last few years, a growing number of companies have turned to renewable electricity as an approach to significantly reduce their carbon footprint (see the RE100 Annual Report for a list of companies leading the way on that front). From the FAQ and a discussion with Corporate Knights' lead analyst for the rankings, Newsweek does not appear to recognize the impact of renewable electricity and instead assumes all electricity generates the carbon emissions associated with the average emission factor of the region (this is a calculation approach called the 'location-based approach').
Without further adios, let's move to the trends. Below is a graphic summarizing a few trends over the past two years. For the pay link, board committee and audit rate values, only companies that responded were considered.
- Lower Response Rate: The response rate is down significantly for both the US and World lists with 37 and 28 fewer companies responding respectively. Is this a sign of reporting fatigue or strategic move away from Newsweek Green Ranking? Newsweek's survey is by far one of the easiest to complete (less than an hour), leading me to believe this may be a strategic decision by the corporate sustainability teams that do not need the B2C media boost.
- Minor Drop in Sustainability Pay Link: This drop this surprises me a little. With the increased stakeholder focus on executive compensation and continued inclusion of this issue in both the Dow Jones Sustainability Index and CDP, I expected the rate to trend upward. This drop is also concerning as the pay link is critical to incentivizing executives to make long-term sustainability decisions rather than short-term stock price spiking 'restructuring' and buyback moves.
- US-World Divergence: Companies with a board committee responsible for sustainability and audited environmental data increased in the US but decreased in the World listing. Is this a case of US companies simply catching up with their global peers? Stakeholder pressure may be another consideration.
- World Performance Dominance: Across the board the largest companies in the World outperform the top US companies. Not an unexpected occurrence for two reasons: 1) the US has lagged the rest of the developing world in concern over sustainability issues and 2) larger companies have more resources to dedicate.
2016 Results for the US List
The largest story in 2016 is Hasbro jumping into the #1 position in its first year on the list. While this makes Hasbro seem like a sleeping sustainability giant, the data provides a clear explanation. Hasbro is the sole company in the leisure products industry within the consumer discretionary sector. What does this mean? Since Newsweek compares the productivity of all companies within a sector, a company like Hasbro is being compared to Disney, GM, Hilton, and Starbucks. From a productivity perspective, the base resources required to generate a dollar of revenue are much higher for retailers and the automotive industry. While Hasbro has made some good progress and released 2020 targets, I believe most in the industry would agree that they have a lot of work to do before being considered a top tier company when it comes to sustainability.
The other companies I would highlight are:
- Nike jumped 51 spots to 2nd. The bump is primarily due to significantly better scores in the energy and greenhouse gas productivity criteria. Nike is doing some great work on the environmental side of sustainability including committing to RE100, although there a number of companies ahead of them on this front.
- Oracle surged 183 spots to 10th. As you can imagine the main reason for this was deciding to respond to the survey this year.
- Biogen drops out of the top 2 spots for the first time since the methodology revamp. The carbon neutral company, which was one of the first companies to fulfill its 100% renewable electricity commitment in 2014, dropped its pay link costing them the top spot for a second consecutive year.
- Adobe Systems fell 50 spots to 53. This software maker has a tiny footprint that makes it susceptible to steep increases in energy and greenhouse gas productivity from operational changes such as their recent India expansion.
2016 Results for the World List
Overall more year over year stability in this list. Shire moves up one spot to take over the #1 position from Biogen, who would have retained #1 if not for the pay link). UK-based companies fair the best with 4 in the top 10 including perennial sustainability leader Unilever.
Besides Nike and Oracle, big gainers were Enbridge (117 spots to 12th), a Canadian energy company, despite a low Green Revenue score, and Airbus (41 spots to 14th). and Schneider Electric (15 spots to land in 10th).
The Pharmaceutical industry saw a number of drops including Allergan (21 spots to 24th), due to not reporting waste, and the DJSI pharmaceuticals industry leader Roche (16 spots to 25th).
A Deeper Dive
For those interested in diving into the data, below are two Tableau visualizations I created. Click the industry on the left side for a deeper dive on the right graph. Enjoy!