The Corporate Sustainability Assessment (CSA) opened yesterday (March 30th) 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 those 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 five 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 2017 universe of invited companies is linked HERE.
None in 2017
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 in a single 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.
MAJOR ASSESSMENT CHANGES
A few weeks ago RobecoSAM presented the most important methodology changes in a 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:
- Further streamlining on the number of criteria (see HERE for list of deleted questions)
- Focus on the general criteria this year (next year's materiality review will focus more on industry-specific criteria)
- Further alignment with GRI and SASB Standards
POLICY INFLUENCE (New to All Industries)
This new criteria was added based on the potential reputation, operational and legal risk associated with seeking to influence public policy. One example eluded to was lobbying against soda taxes. There are two questions now asked of companies:
- Total contributions over the past four years made to external parties whose mission includes influencing public policy. Political campaigns, trade groups, lobbyist, think tanks and some NGOs would all fall under this umbrella. Scoring will be on disclosure for all four years as well as the trend in spend intensity, where a declining trend is positive and increasing trend is negative. Level of spend is not currently scored, but is being evaluated and may be incorporated in future years.
- Disclosing the five largest contributions to individual candidates, organizations or issue area. There was particular stress on the term issue area, where if you utilize a single trade group, lobbying firm, etc to manage a host of different topics, you must breakup the contribution per issue area. A single issue area can cover lobbying for multiple different bills in multiple different locations, but should have the same focus - i.e. preventing the taxation of sugary drinks. Scoring will be on disclosure only.
In both questions, RobecoSAM is asking for supporting documentation in the public domain and were specific that third-party documents were not acceptable.
SUPPLY CHAIN MANAGEMENT (Updated - No industry adds or removes)
This update was primarily focused on the idea of critical supplier as a means to a company's ability to identify and manage supply chain risk. As a result questions were removed, added or modified to reflect this focus, which the expectation that leading companies have robust processes in place to:
- Identify their critical suppliers - where ever they may exist in the supply chain (not just Tier 1)
- Identify potentially high risk Tier 1 and non-Tier 1 critical suppliers
- Assess potentially high risk suppliers
- Establish and track progress against corrective action plans.
- Establish and track three KPIs with targets
Expectations have also been ramped up considerably this year as sustainability in supply chain management matures. First, the responses are now more quantitative in nature with RobecoSAM asking for the number of suppliers that make it through each step of the supply chain risk management process. Scoring-wise, this criterion has largely moved towards performance based scoring. For example a high percentage of those suppliers identified as high risk to be assessed at least every three years, where assessed now must include an on-site visit either by your company or a third-party on your behalf. My guess is anything below 50 percent will see less than full credit awarded.
Additional changes include:
- Moving the question on Supplier Code of Conduct here from Risk and Crisis Management with the addition that the Code must be publicly available.
- For a limited number of industries a question on conflict minerals was added. Keeping with the quantitative approach, the question asks for the percent of revenue from product that contain conflict minerals and the percent from the same products where the conflict mineral is determined to be conflict-free. For the US-based companies, RobecoSAM is using the OECD definition for regions with conflict minerals and not the more limited Dodd-Frank Act.
Companies that have not established a robust sustainability risk process for your supply chain will struggle which these changes as I believe they are designed to really see which companies have done the work and which have not.
IMPACT MEASUREMENT AND VALUATION (Expanded out to 57 industries - all excluding those related to Utilities)
There was minimal discussion during the webinar on this criteria as it was heavily covered last year, but the expectations are definitely higher. The primary message was that leading companies should be measuring social and natural capital in a more comprehensive manner, specifically covering at least three environmental and two social issues. Simply entering that your company has an internal price on carbon will not be sufficient for full credit this year. Similar to last year, scoring is completely based on disclosure with the Valuation Disclosure question specifically requiring documentation in the public domain. This will likely be a challenge for many companies and thus the very small scoring weight RobecoSAM has applied to it.
PRODUCT STEWARDSHIP (Updated - No industry adds or removals)
Similar story here as with supply chain management - questions are moving from qualitative in nature to quantitative and expectations towards more mature programs. This criterion also some modified to better align with SASB standards. The major questions here include:
- Existence of environmental criteria in five stages of product development with supporting documentation required.
- Percentage of products covered by LCAs and if those LCAs are looking at broad range of impacts, specifically human health, resources use, and ecological consequences (again supporting documentation required)
- Percentage of products demonstrating a superior resource efficiency during the use phase. There was a question on what is 'superior' and the answer indicated there is no set definition, but the concept is performance improvement should be innovative/design in nature rather than just being slightly more efficiency than the typical product. More CFL to LED rather than 5-10% increase in lumen per watt efficiency in a CFL is my guess (for those familar with lighting products).
- Measuring the amount of hazardous materials in your products, where hazardous uses three different definitions - regulated, of international concern, and on the SIN list. This is not compliance related and scoring is on disclosure only. RobecoSAM was upfront that they expect companies should know what is in their products.
- Existance of a commitment to phase-out hazardous materials from its product and progress made towards that target with supporting documentation required.
Two additional industry specific questions included End of Life Cycle Responsibility associated with the extent companies are involved in take-back programs in quantitative terms and Environmental Labels and Declarations associated with the percentage of products covered by environmental product declarations, which replaced last year's labeling question.
- A Company Information dimension was created to manage normalization of data across the rest of the CSA. Everyone will see this at the top of your assessment. The normalization information was previously held in Operational Eco-Efficiency. One impact of notice is one normalization factor (FTE, revenue + occupied rooms for relevant industries) can be selected for use across the entire CSA. You are not able to use FTE for one metric and revenue for another now.
- Labor Practice Indicators and Human Rights was broken into two separate criteria (Labor Practice Indicators / Human Rights). The relevant questions were relatively unchanged.
- The Corporate Governance criterion had a few questions changed to increase focus on the quality of the board of directors.
- The Code of Business Conduct criterion is now more quantitative in nature with two new questions targeting the number of cases and fines associated with anti-competitive and ABC issues.
- Various other questions and/or their guidance notes were removed, added or slightly modified, so be sure to read each question before copying last year's response and moving on.
The weight of each criterion may also change as a result of the changes above. 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. Criteria weights in 2017 are found HERE.
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 generally do not influence your score, 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.
Other tips from this year's webinar:
- Supporting documents need to be recent - in a change from the past, they stated recent means within 2 years rather than the standard 3 years. Morale of the story - if you have documents that are still relevant, but were uploaded years ago, you need to re-upload those same documents to ensure credit.
- Publicly available documents must actually be available in the public domain (check any older links to ensure they did not break)
- Ignore the warning messages that will pop up for certain data entries at your own peril. Unless something crazy happened at your company, it generally means you mis-entered something.
- If you really believe a question to not be applicable - always back it up with an explanation. My recommendation is to always avoid this if at all feasible since more than likely it will be scored 0.
- The Climate Strategy criterion aligned with CDP does not mean RobecoSAM and CDP share data. It simply means the questions are the same. You still must enter all the information into the CSA regardless if you disclose to CDP or not.
Good luck to everyone in responding this year.