Companies are doing more to improve their performance on environmental, social, and corporate governance issues, but they are getting less credit for it from customers, investors, and the public, according to a new study.
The study, conducted by sustainable investment research firm CRD Analytics and consulting firm Brandlogic, reveals a widening gap between the sustainability initiatives companies are taking and how the public views those efforts.
CRD Analytics reviewed 141 quantitative and qualitative ESG and financial metrics to gauge the sustainability performance of 100 large, global companies. The study then compared those efforts against how 2,500 external respondents—including supply chain managers and investors who say they are “highly attentive” to sustainability issues—perceive the sustainability efforts of those same companies.
The result was that while companies made real gains on environmental and social issues, they were not reflected in the views of outside stakeholders. “Real performance has increased across the board,” says James Cerruti, Brandlogic's senior partner of strategy and research. “At the same time, though, perception has slipped.”
Even though 93 companies increased their performance scores over the last year, 68 saw a decline in their perception scores. The findings indicate that many companies' ESG performance exceeds their communication efforts. The intent of the study, says Cerruti, is for companies to use it as a strategic decision-making benchmark. “It is a tool that is intended to help executive teams identify investment communications priorities around sustainability,” he says.
Based on the data, the study grouped companies into four performance categories:
Leaders: Companies that have relatively high ESG performance and successfully communicate those achievements.
Challengers: Companies that make a respectable effort at ESG performance, but don't get enough credit for it among the public.
Promoters: Companies that get more credit for ESG performance than their actual achievements should warrant.
Laggards: Companies that have shown a relatively low commitment to ESG initiatives, and likewise don't score well with the public.
Twelve companies that ranked as leaders last year experienced a “significant slip” in their perception scores in 2012, although they still rank as leaders. These companies include IBM, Colgate-Palmolive, Walt Disney, Abbott Labs, Novo Nordisk, GlaxoSmithKline, ABB, 3M, Intel, Cisco, Accenture, and Nokia.
Five companies that qualified as leaders in last year's study slipped back to the challenger's category, suggesting they are lagging behind in their communications efforts. That means they perform well on ESG scores, but aren't considered high performers by investors and other stakeholders. These companies are AstraZeneca, Bayer, HP, Nike, and Merck.
“Real performance has increased across the board. At the same time, though, perception has slipped.”
—James Cerruti,
Senior Partner of Strategy and Research,
BrandLogic
Companies in the challengers category “have an opportunity to secure unrealized benefits of their sustainability investments,” says Cerruti. Other companies that tend to outperform their reputations as challengers include UPS, Citi, Shell, BP, ExxonMobil, and Bank of America.
In a positive development, six companies that ranked as challengers last year advanced to the leaders category, including GE, Coca-Cola, EADS, L'Oreal, AXA, and Deutchse Bank. Cerruti reasons that these companies were able to advance by improving how they communicate their ESG commitments and achievements to stakeholders.
At the other end of the spectrum, companies in the laggards category include ConocoPhilips, Visa, American Express, Adidas, Facebook, and Walmart. “These companies are at risk of being left behind by their respective peers,” says Cerruti.
Only two companies that ranked as laggards last year raised their real performance enough to jump into the challengers quadrant: Bank of America and Heineken. Four other companies in this category last year—Amazon, American Airlines, Avon, and FedEx—moved to the promoters ranking, which may reflect a greater investment by these companies in stakeholder communication versus improved real ESG performance, according to the study.
Other examples of promoters—companies that score lower than average on sustainability, but high on perception—include Avon, Zurich, Honeywell, Sony, and Starbucks. The larger the gap between a company's reality and perception scores on ESG practices, “the greater the opportunity or risk, as the case may be,” says Cerruti.
This year's study also added six new companies to replace six that were taken off the list. Three of these newly added companies—Dell, SAP, and John Deere—were ranked as leaders. The other three companies—Barclays, H&M, and Facebook— ranked as laggards.
The findings revealed notable variations among industries, as well. Telecom and Internet companies ranked particularly low. Facebook had the lowest real performance score among the 100 companies ranked followed by Amazon with the second lowest score. Google and Yahoo also trailed behind. One reason for the low scores by these technology companies is that many of them are considered to have poor corporate governance practices. Google and Facebook, for example have dual-class shares, and many of them have fewer independent board members than companies in other industries.
The study also revealed variations between companies within the same industry. For example, UPS has one of the top three real performance scores in the entire study, while its competitor FedEx, which has real performance 50 percent below UPS, leads in perceived performance. In the automotive sector, Toyota's perceived performance in the promoters category far exceeds that of BWM, Volkswagen, and Ford, which all lead in real performance.
Stakeholder Engagement
The results underscore how important it is for companies to find appropriate communication channels and forms of engagement to reach stakeholders and tell their stories effectively, says Cerruti. Creating sustainability reports is not enough; unless stakeholders find those reports themselves, the information is not being broadly disseminated, he says.
REAL GAINS, PERCEPTION CHALLENGES
Below is some observations from BrandLogic comparing their 2011 sustainability report to the results of this year's report.
We proposed in our 2011 report that the Challenger companies are best positioned to achieve new sustainability leadership and secure the attendant unrealized ROI
through investing in effective communications. Several companies were, in fact, able to do this.
Six companies who were Challengers in our 2011 study are new Leaders in 2012. These companies—AXA, Coca-Cola, Deutsche Bank, EADS/Airbus, GE, and L'Oréal—stand out for having found ways to leverage their high real performance into correspondingly high perceived performance relative to their peers.
While no company placed in the Promoters or Laggards quadrants in the 2011study moved into the Leaders quadrant, three of our newly added companies have entered the study as Leaders—SAP, Dell, and John Deere. The other three new additions—Barclays, Facebook, and H&M—join their global brand peers
as Laggards.
Twelve of the 2012 Leaders who were also Leaders in 2011 saw significant slippage (5 points or more) in their perceived performance: IBM, Colgate-Palmolive, Walt Disney, Abbott Labs, Novo Nordisk, GSK, ABB, 3M, Intel, Cisco, Accenture, and Nokia. Another five 2011 Leaders slipped back to the Challenger quadrant—AstraZeneca, Bayer, HP, Nike, and Merck, suggesting that they are falling behind in their communications efforts.
Only two of the 2011 Leaders, Deutsche Telekom and Alcoa, dropped below the
SRS mean in 2012. Deutsche Telekom landed in the Promoters quadrant while
Alcoa dropped all the way into the Laggards quadrant. Also joining the Laggards this year are DuPont, among Challengers in 2011, and Panasonic, one of 2011's Promoters.
There were only two companies from the Laggards quadrant in 2011 who raised
their real performance enough to jump into the Challengers quadrant: Bank of
America gained 27.7 points and Heineken 12.4 points. Four other 2011 Laggards, perhaps reflecting investment more in improving communications versus in improved real ESG performance, moved from the Laggards quadrant to the Promoters quadrant—Amazon, American Airlines, Avon, and FedEx.
Source: BrandLogic.
Companies that excel in communicating their accomplishments link their sustainability efforts to their brand communications, Cerruti adds. In addition, they tend to consolidate their efforts into one sustainability report, making it easier for stakeholders to understand the company's ESG commitments “from the get-go, rather than having to paw through hundreds of different initiatives in a given year,” he says.
Eric Hespenheide, a partner in Deloitte's Sustainability practice, further emphasizes the importance of effectively communicating ESG initiatives. Companies that demonstrate through disclosure their commitment to ESG initiatives tend to experience a protective “ESG halo effect,” in which they may take less of a hit to their valuation in the event of an adverse event.
Susan Graff, principal at business sustainability consulting firm ERS Global, agrees. Repairing the damage sustained by an adverse event is difficult, “but if you're already out there doing well by doing good you've got an advantage in that you've already established your reputation, and it's easier to rebound from mistakes,” she says.
Graff adds that it's also important for companies to understand what third parties, customers, and stakeholders care about. “That engagement piece is a huge competency that's often missed,” she says. “People tend to focus on analysis and numbers, because what gets measured gets done, but the insight one can get from parties outside the organization, who see the organization's blind spots, is invaluable.”
Core Competencies
In addition to engaging and communicating with stakeholders, leading companies share four other core competencies:
Demonstrated management commitment. One significant factor that effects how stakeholders perceive corporate ESG performance comes down to how they perceive senior management's ability “to understand the business environment in which they operate, what their competitive strategy might be, and how management executes against that,” says Hespenheide.
“Unless you have demonstrated management commitments that are published and communicated and understood internally, companies are not going to be able to drive performance improvement,” says Graff. One example is having a clear compliance-driven corporate responsibility policy that conforms to international standards.
Measurements against commitments. “Reporting for reporting's sake isn't the point,” says Hespenheide. “Reporting because you're actually collecting meaningful information that's integral to your business value-creation model is critical.”
By reporting on the company's energy consumption or carbon footprint, for example, management can use that information as a launching off point for gaining a clearer understanding of how to develop a better energy strategy, or how reducing their carbon footprint can “start driving internal value,” says Hespenheide.
Innovation. Look at products and services and try to design them with consideration of the product's overall lifecycle, advises Graff. By paying attention to just the product cycle of a product, for example, and not the end cycle, “you're missing the biggest environmental impacts of your product,” she says.
Independent verification of ESG performance. Companies have many certifications to turn to in the marketplace to verify their sustainability performance. “We encourage companies not to start with that,” says Graff, “because that should be the culmination of getting your data in order and being able to prove that you're doing what you say you're doing.”
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