Measuring corporate environmental performance: the trade‐offs of sustainability ratings

TLDR

Socially responsible investing reflects environmental and social preferences, yet the financial industry lacks transparency on metrics used to assess corporate sustainability, creating trade‑offs in evaluation. The paper discusses trade‑offs in sustainability screening and offers methodological recommendations for evaluating corporate environmental performance. The authors evaluate 15 chemical‑sector firms and propose methodological recommendations for assessing corporate environmental performance. Ratings differ markedly depending on whether they focus on toxic releases/compliance or on environmental policy quality, and firms with advanced reporting often exhibit higher toxic releases and lower compliance. © 2010 John Wiley & Sons, Ltd and ERP Environment.

Abstract

Abstract Socially responsible investing (SRI) represents an investment process that reflects environmental and social preferences. The financial industry is in a unique position to move corporations towards corporate sustainability. However, there is often little transparency regarding the metrics used to evaluate corporate social and environmental performance and the trade‐offs involved in the evaluation. In this paper we discuss the various trade‐offs of sustainability screening methodologies. We show that the rating of companies varies significantly according to whether the screening is based on toxic releases and regulatory compliance or on the quality of environmental policy and disclosure. We base our analysis on the evaluation of the performance of 15 firms in the chemical sector. The analysis indicates that firms that have the most advanced reporting and environmental management practices tend also to have higher levels of toxic releases and lower environmental compliance. We provide methodological recommendations to help stakeholders evaluate corporate environmental performance. Copyright © 2010 John Wiley & Sons, Ltd and ERP Environment.