Solution Manual for Financial Accounting, 11th Edition by Robert Libby, Patri...
Too big for their boots - Sustainability column
1. Into the breach
Let’s say you want to find out how sustainable a particular company is.
Who would you go to?
A) The company itself or,
B) An independent assessment, carried out by experts?
Chances are you’d plump for B. Which explains the rise in recent years
of specialized sustainability rating agencies.
These agencies began with a pretty simple mission: to assess
companies’ sustainability performance on behalf of investors, and give
a clear, honest and impartial verdict.
That’s still their mission – but these days rating agencies have taken on
an importance unimaginable just a few years ago.
Why is that?
Much of the explanation lies in the reaction of companies themselves –
rather than in anything the rating agencies themselves have done (or
not done).
Many companies have embraced ratings as a source of pride. Others
see a good score as a kind of ‘kite mark’ – outside endorsement of their
sustainability credentials.
Even better, rating agencies provided something that companies had
already been searching for: a way of measuring sustainability in terms
their accountants and auditors would understand.
Not surprisingly perhaps, companies have started to use these ratings
in other areas of their business. Many – including AEGON – link bonuses
2. for executives and senior management to the Dow Jones Sustainability
index – probably the best known and most respected.
As the influence of rating agencies has grown however, so has the
criticism.
Models were wrong – or gave too much importance to one area and
not another.
Methodologies were difficult to understand, and the results were
unpredictable.
Rating agencies, in short, were getting too big for their boots.
In the past few years, agencies – particularly SAM, which publishes the
DJSI every year – have also shown they’re not afraid of controversy.
In 2010, BP – one of the world’s biggest energy companies – was
bumped from the DJSI World Index because of the oil spill in the Gulf of
Mexico. And last year, several household names lost their places too,
including Coca-Cola, Hewlett Packard and the German car maker,
Volkswagen. (AEGON, meanwhile, lost its place in the European version
of the index).
Such independence of spirit, however, should be applauded, not
criticised.
At times, much of the griping seems to be a result of wounded pride, on
the part of the companies affected, rather than a consequence of
legitimate concerns.
The fact is, rating agencies – SAM and the DJSI particularly – are victims
of their own success. Their influence increased because companies and
3. investors needed a way to measure and compare sustainability
performance. Ratings like the DJSI or the FTSE4Good were simply the
best available. Thirteen years after the DJSI was first launched, they still
are - and will remain so until companies, auditors and regulators agree
a workable alternative. If rating agencies are too influential, as some
argue, it was companies and their investors who made them so.
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