RobecoSAM 2014 Corporate
Sustainability Assessment
Annual Scoring & Methodology Review
September 2014
RobecoSAM AG
Josefstrasse 218 - 8005 Zurich - Switzerland - www.robecosam.com - Phone +41 44 653 10 30 - Fax +41 44 653 10 50
Contents
1.
Introduction ....................................................................................................... 3
2.
General Scoring Information ............................................................................... 4
2.1 Question scoring
2.2 Criteria scoring
2.3 Criteria Percentile Rankings
2.4 Weightings
2.5 Scoring variations
4
4
4
4
4
3.
Methodology Changes - General Criteria .............................................................. 6
3.1 Corporate Governance
6
3.1.1
Board Nomination Process ................................................................................................... 6
3.1.2
Board Effectiveness............................................................................................................... 6
3.1.3
Transparency of Senior Management Remuneration ............................................................. 7
3.2 Tax Strategy
8
3.2.1
Tax Strategy ......................................................................................................................... 8
3.2.2
Tax Reporting ....................................................................................................................... 8
3.2.3
Taxation Risks ...................................................................................................................... 9
3.3 Social and Environmental Reporting
10
3.3.1
Environmental / Social Reporting - Materiality .....................................................................10
3.3.2
Environmental/Social Reporting - Quantitative Data ............................................................ 11
3.4 Human Capital Development
12
3.4.1
Training & Development Inputs ........................................................................................... 12
3.4.2
Employee Development Programs ....................................................................................... 12
3.4.3
Human Capital Return Metrics ............................................................................................. 13
3.4.4
Human Capital Return on Investment .................................................................................. 13
3.5 Labor Practice Indicators & Business and Human Rights
13
3.5.1
Labor Practice Indicators ...................................................................................................... 13
3.5.2
Public Commitment to Human Rights / Business and Human Rights ..................................... 13
4.
Performance scoring – Linear Peer Group Scoring ................................................15
4.1 Occupational Health & Safety and Talent Attraction & Retention
5.
16
Disclaimer ........................................................................................................ 17
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1.
Introduction
This year, a record 830 companies participated in the RobecoSAM Corporate Sustainability Assessment.
In addition, we assessed 983 companies based on publicly available information. The 2014 methodology
was updated to reflect rising emerging sustainability challenges that companies face and that are
considered to be critical for their long-term success. For example, how do companies approach the
sensitive topic of taxation? Are companies effectively measuring the return on their investments into their
human capital?
A push towards the financial materiality of sustainability, more closely aligning topics that are financially
relevant for companies with those that are critical to stakeholders is increasingly reflected in changing
investor priorities and companies’ reporting standards. In line with our core belief in the financial
materiality of sustainability, we have also updated our Social and Environmental Reporting sections,
allowing companies to explain to us how they identify and report on the sustainability issues that are
most important to them.
RobecoSAM continuously develops its methodology in order to identify the companies that are best
equipped for long-term success in light of risks and opportunities related to sustainability factors. This
means that new, challenging criteria are regularly introduced and questions or criteria that have been
become ‘business as usual’ and no longer differentiating may be deleted. By continuously raising the bar,
RobecoSAM is able to identify the most sustainable companies in the world.
This document, prepared for the first time, aims to elaborate on the major methodology changes made
in 2014 and explain some of the main scoring trends that have been influenced by changes to the
methodology. For a more general understanding of our methodology and assessment approach, we
recommend reading our White Paper, “Measuring Intangibles.”
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2.
General Scoring Information
2.1
Question scoring
The maximum score for each question is 100. The various answer options within a question are scored
individually or in combination, with the total sum resulting in a maximum of 100 points. As a result,
removing or adding options to a question may impact the overall weight of each question component
and thus the overall scoring of the question. Therefore, it is important to carefully review each question,
as new elements might have been added, or other options removed. Examples of the major changes to
questions will be discussed in the following pages.
2.2
Criteria scoring
Criteria scores are determined by the weighted sum of question scores. As already described above,
adding or removing questions within a criterion will change the weight of the individual questions, and
therefore impact the criteria score. Therefore, it is possible that a criteria score may change, even if the
answers provided to the individual questions have not changed from one year to the next – given that a
new question may have been added, a previous question deleted or if the underlying scoring scheme at
the question level has changed.
2.3
Criteria Percentile Rankings
In addition to the absolute criterion score, companies receive their percentile ranking for each criterion.
The percentile ranking represents the percentage of assessed companies that have received a lower score
than the company in question. For example, if a company has a percentile ranking of 95 for a specific
criterion, this means that it received a higher score than 95% of the companies in its peer group.
Considering that the methodology continuously develops and that weightings of questions and criteria
may change over time, the percentile ranking is a useful tool to track performance against the industry
peers as it shows the relative performance rather than the absolute performance of the company.
2.4
Weightings
As part of our effort to increase transparency towards companies, RobecoSAM has publicly disclosed the
criteria weightings for all industries on the Corporate Sustainability Assessments website for the past two
years. The weightings of both individual questions and criteria are subject to annual review, based on the
materiality of each topic to an industry and the introduction or deletion of questions. As a result, criteria
scores may change due to a change in the underlying question weights.
2.5
Scoring variations
a.
Transparency / Disclosure vs. Performance Scoring. Changes in scores can result from a change
in scoring approaches, moving from “disclosure” scoring to “performance” scoring.
“Disclosure” scoring awards points for qualitative or quantitative information without placing
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any value judgement on the answer. For example, if the questionnaire asks for the share of
female managers, the score could be driven by the company’s ability to report the number of
women in management, indicating that this is something the company is actively tracking
(disclosure). Alternatively, with “performance” scoring, the score is driven by the actual number
of female managers, measured against the total number of managers (performance).
When introducing new questions asking for quantitative information, initially the focus is
typically on disclosure scoring, awarding points to companies that are able to disclose relevant
information. As data collection and reporting mature over time, performance scoring may be
introduced to capture a trend over time or measure a company’s performance in relation to its
peers.
b.
Public vs. Non-public information. In line with the increasing demand for accountability and
transparency, the methodology increasingly focuses on information that is publicly available. In
the event that a question asks for either a public or internal document, preference is given to
publicly available information.
c.
Linear Peer Group Scoring. This year, for the first time, linear performance scoring was
introduced to some questions in order to measure a company’s relative performance against its
industry peers. Previously, a company’s performance over time was measured based only on
the company’s own relative or absolute improvement. For more information on industry
performance scoring, please refer to Chapter 4 in this document.
Below is an overview of different types of scoring used. Please note that “transparency” and
“performance” refer to the scoring approach used for that specific question. One specific question can
include either transparency, performance, or a combination of the two elements, but ultimately one
Total Sustainability Score will be calculated, consisting of both transparency and performance
components.
Figure 1: Overview of scoring types
Scoring Type
Transparency
Performance
Description
Sample Questions
Public disclosure
• Public Commitment to Human Rights
Availability of qualitative or
quantitative information
• Tax Strategy
• Disclosure of Median Compensation of All
Employees & CEO Compensation
Scoring of qualitative or
quantitative data based on
pre-defined thresholds or
expectations.
• Reporting – Materiality
• Board Structure
Trend scoring on company’s
own performance over time
• Operational Eco-Efficiency
Scoring of data compared to
other companies within
industry
• Lost Time Injury Frequency Rate
• Employee Turnover Rate
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3.
Methodology Changes - General Criteria
3.1
Corporate Governance
3.1.1
Board Nomination Process
Gender diversity and the right mix of skills and backgrounds are increasingly gaining relevance as key
indicators for translating good board performance into good corporate performance. Corporate boards
are tasked with monitoring the management of companies on behalf of the companies’ shareholders.
Boards directly represent these shareholders and the composition of the board is one of the most
important aspects of corporate governance. Therefore it is important that the selected board members
have sufficient experience, skills, independence and act in the best interest of all shareholders.
Additionally, diversity of its members can add value to the board. When diversity leads to differences in
perspective and experience, boards will be able to assess problems from a broader point of view and are
more likely to take into account the best interest of all shareholders. Studies have shown a positive
correlation between gender diversity of the board and financial performance.
The newly introduced question focuses on the following areas:
•
•
•
Do companies have a board nomination policy in place and is it publicly available to its
stakeholders?
What factors are considered in the board nomination process? Does the company include
factors such as age, background, gender, etc. in the process and are these factors clearly stated
in the board nomination policy?
Does the company use tools such as skill matrices and gap analysis to advise the
recommendations of the nomination committee?
While RobecoSAM does not expect companies to consider all diversity and skill indicators, companies
should be able to demonstrate that at least three such metrics are being used. In line with the belief that
transparency on corporate governance metrics and policies constitutes best practice, these should ideally
be publicly available.
3.1.2
Board Effectiveness
In 2014, an additional section was added to the Board Effectiveness question, focusing on the election of
board members. The question focuses on the accountability of the board and what rules are in place to
ensure adequate attention from board members – for example meeting attendance, restrictions on the
number of other mandates and the assessment of the board’s performance.
The question has been extended to assess how board members are elected (annually / not annually /
individually / by slate). The frequency of election and structure of the process can impact the
accountability of board members to its shareholders. When board members are elected individually and
on an annual basis, shareholders will be able to vote off board members when they are concerned with a
board member’s performance. When shareholders can more frequently express their confidence in or
concerns about board members, the board as a whole becomes more accountable to its shareholders.
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3.1.3
Transparency of Senior Management Remuneration
This question has been extended this year to determine to what extent executive compensation is
detailed in a company’s public reporting. Previously, the question only considered whether remuneration
was publicly disclosed, and for which management levels this information was reported – e.g. Board of
Directors & CEO, other Executive Management members, Senior Managers, etc. A new component to
this question has been added, asking for more detail beyond just compensation, but rather what
performance metrics and targets are used to determine executive and board level remuneration. This
question focuses solely on public reporting, and aims to address the growing call for transparency by
shareholders and other stakeholders regarding how board members are being compensated and under
which circumstances.
As seen in the results below, a focus on more detailed disclosure allows for greater differentiation between
companies, influencing the range of scores for this question. The graph below shows the percentage of all
assessed companies in the 2014 RobecoSAM CSA that publicly disclosed various indicators relating to
executive compensation.
Figure 2: Reporting metrics for executive compensation
Source: RobecoSAM CSA 2014 – Data based on all participating companies and additional companies assessed based on publicly
available information (1,813 companies).
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3.2
Tax Strategy
The newly introduced Tax Strategy criterion aims to address the growing criticism on companies’ taxation
structures, the transparency of tax reporting and the risks associated with taxation. Tax competition
between tax territories (countries or regions within countries) has left room for companies to optimize
their tax spending. While tax optimization has a positive impact on profitability and hence company
value, an overly aggressive tax strategy might not be sustainable over the mid- to long-run and could
potentially put long-term profits at risk. First, there are reputational risks due to increased public and
regulatory scrutiny which could result in decreased brand value. Second, the relationship with the host
country may be negatively impacted. This could result in approval delays or rejection of expansion
projects or in the worst case companies risk losing their license to operate. Third, earnings may be
impacted if the tax authorities decide to change tax regulation, leading to direct financial risks. Finally,
economic development risks arise if governments receive inadequate tax receipts to fund local
infrastructure or education.
The introduction of this criterion across all industries had an impact on the score of the Economic
Dimension. On average, the scores for the Tax Strategy criterion were lower compared to other criteria in
the dimension. However, as it was the first year this criterion was applied, the weighting of the criterion
was kept low, at 2% for all industries.
Three new questions were introduced in 2014:
3.2.1
Tax Strategy
In this question we assess whether or not companies have a tax policy in place that governs their
approach to taxation. While many companies have group-wide tax accounting policies with clearly
defined roles and responsibilities within the organization in place, we specifically looked for taxation
policies that addressed issues such as responsible taxation, transparency, transfer pricing, etc., going
beyond minimum legal tax disclosure requirements. Public availability of these documents to all
stakeholders is considered best practice, but internal documents were also accepted as this is an
emerging issue.
Figure 3: Percentage of participating companies with a tax policy
Source: RobecoSAM CSA 2014 – Data based on all companies participating in the CSA (830 companies)
3.2.2
Tax Reporting
This question captures the granularity of tax reporting by companies and their global operations. We
assessed whether or not information such as revenue data, operating profits and income taxes paid were
disclosed for a company’s main revenue-generating regions or in even more detail on a country-by-
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country basis. From an investor’s perspective, revenue data, operating profits and income taxes, along
with the statutory tax rate of a country, allow for the expected tax rate to be calculated. This allows for an
analysis of the difference between the effective tax rate and the expected tax rate – which may give
indications of aggressive tax optimization structures and potential risks associated with these structures.
The question also assesses whether companies transparently explain differences between these two tax
rates, beyond the legally required accounting explanations of differences in tax rates.
The results varied between industries, with companies with a strong local asset base performing on
average better than multinational companies dealing primarily with intellectual property, where profits
can more easily be shifted between countries. Companies in the extractive industries also performed
well, partly due to industry-wide efforts –such as the Extractives Industry Transparency Initiative (EITI) – to
increase transparency on taxes and royalties paid in the countries in which they operate.
3.2.3
Taxation Risks
Companies should be aware of risks associated with taxation and the decisions they take regarding their
tax structures. Increasingly, taxation structures are at the center of political discussions, with topics such
as tax havens, tax inversion and transfer pricing being heavily discussed. This question aims to assess
whether companies have performed their due diligence with regard to taxation risks, specifically beyond
standard financial risks.
Financial risks from taxation cover, but are not limited to:
•
•
•
•
Changes in tax rates
Changes in tax legislation
Unresolved tax disputes
Changes in taxation due to mergers and acquisitions
Increasingly, non-financial taxation risks are a source of risk for the company, including:
•
•
•
•
Reputational risks
License to operate in a region or country
Risks to relationship with host country
Economic development risks in regions where the company is operating
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3.3
Social and Environmental Reporting
In 2014, the Environmental and Social Reporting criteria were updated to delve deeper into a company`s
identification of material sustainability issues and how the impacts of these risks and opportunities are
being measured. Previously, RobecoSAM had conducted the assessment of these questions based on
public information, whereas this year, companies were given the opportunity to complete these sections
themselves and RobecoSAM verified the answers against information available in the public domain. It is
important to emphasize that even though companies now are able to directly provide input on the
questions in the reporting section, the criteria still measure the quality of the public reporting and all
information must therefore be publicly available, including e.g. links between material issues and the
business relevance for such an issue.
3.3.1
Environmental / Social Reporting - Materiality
A description of the company’s material sustainability priorities, the process for determining such
priorities and concrete initiatives related to cost savings or revenue generation linked to such issues in its
public reporting demonstrate a clear understanding of the link between these activities, financial
performance and shareholder value creation. Focusing on material issues identified by the company and
its key stakeholders and communicating these to financial markets through “integrated reporting” are
growing trends and are increasingly considered as best practice. Overall, it indicates that these activities
are indeed truly embedded in the corporate growth strategy and in management processes at
operational levels.
The two main changes made to the questions in 2014 are:
1)
The questions now cover details related to the process for analyzing materiality, including but
not limited to: which stakeholders have been involved, the identification of material issues, and
the how these issues are prioritized.
2) Companies are expected to report on the top three material issues (for social and
environmental reporting respectively) and highlight how each issue is linked to the company’s
business performance and long-term success.
Figure 4:
Source: RobecoSAM CSA 2014. Data based on all participating companies and additional companies assessed based on publicly
available information (1,813 companies)
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As shown in Figure 4, 40% of the participating companies reported on material sustainability issues in
either their sustainability or annual report. Of these, 67% highlighted how these sustainability issues are
linked to the company’s business case.
3.3.2
Environmental/Social Reporting - Quantitative Data
Although disclosure levels continue to increase, the quality of reporting varies significantly across
industries and geographies. Having measurable key performance indicators (KPIs) in place to set goals
and measure progress against those goals helps ensure that companies are able to track progress
effectively and also adds credibility and accountability in their communication to stakeholders.
While in previous years this question also asked for quantitative KPIs and targets, the scope became more
focused in 2014. The main changes are:
1)
The updated question not only tracks a company’s KPIs but also checks for their link to the
identified materiality issues and whether they are regularly reported.
2) In order to assess the companies’ progress on their sustainability initiatives, the question also
assesses whether or not clear targets and goals have been set for the indicators and whether or
not companies have reported their progress against these targets.
As a result of making the questions above more detailed and focused on the business drivers behind sustainability strategies, the scores companies achieved for these questions and the overall criterion score
changed accordingly. While an increasing number of companies are effectively communicating the link
between their sustainability and business strategies, truly integrated reporting is still scarce, with separate
sustainability reports and online sustainability portals remaining the primary source for the discussion of
sustainability issues and initiatives.
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3.4
Human Capital Development
Human capital is frequently cited as one of the most material focus areas for companies. Attracting the
best talent and creating an environment for fostering innovation and employee growth allows companies
to differentiate themselves from the competition. While investments in human capital are significant and
abundant, the mechanisms used to measure the success of certain programs or investments remain
scarce. For 2014, this criterion was revised to focus on the quantitative metrics used to measure the
success of a company’s human capital development programs. While it is clear that strong human capital
contributes to the overall success of the company, companies should be able to measure the return on
their investments in order to maximize the value added by their programs and steer strategic decisions.
As a result of the shift towards a more quantitative approach to measuring human capital investments and
development, the average score achieved for this criterion decreased significantly across all industries
compared to 2013, when a more qualitative approach was used.
Figure 5: Human Capital Development average score
Source: RobecoSAM CSA 2013 and 2014 – Data based on all participating companies
(818 companies in 2013 and 830 companies in 2014)
Four new questions have been added to the criterion following the change:
3.4.1
Training & Development Inputs
This question focuses on whether or not companies are tracking metrics such as number of hours of
training and the average amount spent on training per full-time employee (FTE). Additionally, the
question focuses on the share of open positions filled by internal candidates within the last fiscal year.
Hiring internal candidates can substantially reduce external hiring and training costs and provide new
development opportunities for existing employees.
3.4.2
Employee Development Programs
This question assesses examples of the types of employee development programs offered by a company,
if a clear business case for these programs exists and whether or not the benefits of these programs can
be quantified in monetary terms – for example through cost savings or revenue generation that can be
directly linked to that program or the skills developed through the program.
Programs that provide employees with mandatory training such as compliance, basic health & safety or
introductory programs that provide employees with standard skills needed to perform their job are not
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considered for this question. Rather, the question focuses on identifying programs that are specific and of
strategic value to the company, and provides benefits such as:
•
•
3.4.3
Increased competitiveness
Increased efficiency to increase output or reduce costs
Human Capital Return Metrics
Building on the previous questions, this question assesses whether companies are using global or more
localized metrics to track the monetary impact of their human capital investments.
This question aims to capture a Return on Investment metric, rather than a productivity or output metric
which can simply be calculated by dividing output by the number of employees, but gives little indication
of how successful targeted human capital investments have been.
Not considered to be relevant return metrics such calculations such as:
•
•
EBIT/ FTEs
Revenues/ FTEs
Examples of accepted metrics are:
•
•
3.4.4
Human Capital ROI
Economic Value Added
Human Capital Return on Investment
As a final question, and to facilitate comparability of data between companies, we provided a
standardized framework for companies to calculate their Human Capital Return on Investment. We
collect data to calculate the following formula:
(Total revenue – (Total operating expenses – Total employee-related expenses))
-----------------------------------------------------------------------------------------------------------------------Total employee-related expenses
3.5
Labor Practice Indicators & Business and Human Rights
3.5.1
Labor Practice Indicators
In order to simplify the structure of the question on Labor Practice Indicators was divided into four
separate questions according to the relevant ILO conventions. The relative weight of each option across
the four new questions has remained similar to the previous single question and has not substantially
impacted the overall score of the criterion.
3.5.2
Public Commitment to Human Rights / Business and Human Rights
The previous question has been split into two, one focusing on a company’s public commitment to
human rights (such as the Universal Declaration on Human Rights or the United Nation’s Global
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Compact) and the other focusing on the company’s awareness of the UN Guiding Principles on Business
and Human Rights, also known as the Ruggie Framework. Although not new in the 2014 assessment,
splitting the questions emphasizes the importance of the emergence of a framework such as the Ruggie
Framework, as it uniquely focuses on the importance of business and corporations in actively promoting
human rights, and clearly defines the roles and responsibilities that corporations can take. As a result, it
allows companies to assess the implications of these responsibilities and how they might impact their
business, providing a basis for identifying areas for improvement.
RobecoSAM specifically assesses a company’s awareness and commitment to the UN Guiding Principles on
Business and Human Rights in this question. Other frameworks are not considered.
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4.
Performance scoring – Linear Peer Group Scoring
As mentioned in section 2.5, a new scoring approach aimed at measuring a company’s performance not
only in terms of its own improvement over time, but in comparison to its peers within its industry, was
introduced this year. To do so, RobecoSAM conducted analysis on historical data for selected questions to
determine the boundaries that could be used as the basis for scoring. Given that this approach is new, it
was introduced as a supplement to existing scoring methodologies with a moderate weight. This
approach relies on a number of fundamental criteria being met when selecting questions:
1.
2.
3.
The question asks for a standardized, comparable metric that is reported globally and can be
effectively used to compare companies
The sample size of available data within each industry is sufficient to make a significant analysis
about a performance range
All outliers and data inconsistencies are accounted for
In cases where this analysis cannot be performed for an industry for any of the reasons stated above, this
new scoring mechanism is not introduced and the old scoring approach is retained.
Once boundaries are established for an industry, the following approach is taken:
1.
2.
The performance data is divided into quintiles.
Companies scoring in the first quintile receive 100 points, and companies in the fifth quintile
receive a score of 0. Linear scoring is used for all other companies that fall in between the fifth
and first quintile, starting at 10 points and ending at 100 points
For companies that clearly are tracking a comparable metric, but not in a unit that is convertible to the
desired unit, the questions are considered as ‘Not Applicable’ and their weight is redistributed over other
questions in the criterion.
Figure 6: Example of Linear Peer Group scoring for Lost Time Injury Frequency Rate (LTIFR)
Source: RobecoSAM CSA. Data based on four-year average LTIFR for a selected industry
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4.1
Occupational Health & Safety and Talent Attraction & Retention
Given the standardized nature of health & safety metrics that allow performance to be compared among
companies in the same industry, the Linear Peer Group scoring approach was introduced for the following
questions:
•
•
•
Lost Time Injury Frequency Rate (LTIFR) – Employees & Contractors
Occupational Illness Frequency Rate (OIFR) - Employees
Employee Turnover Rate
For any additional questions, please do not hesitate to contact us:
RobecoSAM
DJSI Helpline
[email protected]
+41 44 653 10 30
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5.
Disclaimer
No warranty This publication is derived from sources believed to be accurate and reliable, but
neither its accuracy nor completeness is guaranteed. The material and information in this
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implied. RobecoSAM AG and its related, affiliated and subsidiary companies disclaim all
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reflect the current judgment of the authors and may change without notice. It is each reader's
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Limitation of liability All information contained in this publication is distributed with the
understanding that the authors, publishers and distributors are not rendering legal, accounting
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