Indexes, rankings and corporate responsibility

The editor of a financial publication, Money Market, sent me a couple of questions this morning, which I attempted to try and answer. I thought I’d put what I wrote up on the blog to see if readers agree or disagree with me. Here’s the questions and my responses:

1) Is the BITC Index a genuine marker for CR?

2) Has having a good CR rating even been known to boost a company´s share price? Or drive ethical investors to a particular stock?

Here’s what I said in response. If you agree or disagree, please post a comment below:

The BITC Index is a useful indicator that a company is making progress. But it’s no guarantee.

BP’s shares were held by ethical funds and the company was listed in ethical indices until recently.

Comparing companies in different sectors is never a good idea, and the trouble with cross sector indices and rankings is the difficulty in making meaningful comparisons between companies, even in the same sector.

The key indicator is how a company is performing against the past five years of ESG data that’s relevant for that company specifically.

Another key area to look at is whether external benchmarks and the company’s own indicators and measurement methodologies have changed either year on year or over a period of years, as any changes will of course skew performance data.

On point two: There are many factors that affect share price as we know. A good CR rating is increasingly seen as a quality of management indicator.

The trouble is the ratings game for CR is immature and many of the firms use opaque methodologies or methodologies that sometimes just do not add up.

The challenge for them is that standardising ‘goodness’ is a very difficult and often subjective issue.

Some further useful stats are here.

BITC claims that: “According to research conducted by Ipsos MORI, the companies participating in BITC’s Corporate Responsibility Index (CRI) each year between 2002 and 2009 outperform their FTSE350 peers on total shareholder return (TSR) by an average of 10 percentage points in seven out of the eight years. Furthermore, the TSR of these companies did not fall as far and recovered more quickly in 2009.” (But I am unable to get further information from them on how they came up with these numbers to date).

Ethical Investors did not cover themselves in glory, particularly in the US, pre-recession, by negatively screening out some companies but investing heavily in banks (ethical investors pushed hard for sub prime mortage lending growth under Clinton onwards) because they seemed to think banks were ‘clean’ (despite who they lend to!) and their stock / dividend performance was much stronger than other sectors (partly due to the bubble they collectively created of course!)

Look forward to some reader comments on the above…

1 Comment

  1. Marc Orlitzky and John D. Benjamin have done some good empirical work on this. In a 2001 analysis they found the higher a firm’s social performance the lower its
    financial risk (Business Society 2001 40: 369). In 2003 they conducted a meta-analysis of 52 studies, with a total sample size of 33,878 observations on the relationship between corporate social/environmental performance (CSP) and corporate financial performance (CFP). They state: "
    The metaanalytic findings suggest that corporate virtue in the form of social responsibility and,
    to a lesser extent, environmental responsibility is likely to pay off. … This meta-analysis establishes a greater degree of certainty with respect to the CSP–CFP relationship than is currently assumed to exist by many business scholars." (Organization Studies, 24(3), 403 -441)

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