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25 April 2024
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Sustainability ratings just a gimmick?

Amid mounting criticism of business operations’ environmental and social impacts, businesses are proudly showcasing their sustainability ratings and awards to demonstrate their commitment to sustainable development. Yet, do these accolades credibly reflect such commitment, or are they just a public relations tool?

This scepticism resurfaced recently when a prominent Thai conglomerate was named one of the world’s most ethical companies in 2024, despite public criticism about their operations.

These sustainability awards and ratings are sought after by the business sector because investors and creditors no longer solely focus on financial performance. Also important for them is business sustainability practice, referred to as ESG — short for environment, social, and governance.

A survey by the Thailand Research Development Institute (TDRI) showed a growing trend among companies listed on the SET100 Index between 2015 and 2021 to disclose more and more of their ESG data.

This is because they realise that corporate sustainability is an important factor in getting support from investors and financial institutions, as well as fostering cooperation between their business and society.

ESG data is also used to evaluate ratings and corporate sustainability awards from various institutions, domestically and internationally. These accolades have become indicators of success and are used to promote the company’s image. They are also used in the company’s internal communications to motivate their personnel to attain their sustainability goals together. However, there are growing concerns about data accuracy and data sources used for the assessment of these ratings and awards.

Ethisphere’s “World’s Most Ethical Companies” is among the awards facing questions.

This year, Ethisphere named 136 companies from 20 countries as the World’s Most Ethical Companies. But many questions surround its assessment. For instance, Elbit Systems of America has won this award six times, despite the fact that it is connected to Elbit Systems of Israel, which provides weapons and drones for use in warfare.

Ethisphere also charges high application and assessment fees of US$3,500–4,500 (129,600-166,600 baht) for the assessment. It also costs companies US$35,000 to use the award logo, which raises conflict of interest concerns about the assessing body.

Different corporate sustainability ratings and awards may have varying objectives. For example, the assessment by S&P for listing companies on the Dow Jones Sustainability Indices (DJSI), the assessment by The Stock Exchange of Thailand (SET) for Thai stocks’ ESG ratings, or the assessments by EcoVadis on business sustainability within value chains.

Besides assessments for such ratings, awards grading related to corporate sustainability have different assessment procedures and objectives. For example, the SET Sustainability Awards select companies that meet ESG ratings and seek additional information for a final decision. The SEAL Business Sustainability Awards, meanwhile, focus on environmentally friendly innovations or products and services based on sustainability practices.

Although some assessments seek information from different sources, some may rely on publicly available data from business organisations with additional self-reports, which makes it highly possible to omit negative business impacts.

In addition, some rating systems and awards do not clearly explain how they judge companies. They might also keep the details of their assessment criteria hidden from public access. As a result, this makes it difficult to see what part of ESG practice a company is doing well in or where they need to improve.

Some sustainability assessment bodies have attempted to overcome these limitations. For example, the DJSI assessment includes media and stakeholder analysis (MSA) to track negative news about these businesses and collect their responses and risk management with continuous follow-ups.

To ensure the accuracy and transparency of ESG ratings and methodologies, the European Union has set out rules to regulate ESG rating agencies operating in the EU, requiring them to get approval from the European Securities and Markets Authority (ESMA). If they give a single ESG rating number that combines different dimensions, they have to provide information on the weighting for each dimension.

Additionally, all other activities of rating agencies must be clearly separated from rating assessment activities to prevent conflicts of interest. Failure to comply with regulations may result in fines of up to 10% of revenue. These regulations aim to make ESG ratings as trustworthy as credit ratings.

These regulations might not entirely solve the problems of assessing corporate sustainability or the disparities between rating agencies. But knowing how assessments are done and how much each aspect of ESG practice counts could help people understand the data better.

So, ESG ratings or awards should not be accepted unquestioningly. It is important to look closely at how the assessments are made and how trustworthy the assessing institutions are. It is also useful to check the alignments or discrepancies of the assessment results with other information sources so that the results of these sustainability ratings and awards are not seen as a mere high-profile public relations tool, detaching from genuine corporate sustainability actions.

Writer :  Charika Channuntapipat, PhD, is a research fellow and Khajornphong Prasastranuvat is a researcher at the Thailand Development and Research Institute.

First Publish : Bangkok Post  24 April 2024