Mountain Equipment Co-op (MEC), the clothing and sporting equipment retailer, deserves plaudits for achieving the top overall score in this year’s Best 50. Remarkably, MEC came in with top quartile performance on six metrics, including carbon productivity, waste productivity and CEO-average employee pay.

While the Best 50 consists of organizations from many different sectors, companies are only ever scored against their industry peers. It is not until the final step in the process, when companies each have an overall score based on their performance against their global industry peers, that they are amalgamated. This approach lets us consider each company against the best practices, expectations and performance standards that are prevalent in their particular industry group.

The industry-specific nature of the Best 50 means that it can be interpreted in different ways. For instance, BCE, while placing 17th overall, was the top performing telecommunications company considered in this year’s ranking, placing well ahead of industry peers Telus (28th overall) and Rogers Communications (37th overall). This means BCE is at or near the top of its industry in overall sustainability performance, but significantly trails best practice among Best 50 firms in absolute terms.

In another interesting twist, Loblaws inched into this year’s ranking, placing 50th overall. But it was actually the highest ranked company within the consumer staples sector, placing above such peers as La Coop fédérée (63rd position), Sobeys (76th position) and LCBO (84th position). This tells us that the consumer staples sector has a relatively low sustainability performance bar, and that companies in this sector can stand out from their peers with comparatively modest improvements in corporate sustainability performance.

The nine “sector leaders” in this year’s Best 50 were MEC (consumer discretionary), Loblaws (consumer staples), Husky Energy (energy), Vancouver City Savings Credit Union (financials), Bombardier (industrials), Celestica (information technology), Teck Resources (materials), BCE (telecommunication services) and Capital Power (utilities).

If these sector leaders and the rest of their Best 50 brethren stand up as Canada’s “best of the best” in overall sustainability performance, it is worth considering whether the best are getting better.

A quick comparison between this year’s Best 50 and last year’s cohort shows that performance on most indicators is essentially flat, although notable improvements were made on several natural resource-based metrics. Admittedly, a single year-over-year comparison is hardly indicative of long-term trends, but this analysis still serves to show where Canada’s most sustainable companies are veering, and where future weaknesses may lie.

The average Best 50 company last year had a 9.6 per cent employee turnover rate, a CEO-average worker pay ratio of 73:1, executive management diversity of 21 per cent, board diversity of 20 per cent and innovation capacity of 1 per cent.

The typical Best 50 firm this year had a strikingly similar profile, with 10.1 per cent employee turnover, an 88:1 CEO-average worker pay ratio, executive management diversity of 22 per cent and identical figures for board diversity and innovation capacity.

While longitudinal analysis would be needed to identify any long-term trends, this comparison shows that the Best 50 may be approaching performance thresholds on these particular indicators.

Among metrics that are generally more volatile, a notable improvement came with carbon productivity. Compared to the average Best 50 firm last year, the average Best 50 firm from this year’s class generated 21 per cent more revenue for every tonne of CO2-equivalent emissions from their operations. The financials sector led the way, with companies such as HSBC Bank Canada squeezing an additional $54,000 in revenue out of every tonne of emitted carbon, which, in the case of banks, comes largely from the heating and cooling of their buildings.

The Best 50 is the corporate sustainability “ranking of record” in the Canadian market, and has been embraced by the business community because of its objectivity and transparency. We look forward to welcoming next year’s class and monitoring the ongoing performance of this group of recognized sustainability leaders.

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He points to the tragic collapse in April 2013 of Rana Plaza in Dhaka, the capital of Bangladesh, in which more than 1,100 garment factory workers were killed. In the months that followed there was a consumer outcry, as westerners came to terms with the working conditions in the places where much of our clothing is made. But Bangladesh did not export less clothing during the remainder of that year.

“The Rana Plaza issue did not impact their exports – in fact, they went up,” Labistour says. “I think there’s a huge disconnect between what consumers say and how they react on social media versus how they actually act in their daily lives… I never operate from the point of view that the consumer is going to buy stuff from you because of sustainability attributes.”

And yet MEC places such an emphasis on sustainability that it received the top spot on this year’s Corporate Knights ranking of the Best 50 Corporate Citizens in Canada, its second 1st place ranking since first appearing on the Best 50 in 2007. MEC outshines its retailing peers when it comes to areas such as carbon productivity, the percentage of women in senior management, and the ratio of the CEO’s pay compared to that of the company’s average worker.

So why does it embrace sustainability, if not to appeal to consumers?

“It’s just smart business,” Labistour says. “Resources are becoming more expensive, local communities are railing against toxicity from the factories in their neighbourhoods, water is becoming a real commodity that we have to watch.”

Staying ahead of the curve on these issues not only bolsters efficiency but helps minimize a company’s future risks, he suggests. For example, “governments are now bringing in packaging taxation, and people that are ahead of that game and legislation are going to be more efficient businesses in the long term,” he says. “So for me, this is not the right thing to do, it’s the smart thing to do.”

In an era of extreme business complexity, Labistour is a fan of breaking down barriers so that the company can run as an organic whole. “You can no longer run your business in silos,” he says.

That means, for instance, that information technology, financing and marketing should be working symbiotically. And it means that sustainability should be integrated, not separate.

“We don’t have a ‘sustainability person’ who is responsible for waste diversion in stores. It’s part of the standard operations of the organization,” Labistour says. “It’s the integration of these deliverables within everyone’s job descriptions – whether you’re getting better at waste diversion, or getting better at meeting the customer’s expectations, or becoming more efficient in your supply chain, it’s all part and parcel of trying to be a better business.”

By embedding sustainability in everyone’s jobs, it becomes “operational dial tone,” he adds. “You always hit problems on the way, whether it be legislative changes or process changes that you bump up against. But if it is part of someone’s job description and it is something that is part of general performance delivery, you work your way around it.”

Labistour credits the diversity within the organization’s ranks for making meetings more fruitful than they might otherwise be. Forty-four per cent of MEC’s executives and directors were women in 2012. “It’s not just physical diversity, it’s diversity of thought,” he says. “You have a much stronger discussion, and you come to much richer results.”

The outdoor goods retailer, which has more than 3.5 million members, updated its five-year business sustainability strategy in 2012, focusing on four pillars: product integrity, retail operations, member service, and community.

Labistour believes one of the company’s biggest sustainability achievements is also one of its least recognized, and that’s the fact that more than half of its MEC-brand apparel materials are bluesign approved. The bluesign system looks at the use of sustainable ingredients and the production process in the textile industry and is based on five principles: resource productivity, consumer safety, water emission, air emission, and occupational health and safety.

The accomplishment, however, that brings the biggest smile to Labistour’s face is the way MEC now reports its sustainability achievements and goals. “For me, the thing I’m most proud of is the fact that our year-end report this year will be an integrated business and sustainability report,” he says.

That’s in keeping with his philosophy about breaking down silos and ensuring that sustainability permeates the organization. “We’ve still got a way to go, it’s not going to be perfect, but it’s the first one.”

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Should this have affected whether or not these companies are considered for the Best 50 Corporate Citizens in Canada ranking?

Balancing our desire to measure companies from an environmental, social and governance standpoint with the limitations of measurable data is a constant struggle for the CK Capital research team. Being reliant on publicly disclosed indicators allows for comparisons between industry peers, rewards companies for their transparency and sets simple benchmarks for measuring progress over time. It also means that our definition of what constitutes a top corporate citizen is somewhat constrained.

Flagship Corporate Knights rankings like the Best 50 will continue to be product agnostic, working to identify the best corporations in each sector regardless of the merits or impact of that specific industry. To supplement this, however, we have decided to institute a sanctions screen involving each company considered for inclusion.

This screen is applied by tallying up the sum total of sustainability-related fines, penalties and settlements paid out by each corporation over the past year. If this amount is in the top 25 per cent of fines paid (compared to other companies in that specific industry group), the company is eliminated from contention on the Best 50.

Fines, penalties and settlements have been added to our Best 50 toolkit because they capture, in part, different aspects of corporate performance. There are many ways wherein a company can perform well on our 12 indicators, yet still act as a poor corporate citizen. Corporate Knights has long written about these issues from an editorial standpoint, but many of these factors – human rights violations, bribery, monopolistic practices – do not easily lend themselves to objective measurement. The addition of the fines screen for the Best 50 ranking is part of an ongoing effort to expand the scope of the methodology.

As a result, four companies were excluded from the list this year: Agrium, PotashCorp, Barrick Gold and Industrial Alliance. Potash and Agrium were disallowed due to their participation in the antitrust settlement, while Industrial Alliance paid a $165,000 fine to Quebec financial regulators for alleged sales violations. Even though the sum paid by Industrial Alliance was itself quite small, when contrasted against fines paid by other insurance companies in 2013 it grew in significance.

The case of Barrick Gold is perhaps the most interesting, as the firm placed fourth in last year’s Best 50 ranking. Its disclosure record remains impressive, while its resource productivity indicators are among the leaders in the materials industry group. In spite of that, our new screen identified several large environmental fines levied against the firm in 2013.

Three gold mines in northern Nevada – all subsidiaries of Barrick – were ordered by the U.S. Environmental Protection Agency to pay $618,000 for neglecting to disclose multiple toxic chemical releases from 2005 to 2008. A portion of that money will be donated to an environmentally beneficial project.

In Chile, Barrick’s troubled Pascua-Lama gold project suffered yet another setback when the Chilean environmental regulator ordered the project suspended last May. It followed on the heels of an earlier court ruling making the same recommendation. The regulator also fined Barrick $16 million for what it deemed to be “serious environmental violations” that negatively impacted local water supplies. Barrick managed to have the amount reduced 25 per cent by making quick payment.

Screening Canadian companies based on financial penalties paid out over the past year is far from perfect. It places faith in a range of different regulations from varying jurisdictions, which are often inadequate or unevenly enforced. Another constraint is the need to wait until the amount is definitive. Only after all potential avenues for appeal have been exhausted can Corporate Knights consider the penalty in question.

Even with these caveats, Corporate Knights remains convinced that this new addition to the methodology adds a valuable dimension to our ongoing evaluation of corporate sustainability performance.

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These companies are then subjected to the sanctions screen, which looks at the dollar amount that companies have paid out on a trailing one year basis in sustainability-related fines, penalties or settlements.

If the total amount of a company’s fines, penalties and settlements as a percentage of total revenue since Jan. 2013 is found to be in the bottom quartile compared to GICS Industry Group peers, the company is removed from Best 50 contention.

The sanctions screen only considers monetary fines, penalties and settlements that are definitive i.e. the company has reached a point where all possible options have been exhausted and it has no other choice but to pay the set amount. Therefore, amounts associated with legal claims are not considered.

The methodology for the 2014 Best 50 Corporate Citizens of Canada is based on 12 key performance indicators (KPIs) covering resource, employee and financial management. All information is derived from publicly-disclosed data. All eligible entities are contacted for data verification prior to project completion.

1. Energy productivity: Revenue per gigajoule of energy consumption.

2. Carbon productivity: Revenue per metric tonne of direct/indirect GHG emissions.

3. Water productivity: Revenue per cubic metre of water withdrawal.

4. Waste productivity: Revenue per metric tonne of waste produced.

5. Percentage tax paid: Taxes paid in cash, as a percentage of EBITDA, trailing over the past 5 years.

6. Leadership diversity: Percentage of women on board of directors and in executive management.

7. Clean capitalism pay link: At least one senior executive’s compensation tied to clean capitalism-themed performance targets.

8. CEO-to-average worker pay link: How much more CEO gets paid (expressed as a multiple) compared to average worker.

9. Safety performance: Lost time injury rate and number of fatalities/number of employees.

10. Innovation capacity: R&D expenditure as a percentage of revenue, trailing over the past three years.

11. Employee turnover: Number of departures/average employee compensation.

12. Pension fund status: Unfunded liabilities at year end 2012 by market capitalization are divided by market capitalization at year end 2012, or expenses towards defined contribution plans.

The top foreign corporate citizens methodology

The Top Foreign Corporate Citizens represent corporations with substantial operations in Canada who are leading the way on corporate citizenship and have their main headquarters in another country. Companies must earn more than $1 billion/year in Canada, and the parent corporations must have qualified for CK’s 2014 Global 100 Most Sustainable Corporations in the world shortlist.

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