And so it is with corporate sustainability, a topic that Corporate Knights has been thinking about and measuring since 2005, when the first iteration of the Global 100 Most Sustainable Corporations ranking was released.

The Global 100 is not the only analytical framework for measuring corporate sustainability, but few can match its longevity, its commitment to transparency, or the credibility that it holds in both the sustainability and investment worlds.

The notion of measuring corporate sustainability is inherently challenging, but the intellectual and financial importance of carrying out this assignment has never been higher. While forecasts of any sort should be discounted with an appropriate degree of skepticism, one does not have to be a prophet of doom to recognize there are a great number of complex, systemic challenges on the horizon that businesses, governments and communities will have to manage. These include climate change, resource depletion, urbanization, population growth and rising fossil fuel prices.

Projects such as the Global 100, driven by company performance on a series of specialized environmental, social and governance metrics, provide first-level insight into how companies are exposed to these sorts of events.

As has been written about extensively by Corporate Knights, the Global 100 is, above all, an exercise in data. Companies are scored and ranked based on their performance on a suite of 12 metrics, each of which is quantitative in nature. Examples include a company’s revenue divided by its energy use, the total remuneration of a company’s CEO compared to the average salary across its workforce, or a company’s lost-time injury rate.

The Global 100 incentivizes disclosure and transparency; companies that measure their sustainability performance but stop short of publicly disclosing it will be at a disadvantage. Only data that is publicly disclosed – in annual reports, corporate sustainability reports or through other channels – can be used in the Global 100.

As might be expected, the methodology behind the Global 100 has evolved over the last 10 years. The reporting practices of the world’s publicly traded companies have changed dramatically since 2005, and the Global 100 has had to keep pace. For instance, an 11th indicator, Employee Turnover, was added in 2011, and a 12th, Pension Fund Status, in 2012. Other indicators, such as Leadership Diversity, have been refined over the years.

Despite this evolution, the singular objective of the Global 100 has remained constant – to identify the 100 most sustainable corporations on Earth.

Which brings us to the Class of 2014. Based on its strong across-the-board sustainability performance, Westpac Banking came out in top position. Headquartered in Sydney, Australia, Westpac is one of the largest banks in Australasia, with annual revenues of $42 billion and over 36,000 employees.

The Top 5 were rounded out by Biogen Idec, the U.S.-based biotech firm; Outotec, a Finnish mining technology and capital goods company; Norwegian oil giant Statoil; and Dassault Systemes, a French company that specializes in the production of 3D design software. The geographic and sector diversity of the Top 5 is a clear sign that the drive to do business more sustainably is not specific to particular regions or industries. It’s a global, multi-sector response to global challenges with economy-wide impacts.

Still, some countries do stand out. Perhaps the most striking feature of the 2014 Global 100 is the concentration of U.S. and, to a lesser extent, Canadian companies. There are 18 U.S. companies in the 2014 class, up from 10 in 2013. Canadian companies trail slightly with 13, up from 10 a year ago.

What makes this latest distribution interesting is that the U.S. and Canada significantly outperformed – or out-represented – a large number of sustainability heavyweights, including the United Kingdom (8), Germany (7), Sweden (5) and Denmark (1). There’s no indication that U.S. or Canadian companies benefited from any specific government policies, which shows that companies can (and do) push for sustainability excellence in the absence of policy incentives.

Corporate sustainability will always be a challenging concept to measure, and management teams will commit to improving corporate sustainability performance for many different reasons, including hard ones (reduced costs or higher revenues) and soft ones (improved brand and corporate reputation). But we can be sure that over time, with access to more and better data, we will come closer to identifying what it means to operate as a sustainable business.

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Westpac Group is Australia’s oldest bank – in fact, one of the country’s oldest companies with roots tracing back to 1817. Its latest annual report boasts that between 2012 and 2013 its customer base rose from 11.8 million people to 12.2 million, its profits climbed from $5.97 billion Australian to $6.82 billion, and its return on equity increased from 14 per cent to 15.4 per cent.

But it also notes that the bank’s emissions from in-house activities and energy purchases in Australia and New Zealand fell from 183,937 tonnes CO2-equivalent to 180,862 tonnes, while its total indirect emissions (excluding energy purchases) were reduced from 91,855 tonnes to 85,013 tonnes. At the same time, the use of office paper fell from 1,579 tonnes to 1,523 tonnes.

Westpac is not perfect – the percentage of its pre-tax profits going to community investment dropped from 1.5 in 2012 to 1.33 in 2013 – but it has demonstrated its ability to challenge itself, measure its progress and provide transparency in terms of both its successes and shortcomings.

In 1992, Westpac became the first of Australia’s four major banks to publish an environmental policy. In 1997, it was the first to create a formal community-volunteering program, and in 2001 it established a board committee dedicated to sustainability. A year later, the bank became the first of its peers to publish a sustainability report and to establish a sustainable supply chain policy. It endorsed the UN principles for responsible investment in 2007, and in 2008 launched a five-year climate change strategy.

These actions have produced results. Between 1996 and 2008 the bank reduced its emissions by more than 40 per cent. It recently became a carbon-neutral operation.

Last February, after much thought, Westpac took its sustainability ambitions a step further and launched a new strategy for 2013 through 2017 that includes 10 measurable goals in what it deemed to be three areas of priority: improving the way people work and live, finding solutions to environmental challenges, and helping customers to have a better relationship with money.

The resulting “sustainability scorecard” for the coming years was the outcome of much brainstorming and work by both the bank’s sustainability people and its senior leaders.

“It was time to really take it up to the next level and look at the future and understand what are the emerging issues,” says Siobhan Toohill, Westpac’s head of sustainability.

The work involved a thorough assessment of what Westpac sees as the key issues that will emerge over the next 30 years. The 10 objectives it set include extending the length and quality of working lives, anticipating the future needs of aging and culturally diverse customers, providing products and services to help customers adapt to environmental challenges, and increasing lending and investment in clean technology and environmental services.

Westpac is already making progress toward its new goals. The proportion of women in its leadership ranks has risen to 42 per cent, up from 40 per cent in 2012 and 35 per cent in 2010. It has earmarked $6 billion for lending and investment by 2017 in clean technology and environmental services (including renewable energy, water efficiency and waste management activities), which amounts to a doubling of its current investment in the sector. And it has recently introduced new technology to further reduce wasted printed paper.

The bank is now trying to lower its electricity consumption at both its retail and commercial sites by 10 per cent per square metre, make its data centres more efficient and increase the recycling rate at its head office in Sydney to 75 per cent. It is also at the forefront of the burgeoning social investment sector, and has begun spending much time on social impact evaluation.

Westpac recently led a consortium with the Commonwealth Bank of Australia and the Benevolent Society (Australia’s first charity) that won a tender from the New South Wales government to issue a $10-million five-year social benefit bond.

Funds from the bond, issued in early October, have been used to create a service called Resilient Families, which will seek to reduce the number of children who wind up in foster care. The senior tranche of the bond will return anywhere from zero to 10 per cent per year, depending on how successful the program is at preserving families, with the returns being paid from the funds the government will save on foster care.

“We see this broader area around impact investing growing, and we’re excited to be at the front end of helping to design initiatives,” Toohill says.

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How is the Global 100 determined?

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Against this backdrop, our approach is simple – we unpackage “corporate sustainability” into its component parts, and stick to the numbers.

Qualifying Global 100 companies are scored on a percent rank basis against their global industry peers on a list of twelve quantitative key performance indicators that run the gamut from energy and water use, to employee compensation and corporate tax strategy.

Because the indicators are quantitative and clearly-defined, the results of the Global 100 are objective and replicable. The Global 100 follows a rules-based construction methodology and is more akin to a financial index than many other “sustainability” indices.

The Global 100 starting universe

All publicly traded companies with a market capitalization of at least US$ 2 billion are automatically considered in the Global 100 starting universe. Market capitalization data is taken each year on October 1st.

First Screen: sustainability disclosure

The first screen eliminates companies that are not keeping pace with the sustainability reporting trends in their specific industry. Companies that fail to disclose at least 75% of the “priority indicators” for their respective GICS Industry Group are eliminated at this point in the project.

A priority indicator is any of the 12 key performance indicators (KPIs) that are disclosed by at least 10% of all large companies in a given GICS Industry Group. Large companies are defined as those with a market capitalization of at least US$ 2 billion.

For example, if there are 250 large companies in the Automobiles & Components GICS Industry Group, and 25 of these companies are found to disclose energy use, then Energy Productivity becomes a priority indicator for companies in the Automobiles & Components Industry Group.

Companies classified in Industry Groups where all 12 KPIs are priority indicators will need to disclose at least 9 (12 x 75% = 9) KPIs in order to pass this screen.

The list of priority indicators for each GICS Industry Group for the 2014 Global 100 ranking can be found here.

The list of priority indicators may change in the future as disclosure practices evolves.

Second screen: F-Score

The Piotroski F-Score consists of nine individual tests. Each test scores one for a pass and zero for a fail. The tests are:

1. Net profit is positive;
2. Operating cash flow is positive;
3. Net profit ÷ total assets at beginning of year, minus the same number for the previous year is positive;
4. Operating cash flow is greater than net profit;
5. Long term debt ÷ by average assets has not increased;
6. The current ratio has increased (the change is more than zero, so even a negligible increase passes the test);
7. No raising of ordinary (common) equity over the previous year: this test is passed if the company did not issue any ordinary shares (excluding shares from dividend reinvestment plans);
8. Gross margin has improved over the previous year; and
9. Asset turnover has increased.
10. Companies have to score at least 5 to pass this screen.

Third screen: product category

Companies with a GICS Sub-Industry classification equal to “Tobacco” are eliminated. Companies with a GICS Sub-Industry classification equal to “Aerospace & Defence” are revenue tested; if a company derives a majority of its revenue from its Defence business group (e.g. weapons manufacturing), it is eliminated.

Fourth screen: sanctions

Companies that remain in contention after the first three screens are 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 during the 12 months period prior to October 1st of the year is found to be in the bottom quartile compared to GICS Industry Group peers, the company is removed from the Global 100.

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.

For example, Company X was originally fined US$ 1 million in June 2010 for violating environmental laws in the United States. The United States courts rejected Company X’s appeal in November 2012 but agreed to reduce the fine to US$ 500,000. In that situation, it is definitive that Company X will have to pay the fine of US$ 500,000.

If Company X’s total revenue for the 12 month period from October 2012 – September 2013 was US$10 million, the fine of US$ 500,000 would represent 5% of the company’s total revenue in 2012. This ratio would then be compared against the figures for other GICS Industry Group peers. If Company X’s ratio is found to be in the bottom quartile, Company X will be removed from the Global 100 process.

The only exception to this analysis is that companies that were part of the most recent Global 100 ranking are subjected to this test on a trailing two year basis.

Previous year Global 100 constituents

Global 100 companies from the previous year are added if they are not in the bottom quartile of their GICS Industry Group on the Fourth Screen (Sanctions).

The Global 100 shortlist

Companies that successfully pass all four screening criteria form the Global 100 Shortlist. It is at this point in the process that the 12 KPIs for which the Global 100 is known are introduced. All companies on the Shortlist are scored on a percent rank basis against their global industry peers on the priority KPIs for their respective GICS Industry Group.

Each company in the Shortlist is assigned an overall score, which is an average of the scores on each priority KPI. If a company does not disclose the required data fields for a priority KPI to be calculated, the company scores a “0″ on the priority KPI. This creates a scoring incentive for companies to disclose all of the priority KPIs for their respective GICS Industry Group.

The Global 100

The Global 100 consists of the companies with the top overall score in each GICS Sector. In order to match the industry composition of the benchmark, each sector is assigned a fixed number of slots in the Global 100. For instance, if 10% of the MSCI ACWI consists of Financial sector companies (on a market capitalization-weighted basis), 10 positions in the Global 100 would be reserved for Financial companies.

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Below we explain the rationale and measurement process for each KPI:

Energy productivity

In just about every jurisdiction on Earth, energy costs are rising.  Prices are also becoming much more volatile, making it more difficult for companies to manage their energy strategy.  This metric looks at how much revenue companies can squeeze out of every unit of energy they use, and shows which companies are best able to adapt to our changing energy future.

Equation: Revenue ($US) / Energy use (Gigajoules)

Carbon productivity

Greenhouse gas (GHG) emissions are increasingly being priced and regulated, creating new types of financial costs and benefits for affected companies.  This metric divides a company’s total revenue by total GHG emissions, and gives us a sense of how companies are exposed to the new GHG regulatory environment.

Equation: Revenue ($US) / Greenhouse gas emissions (Greenhouse gas protocol Scopes 1 +2)

Water productivity

For far too long, water has been an afterthought in conventional business planning.  Not any more. Water scarcity has become a bona fide board room issue, especially in heavy industries such as Mining.  This indicator divides revenue by water withdrawal, providing a first level measure of how well-positioned companies are to respond to water scarcity challenges.

Equation: Revenue ($US) / Water withdrawal (cubic metres)

Waste productivity

While less financially relevant than energy, carbon or water, waste is an increasingly important environmental indicator in its own right.  With tightening disposal standards, growing land use pressures and rising transportation costs, smart companies are finding ways to recycle their waste stream, creating additional revenues and reducing costs. This metric divides revenue by total non-recycled waste, and helps identify companies that are managing their waste intelligently.

Equation: Revenue ($US) / Non-recycled/reused waste generated (metric tonnes)

Innovation capacity

In many industries, markets are won and lost based on knowledge resources, including a pipeline to channel ideas into new products and services.  This metrics looks at the amount of money companies are investing in R&D as a percentage of their revenue.  It is one of several measures that can be used to identify knowledge champions.

Equation: R&D Expenses / Revenue

Percentage tax paid

Authorities are increasingly eliminating loopholes that allow corporations to legally circumvent their tax obligations, and resulting changes to the tax code can hit companies hard.  The metric measures the amount of tax that companies pay out as a percentage of their EBITDA (for financial services companies, operating income). Companies that perform favourably on this metric may be better positioned to withstand the tightening of global tax policy.

Equation: Cash tax / EBITDA (for financial services companies, operating income)

CEO to average worker pay

Employee morale and productiveness can be adversely affected if the gap between employee and CEO remuneration is unusually large relative to industry norms, especially in an age of rising competition for human capital.  This metric compares total CEO compensation to average employee compensation, and identifies companies with a horizontally integrated remuneration framework.

Equation: Total CEO Compensation / (Total wagebill / Number of employees)

Pension fund status

Corporate pension plans – including defined benefit and defined contribution plans – can play an important role in attracting and retaining top employees.  A deeply underfunded corporate plan, or the absence of a plan in an industry or country where corporate plans are common, can have deleterious effects on corporate competitiveness.  This metric analyzes the performance of corporate pension plans by dividing a plan’s unfunded liabilities by market capitalization.

Equation: (Defined benefit pension plan assets – defined benefit pension plan obligations) / total assets OR defined contribution expense / total assets

Safety performance

Companies with an unusually high number of fatalities or an abnormally high lost time injury rate compared to sector norms could be suffering from inadequate management systems, or generally poor management focus. This metric helps us identify companies with best-in-class health & safety performance.

Equation: Number of fatalities (absolute) and number of lost time incidents (per 200,000 employee hours)

Employee turnover

This metric measures employee turnover, which refers to the rate at which companies lose their employees.  A high rate of employee turnover relative to industry norms can signal an inadequate human capital strategy, which can reduce corporate profitability.

Equation: Number of departures / Average total employees

Leadership diversity

This metric measures the gender diversity of a company’s board of directors and senior management team. A growing body of evidence suggests that diverse boards and management teams can have positive effects on a company’s financial and stock price performance.

Equation: Female representation on the Board of Directors and Executive Management team

Clean capitalism pay link

This metric singles out companies that have a link between their sustainability performance and the remuneration of their senior executives. This test can help identify companies that incentivize management support of sustainability commitments and performance targets.

Equation: Mechanisms that link Executive Management compensation to corporate sustainability performance

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Global Head Responsible Investment, Mercer Investment Consulting

Aron Cramer

Chief Executive, Business for Social Responsibility

Paul Dickenson

Chief Executive, Carbon Disclosure Project

Dr. Tessa Hebb

Director Carleton Centre for Community Innovation

Karl-Henrik Robert

Founder, Natural Step

Ernst Ligteringen

Chief Executive, Global Reporting Initiative

Jim MacNeill

Director of Environment at OECD in Paris (1978-1984), Secretary General of the World Commission on Environment and Development (Brundtland Commission)

Simon Zadek

Senior Fellow at the Global Green Growth Institute and the International Institute of Sustainable Development

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It is maintained by Corporate Knights, a Toronto-based media and investment advisory company.  The media arm publishes Corporate Knights Magazine, the world’s largest circulating magazine focused on responsible business. The investment advisory arm, Corporate Knights Capital, builds indexing solutions and market-beating portfolios for institutional clients.

The Global 100 is calculated by Solactive, the German index provider.  It is available on Bloomberg under the ticker <CKG100 Index> and on Reuters under the ticker <.CKG100>.

Fast facts

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