The landmark China-U.S. climate change agreement, rising awareness and interest in the concept of “unburnable car­bon,” and global momentum behind carbon pricing mean increased risk for organiza­tions with low carbon productivity.

At the same time, populist anger is es­calating against corporations that avoid paying taxes in countries where they oper­ate, whether legal or not. British lawmakers, for example, are toying with the idea of a “Diverted Profits Tax” that would charge a 25 per cent tax rate on profits declared or discovered as diverted.

The Boardroom Accountability Project, spearheaded by New York City comptrol­ler Scott Stringer, has rallied some of the largest pension funds in the United States to pressure large companies in their port­folios to embrace a longer-term perspective regarding executive compensation, board diversity and climate change issues.

The list goes on.

Faced with these increasingly mate­rial trends, leading companies around the world have taken remarkable action to get their proverbial house in order.

For Unilever chief executive Paul Pol­man, whose company is ranked 22nd in this year’s Global 100 ranking, it’s the only choice available.

“Companies that understand this and become part of the solution will have a bright future,” he told a business audience in Toronto last year. “Those that don’t will be dinosaurs – outdated, outmoded and out-of-business.”

Topping the Global 100 Class of 2015 is Biogen, a Massachusetts-based biotechnol­ogy firm that finished second last year (click here to see the company profile).

Biogen edged out fellow American pharmaceutical company Allergan, which found itself in second place in its Global 100 debut. German sportswear company Adidas finished third, followed by Singa­porean real estate corporation Keppel Land and Finnish retailing conglomerate Kesko, which complete the top five.

A careful examination of the results demonstrates that no single sector has a monopoly over corporate sustainability leadership. Each company in the top 10 rep­resents a different GICS Industry, with 42 separate industries represented throughout this list.

Patterns do begin to emerge, however, once the list is broken down by country. Ju­risdictions known as sustainability heavy­weights outperform other similarly sized countries, a group that includes Germany (with five companies on the list), Sweden (four), Norway (three), Netherlands (three) and Denmark (three).

The United States, with 20 compa­nies on the list, had its best showing in the 11-year history of the Global 100. The impressive economic per­formance of the American economy in the face of global headwinds likely played a factor here.

The Global 100, in part, rewards corporations that maximize value cre­ation from scarce resources (click here to see the full methodology, click here to see the Global 100 financial performance). It does so by calculating resource productivity for water, waste, carbon and energy.

This means that when economic fortunes decline and a company fails to make the necessary adjustments, resource productivity suffers. This same phenomenon contributed to the presence of only one Japanese firm on the ranking this year, despite being the third-largest economy in the world.

Perhaps the most interesting pat­tern emerges when one begins to ac­count for the impact of substantial domestic regulatory shifts around cor­porate social responsibility reporting. The Global 100 ranking is structured to reward the transparent disclosure of sustainability data almost as much as the actual performance of individu­al companies.

Both France (12) and Singapore (four) have taken bold steps in recent years to expand CSR reporting prac­tices through a mix of voluntary and mandatory requirements.

“French lawmakers, through provi­sions in the Grenelle II Act, have had a real impact on reporting practices within France,” says Corporate Knights Capital lead analyst Michael Yow. “Sin­gapore, meanwhile, has gradually tight­ened reporting guidelines towards obligatory sustainability reporting, which is expected sometime in 2017.”

China’s continued weak showing in the Global 100 could be seen as evi­dence of complacency regarding corpo­rate sustainability, but separate research conducted by CK Capital suggests that Chinese disclosure practices are im­proving dramatically.

The Corporate Knights Capital 2014 Sustainable Stock Exchange Report documented rapidly improv­ing levels of sustainability disclosure at Chinese companies listed on the Shanghai Stock Exchange over the past five years. Based on this finding, it’s reasonable to expect that a Chi­nese breakthrough on the Global 100 is likely to occur in the near future.

What’s certain is that industries are changing in a positive way. Leaders one year cannot afford to rest on their laurels as once sleeping rivals wake up to the importance of improving, mea­suring and disclosing sustainability performance. The fact that 34 compa­nies on the Global 100 are new to the list this year, including three newcom­ers to the top 10, illustrates this well.

Simply put, more companies are realizing that they won’t rank if they don’t reveal, and this has made the Global 100 an increasingly competi­tive place to be.

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The Global 100 index (which is equally weighted) commenced on February 1, 2005. From inception to December 31, 2014, it delivered a total return of 90.76%, compared to 96.98% for its benchmark, the MSCI All Country World Index. This is the first year-end that the Global 100 Index has fallen behind its benchmark, in large part due to the rising U.S. dollar, as 81 per cent of Global 100 constituents trade in non-US denominated currencies, versus approximately 50% for the MSCI ACWI. 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>.

It is maintained by Corporate Knights, a Toronto-based media and investment advisory company. The investment advisory arm, Corporate Knights Capital, builds indexing solutions and market-beating portfolios for institutional clients.

To learn more how Corporate Knights Capital’s investment sub-advisory services can work for you, please contact CK Capital at capital [@] corporateknights.com.

To learn more about the Global 100 Index, sustainability research and benchmarking services, please contact Michael Yow at global100 [@] corporateknights.com

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Even so, Biogen chief executive George Scangos isn’t resting on those laurels in 2015. “What we need to do is take a look at where we are and see how can we do sus­tainability better than that five years from now, and five years after that,” Scangos said in an interview. “We’re on track to do that.”

Founded in 1978 in Geneva, Switzerland, Biogen is a global biotechnology player now headquartered in Cambridge, Massachu­setts. The company develops medicines for people with neurodegenerative diseases, hematological conditions and autoimmune disorders. While its business has grown sig­nificantly over the years – it generated $6.9 billion in revenues in 2013, up 26 per cent from just a year earlier – so has its attempt to make its operations more energy efficient and its workforce more diverse.

It started in 2008 when the company be­gan taking a more holistic approach to sus­tainability performance. “That’s when we recognized we needed to become more for­mal around the sustainability management issues,” said Hector Rodriguez, Biogen’s senior director of environmental health, safety and sustainability.

Among its environmental strengths to­day: the company relies on less energy than most of its 171 industry peers for each dol­lar of revenue it generates, and has steadily improved in this area each year since 2011. It helps that all four of the company’s newest buildings constructed over the past several years have each been gold- or platinum-level LEED certified. Other “non-sexy” improve­ments that have cut energy use, Rodriguez explains, include a $1.5 million chiller unit and a $13 million cogeneration system that creates electricity without tapping into the local grid. The latter had a payback through energy savings of just three years.

At the same time, Biogen has reduced water intensity by 66 per cent from its 2006 baseline – a record for the company despite its expanding operations. Certain invest­ments have helped on this front, such as a condensate water reclamation system in Cambridge that recovered around 2.4 mil­lion gallons of water in 2013 and saved an estimated $47,000 worth of municipal water.

Some water is also being reused for cleaning purposes or even irrigation, all of which boosted Biogen’s water productivity score this year. And expect more improve­ments later in 2015, which is when the com­pany says it plans to release a new water in­tensity goal.

But like all of its competitors in this year’s Global 100, Biogen didn’t excel in each of the dozen indicators used to assess sustainability performance. While three of the company’s 11-person board, or 27 per cent, are women and puts Biogen among the higher-ranked businesses in this sector, only two out of 12 (or 17 per cent) of its se­nior executive team is made up of women. “We’re not where we should be,” Scangos said. “We’re working on it.”

Meanwhile, his compensation compared to the average worker’s pay was among the worst ratios in this industry, a matter he de­clined to comment on. “It’s very unlikely to have a company that’ll score the best pos­sible score on every metric,” said Michael Yow, lead analyst at Corporate Knights Capital, a division of Corporate Knights. “It’s a question of balance.”

On the issue of diversity, Biogen con­tinues to push. The number of company employees made up of women, veterans, as well as lesbian, gay, bisexual and trans­gender individuals has increased since the company launched its Diversity + Inclusion Strategic Council about three years ago. To help elevate some female workers to the next level, the company is launching two separate leadership-training programs in 2015 – one with Babson College in Welles­ley, Massachusetts, and the other with D.C.-based George Washington University.

This year also marks the first year Biogen plans to participate in Edge, a global busi­ness certification standards program that en­gages corporations in fostering equal career opportunities for both men and women. “We may score well, or poorly, but we’ll find out where we stand,” said Ken DiPietro, Biogen’s executive vice-president of human resources. “That’s the basis of getting better.”

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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 index is maintained by maintained by Corporate Knights research group.

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.

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.

Corporate Knights Notice and Disclaimer

This document and all of the information contained in it, including without limitation all text, data, graphs, charts (collectively, the “Information”) is the property of Corporate Knights Inc. known herein as “Corporate Knights” and is provided for informational purposes only. The Information may not be modified, reverse-engineered, reproduced or redisseminated in whole or in part without prior written permission from Corporate Knights.

The Information may not be used to create indexes, databases, risk models, analytics, software, or in connection with the issuing, offering, sponsoring, managing or marketing of any securities, portfolios, financial products or other investment vehicles utilizing or based on, linked to, tracking or otherwise derived from the Information or any other Corporate Knights data, information, products or services.

The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information. CORPORATE KNIGHTS DOES NOT MAKE ANY EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION (OR THE RESULTS TO BE OBTAINED BY THE USE THEREOF).

Information containing any historical information, data or analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. Past performance does not guarantee future results.
None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), any security, financial product or other investment vehicle or any trading strategy.

The Information may contain back tested data. Back-tested performance is not actual performance, but is hypothetical. There are frequently material differences between back tested performance results and actual results subsequently achieved by any investment strategy.

Constituents of Corporate Knights equity indexes or stock lists are listed companies, which are included in or excluded from the indexes or lists according to the application of the relevant methodologies. Accordingly, constituents in Corporate Knights equity indexes or lists may include Corporate Knights, clients of Corporate Knights or suppliers to Corporate Knights. Inclusion of a security within a Corporate Knights index or list is not a recommendation by Corporate Knights to buy, sell, or hold such security, nor is it considered to be investment advice.

Corporate Knights receives compensation in connection with licensing its indexes to third parties. Corporate Knights Inc.’s revenue includes fees based on assets in Index Linked Investments.
Any use of or access to products, services or information of Corporate Knights requires a license from Corporate Knights. Corporate Knights brands and product names are the trademarks, service marks, or registered trademarks of Corporate Knights and its subsidiaries in Canada, United States and other jurisdictions.

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Corporate Knights a metrics misfire

Saturday, January 24, 2015

Ottawa — In broad strokes, a business is sustainable across any period of time if the rate of use of its total stock of resources is equal to or less than the rate of resource-use required to sustain it. As obvious as these comments appear, they are almost always neglected in contemporary measures of sustainability.

The most recent neglect is illustrated in the metrics of Corporate Knights’ “Global 100 Most Sustainable Corporations,” which came with The Globe (Jan. 21).

It is important to find reliable and valid metrics of sustainable businesses. Even more importantly, we must find measures of a good quality of life. To set the search for such measures going down the right path, we must identify and abandon dead ends such as the Knights’ metrics.

Alex C. Michalos, Ottawa

We do the best with what we have

Saturday, January 31, 2015

Toronto — Re: Corporate Knights a metrics misfire (Jan. 24): While we wish there were perfect data sets for a company’s resource footprint against its claim to a geographic region’s ability to sustain it, down here in the corporate trenches, we have to work with the data that is actually available.

The good news is that the majority of the biggest companies do now report basic metrics, which makes it possible for us to rank who is most efficient with carbon, energy, water and waste.

And as there are now historical data series, we also evaluate how quickly companies are improving their resource efficiency – or not – over time. It is this latter metric that gives us valuable insight as to whether Global 100 companies are part of the solution for our civilization to live within our planetary carbon budget.

Rather than letting the perfect be the enemy of the good, we will continue to make the best use of available data to stimulate competition among companies for who can be the “most sustainable,” which we recognize is not always tantamount to actually sustainable.

Toby Heaps, CEO, Corporate Knights, Toronto

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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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