United States: Part One Of Global Initiative For Sustainability Ratings Now Completed

Last Updated: February 19 2014
Article by Charles Hungerford

Ceres and the Tellus Institute, not-for-profit organizations that promote sustainable business practices, are working together on a joint project to develop a standard for corporate sustainability ratings. Their joint project is called the "Global Initiative for Sustainability Ratings" or GISR. GISR has recently completed the first of its three-part process to establish the standard.

The standard under development by GISR is designed to serve as a benchmark for assessing an organization's sustainability performance. Rather than simply releasing the standard, GISR is planning to implement an accreditation system based on the standard. Under this approach, GISR will confer accreditation on the rating systems administered by other organizations that meet the standard. Thus, the standard will be implemented by organizations that voluntarily seek accreditation of their rating system from GISR and that apply the GISR standard to companies that are undergoing a sustainability performance assessment.

According to GISR, an accreditation system is needed because of the volume and variety of current rating systems. About 100 different organizations rate corporate sustainability. The ratings cover a wide range of target audiences, including investors, consumers, and companies, and a variety of interests, ranging from issue-specific to multi-issue. The various sustainability ratings have led to a multitude of requests that companies respond to questionnaires and analyst inquiries, which can often lead to "survey fatigue." GISR also points out that while the large number of surveys can be annoying, they can be very valuable in helping investors and consumers evaluate a company's capacity to anticipate and manage risks, including risks presented by climate change.

Leading organizations actively involved with sustainability ratings include the Global Reporting Initiative, the Sustainability Accounting Standards Board, and the International Integrated Reporting Council. These organizations focus on the "supply side" of the issue. The Global Reporting Initiative ("GRI") has developed a standard for sustainability reports that include information about economic, environmental, social, and governance performance. Companies use the GRI guidelines to produce their sustainability reports. The Sustainability Accounting Standards Board ("SASB") provides standards for publicly listed companies in the U.S. to develop mandatory disclosures for filings with the SEC, such as Forms 10-K and 20-F. The International Integrated Reporting Council ("IIRC") promotes integrated corporate reporting that includes financial and nonfinancial information about a company's strategy, governance, performance, and prospects over the short, medium, and long term. GISR seeks to complement the reporting focus of these three organizations by fully using the reported sustainability information. GISR focuses more on the demand side and investor understanding and use of the reported information.

The GISR standard will be made up of three components: Principles, Issues, and Indicators. The "Principles" are the attributes of a rating system that give the system credibility. To develop the Principles, GISR reviewed the principles used or adopted by a representative sample of other sustainability assessment systems. The "Issues" are aspects of sustainability that are material in assessing a company's sustainability performance. The "Indicators" are metrics that measure a company's sustainability performance for each of the Issues. In developing Issues and Indicators, GISR will review a representative sample of issues and indicators to identify those that are most commonly used, those that are uncommonly used but significant, and those that are absent but material to assessing sustainability. GISR conducts these reviews to maximize coordination with leading current standard setters, including GRI, SASB, and IIRC.

In December 2013, GISR released the Principles component of its standard, which is designed to apply to any rating system that assesses corporate sustainability performance. The Principles are made up of five process Principles and seven content Principles. Among the key process Principles are transparency (the rating should be transparent to those that use the rating), impartiality (the rating should be protected from undue influence by the rated company), and assurability (the rating should allow for independent third-party assurance that the rating comports with the GISR standard). Key content Principles include materiality (the rating should assess performance based on relevant sustainability issues), comprehensiveness (rating should assess impacts on human, intellectual, natural, and social capital), long-term horizon (the rating should enable evaluation of long-term performance), and comparability (the rating should allow users to compare performance of the same company over time and of different companies within the same time period).

GISR plans to develop the "Issues" component of its standard in 2014 and the "Indicators" component in 2015. Development of each component will take place in three steps—issuance of a draft, issuance of a second draft, and issuance of the final version. The first two steps will be followed by a pubic consultation period. An accreditation process will accompany each component, and accreditation levels will be cumulative. Thus accreditation at level 1 will be based upon consistency with the standard's Principles, accreditation at level 2 will be based upon consistency with the standard's Principles and Issues, and accreditation at level 3 will be based upon consistency with all three components of the standard. GISR protocols and tools will accompany release of each of the components in order to assist raters, and users of the raters' evaluation, in applying the three components of the standard.

More information about GISR, and a copy of Component 1 of the standard, is available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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