Home » A Rush to Standards?

Submitted by kgilliam on Fri, 2011-05-06 20:46.

For the last two weeks I’ve spent a lot of time in the deep-end of the Corporate Responsibility ratings pool. Last week I participated in a workshop here in Washington, DC organized by SustainAbility to reflect on the findings of their Rate the Raters Report. This week I spoke on a panel (coincidentally with a lot of the same people from the workshop) at the Better Business Bureau of New York on the value of ratings systems.

Here’s the feedback…

Dozens of ratings systems have sprung up to evaluate various aspects of corporate responsibility. This proliferation of good intentions has led to overload: companies can’t keep up with all the data calls. As a result, a cry has gone up to standardize on a common set of data elements for rating CR. Moreover, the users of the data – the people who make purchasing and investment decisions based on it – want predictive data, not the retrospective data that makes up most ratings today.

Everyone likes to toss around analogies to finance. Financial ratings like Moody’s and Standard & Poor’s use common, forward-looking data. Wouldn’t it be great if CR could do the same?

Now, I fully support this idea. We need a common lexicon and forward-looking data. At the same time, I have a little trepidation. As far as I know, no one has a full business cycle of sustainability-related data. That’s where the analogy to finance breaks down. Financial metrics have evolved over centuries – and even then periodically get turned upside down by things like the recent recession.

That means if we settle on a set of CR data elements now, we run the risk of getting it wrong by wide margins. When I brought this up, my colleagues rightly said that shouldn’t stop us from trying. Moreover, my colleagues from financial organizations really emphasized that without predictive data investors won’t pay attention.

I’m up for the challenge. We can try to standardize on a set of core metrics. In fact, I just concluded the 100 Best Corporate Citizens Methodology Committee meeting where we agreed to treat alignment with the Global Reporting Initiative as a core principle of the ranking. But as we standardize we need to be prepared to revise the standards as we go – and that means the market will need to respect and respond.

Now that’s probably a bar too low for investors. In fact, after all this discussion, I concluded that we, the raters, may have spent too much time focused on investors as users of this data and not enough on business-to-business buyers. I specifically focus on them because, as buyers of things in large quantities, they have a profound potential to influence their markets. They can also stand to experiment a bit more. They could use different CR data across a spectrum of purchasing decisions and provide excellent “natural experiments” for different models.

We also need to not rush headlong into standardization for its own sake. We’re in the midst of a generational shift. Thomas Kuhn, in his stunning work The Structure of Scientific Revolutions, wherein he basically invented the term “paradigm shift”, lays out how periodically we go through a proliferation of new ideas about how the world and society work before settling down on a “new school” governing how we think of the universe and our place in it. We’re in the midst of such a paradigm shift now, where we’re rethinking the roles of all the major institutions of our society: government, companies, the academy, religious organizations, etc.

In such an environment it’s not easy to know now before society settles on a new reigning school of thought, which data will matter. So I’m all for standards – as long as we’re all ready to revise them over and over again. But that unfortunately is not how the world works. Once a standard is set it’s very hard to change it.

I completely sympathize with the companies burdened with replying to data calls. But I would urge caution. Once standards are set firms will be held to them and given the risk of getting it wrong, we as a society will bear the brunt. There’s an old adage that “what gets measured gets done,” which means that once we start measuring it people will manage to it.

I also realize that some may think this is just me protecting our ratings franchise; that standards will drive ratings organizations out of business. That’s not how it will play out. Standardizing will put some people out of business, but not the raters. There’s a class of company that gathers data and another class that does rating. Some firms do both, but we, as an example, do not. We buy data and then analyze it. Standardizing data elements will drive consolidation as firms like Bloomberg LLP and others take that over. Ratings systems may actually proliferate once standardization drives down the cost of gathering data.

Standards are a great goal and we should head in that vector. At the same time, we need to make sure we set the right standards, ideally the first time.

Agree with me? Disagree with me? Debate with me at the Commit!Forum where we’ll have a series of sessions on the New Rules for Disclosure, hold a town hall meeting on the 100 Best Corporate Citizens Methodology, and engage business-to-business buyer and sellers in how to use CR data in making purchasing decisions.

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