Rating Sustainability Performance: An Essential Business Metric

David McClintock

 

When ING Wholesale Banking launched their Sustainable Improvement Loan, it opened a new source of value for companies who have obtained a Rating and Scorecard. ING selected EcoVadis as a key partner providing our Business Sustainability Ratings that are used in the loan rate calculation: When sustainability performance improves, the rate goes down! 

There has been very positive reaction, and we’ve even seen a couple other loans announced, both of large listed companies.  The majority of the activity in sustainable finance relies on “ESG” sustainability ratings of public companies only.  This is a contrast to the ambitions of ING, who are making their Sustainable Improvement Loan program as inclusive and broadly applicable as possible: By including EcoVadis as a rating partner, they enable a much broader spectrum of businesses to have potential access to these loans. For more than 10 years, EcoVadis has been rating companies of all sizes (70% are SMEs) most of which are non-listed companies. Read on for more details about ratings in this interview with EcoVadis Co-CEO Pierre-Francois Thaler....  [Note, this article was first published on the ING Wholesale Banking website]:

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Rating Sustainability Performance: An Essential Business Metric

EcoVadis sustainability ratings and scorecards help procurement teams monitor supply chain Corporate Social Responsibility (CSR)/ESG practices across 200 industries and 165 countries. Pierre-Francois Thaler, co-founder and co-CEO, explains the company’s business model and why it’s important to get rated.

Pierre-Francois Thaler on EcoVadis ratings for sustainable financeWhy is it advantageous for a company to seek an EcoVadis rating?

Corporate social responsibility (CSR), which is often referred to as environmental, social and governance (ESG) in the finance industry, is becoming an essential criteria for measuring business performance. It is being demanded by stakeholders, not only for reporting and regulatory requirements, but as a key factor in business relationships, supply chains, investment – and now – business lending.

EcoVadis ratings and scorecards provide businesses with a reliable indicator of their CSR performance that they can share with stakeholders. We combine the latest technology with a team of expert analysts and a well-refined methodology that simplifies the process.

Companies use EcoVadis ratings to enhance business relationships, such as in selection for tenders, participation in preferred partner status, or co-innovation programmes. And now they are able to obtain better loan rates!

 

What reputational benefits does a rating offer?

EcoVadis has rated over 65,000 companies that share their results with over 450 of the world’s largest corporates (such as Verizon, L’Oréal, Nestle, GSK, Johnson & Johnson, Michelin and BASF) and six industry initiatives. Having a good EcoVadis score brings a status that companies can use to enhance their brands, both externally with customers and stakeholders, as well as internally with employees and for recruiting. Every month hundreds of companies proudly communicate (examples here) when their score has made them eligible to earn an EcoVadis Gold, Silver or Bronze medal.

 

Why else might a company seek a rating?

In addition to sharing results with stakeholders to enhance business relationships, companies use our ratings to benchmark and guide improvements in sustainability performance, and use the data when reporting to other evaluations and indices. Our customers are finding that high-scoring companies are the ones engaged in creating long-term shared value. Thus from a strategic standpoint, the ratings can be used to identify partners with whom to co-innovate, especially on the growing number of products or categories where sustainability demands are rising.

Our ratings have also been adopted by six industry initiatives, including chemicals, consumer goods, rail and beauty/cosmetics, as a standard for assessing their collective supply chains.

 

How can gaining a rating affect how companies view CSR and sustainability issues internally?

An evaluation by an external expert with broad global benchmarks such as EcoVadis can give CSR professionals and executives an independent view on their performance, and how it compares to peers. This can be a powerful incentive for taking action and steps toward increasing performance.

As a quantitative measure, CFOs can use a rating to see how investments improve performance over time (e.g. after subsequent evaluations). Larger groups use EcoVadis Ratings as a global standard to align their sustainability performance across many subsidiary entities around the world (such as Toyota MHE and Belron).

 

What is involved in seeking an EcoVadis rating?

EcoVadis is a simple four stage process, that works for businesses of all sizes from small and medium sized companies with as few as 10 employees, up to the largest multinationals. The initial questionnaire is available in 10 languages, is adapted to over 190 business activities (purchasing categories), and over 150 countries.  There are no restrictions; just register, answer the online questionnaire and documentation, share results, and improve!

 

What areas does it cover?

The assessment methodology covers 21 CSR/sustainability criteria across four themes: environment, labour/social, ethics, and sustainable supply (relating to sourcing practices). In addition to the questionnaire above which collects documentary evidence of the company’s sustainability management system, the process includes a “360 degree watch”, which checks over 100,000 sources including Regulatory DataCorp watch lists and sanction lists, and thousands of local news sources, all of which may be factored into the evaluation.

 

How long does the process take and what burdens does it place on the company being rated?

The rated company responds to a questionnaire that has customized depending on company size and business activity. They may add as many users (e.g. colleagues) as they like to collaborate on finding and providing the right documents, usually over several weeks. Our pricing plans are based on company size.

 

How frequently does a company need to be re-rated?

Our subscription service includes re-evaluation every year. As companies get re-rated, they are able to track their improvement progress over time in each theme. On average, about 65% of companies that are reassessed improve their score.

 

How do the CSR/sustainability credentials of suppliers affect a company’s rating?

Sustainable procurement is one of the four themes of our assessment; it has its own theme score and is included in the overall rating. However, we do not factor in performance of the company’s individual suppliers, but rather assess the maturity of a company’s procurement management system to integrate CSR criteria into its procurement and supplier management processes.

 

How do you expect the role of sustainability ratings in business to evolve?

We are extremely optimistic about this expansion of the use of our EcoVadis ratings beyond supply chains to lending relationships, and it presages many other similar uses yet to come, where trust, transparency and sustainable practices build value in the business and in the relationships.

 

 

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