Financial Planning

Slight signs of progress in sustainable business governance

By oekom research
Financial Planning
Published: 7 April 2017

Leading independent sustainability ratings agency oekom research has for the first time identified signs of overall improvement in sustainable business governance around the world. Its latest report, now its in ninth year, found a possible reason for this change, most notable among mid-rated businesses, is the pressure to change and pushes for increased sustainability from several angles. These include international initiatives, such as the UN Sustainable Development Goals (SDG), national regulations, increasing demand for sustainable capital markets, and a general rise in sustainability awareness. Businesses also increasingly need to respond to transformation processes, such as decarbonisation in the energy sector, and e-mobility in the automobile industry.

The study shows not all industries are equally well prepared to face these challenges and opportunities. There is still considerable room for improvement, and business has a long way to go before it can boast of ‘holistic’ sustainability.

Biggest improvement among mid-rated corporates
The share of companies ranked in the mid-range, i.e those with at least rudimentary sustainability management systems, has increased most, from 35.8% in 2015 to 40.1% in 2016. The amount of companies rated with a good or very good sustainability performance, thereby receiving oekom ‘prime’ status, remained relatively stable compared to last year (almost 16.3% in 2015, rising to just over 16.5% in 2016). The majority of companies (43.3%) however continue to show an inadequate commitment to sustainability, despite this share having fallen by almost 10% overall in the past four years.
UK has third highest number of top sustainability performers
In the ranking of countries with the largest number of better-rated businesses, France leads (with 16 companies), followed by Germany (12) and the UK (11). These are followed by the US and Sweden (both 6), the Netherlands (5) and Japan (4).
Carmakers and household & personal products industries lead rankings
The automobiles and household & personal products sectors lead the industry rankings, even though they are far from gaining a top score. With values of 46.5 and 44.7 points respectively, on a scale from 0 to 100 points, they have stayed below the midway mark. Carmakers continue to score relatively well, despite downgrades of individual companies following exhaust- and emissions-reporting incidents.
Worst performers from within raw materials sector
As in previous years, the most controversial industries with severe breaches of the principles of the UN Global Compact are from within the raw materials sector. The negative frontrunner is the oil & gas equipment/services sector, where six out of every 10 companies are affected by controversies.
Transformation processes: how businesses are responding to global challenges
Integrating sustainability into companies’ core businesses has become more pressing than ever before, as manifold transformation processes are underway. Businesses are also expected to make a serious contribution to achieving the UN SDGs, which is necessitating radical changes in their business practices. The oekom CR Review 2017 examines several industries to see how their companies are facing up to these challenges, and what concrete measures they are taking to attain the SDGs. 
It is important for both companies and investors that climate risks are considered along the entire value chain. The valuations of the oekom Carbon Risk Rating show much effort is still needed to achieve the global climate goals: of almost 1,600 companies analysed, over 91% receive scores of only 0 to 50 points (on a scale from 0 to 100), and fewer than 9% between 51 to 100 points.
The main transformation challenges facing the automobile industry are the introduction of emissions-free alternatives to the combustion engine, as well as the furtherance of radically new mobility concepts, and the effective and sustainable networking of different modes of transport. Here it is evident that old product strategies are failing. Although central issues regarding the future of mobility must urgently be addressed today rather than tomorrow, carmakers continue to place their bets primarily on the combustion engine. It is therefore likely that, over the medium- to long term, the industry’s relatively good performance in 2016 will be put to the test.
Companies in the oil & gas industry have also come under pressure, especially with increasing focus on their divestment measures. From a sustainability stance, enormous change will be needed if global climate goals are to be met. Current business models essentially remain centred on a largely unabated demand for oil and gas, with barely any noticeable efforts to change. This trend is being amplified by the US’s latest climate-political decrees to the benefit of fossil fuels. Consequently, this is one of the worst sectors in the oekom universe, with just four of the 146 rated companies qualifying for prime status. The industry performance of 23.4 points is also one of the worst in the oekom universe.
The food & beverages industry plays a key role in transforming global economic cycles to the benefit of a more sustainable world. It is seen as one of the central contributors to global megatrends such as climate change, resource scarcity, and loss of biodiversity. But it is responding inadequately to growing pressure to change. As well as manufacturing products which in most cases are problematic from a nutritional perspective, the industry continues to tolerate massive negative consequences for the environment and society in its supply chains. At 33.3 points, the average industry performance is in the lower mid-range, but still has massive room for improvement.
“Many negative consequences of unsustainable business practices – such as the accelerating pace of climate change and depleting supplies of raw materials – are now manifesting themselves financially and have become very tangible,” says oekom research CEO, Robert Hassler.
“Although not all industries are equally prepared for the transformational challenges to come, our findings show more clearly than ever before that things are moving in the right direction. The financial industry’s increasing demand for superior ESG standards and growing investment in sustainable business models also give reason for hope. Sustainability has become so entrenched that even political setbacks within some countries – especially those underway in the US – cannot seriously derail the necessary change processes,” he adds.
The entire findings of the oekom Corporate Responsibility Review 2017 are available here