Green Rankings: 2010 Full Methodology

To produce the 2010 Green Rankings, NEWSWEEK collaborated with MSCI ESG Research—a leading source of environmental, social, and governance ratings—which served as lead research organization; Trucost, which specializes in quantitative measurements of environmental performance; CorporateRegister.com, the world's largest online directory of social responsibility, sustainability, and environmental reports; and our editorial partner, ASAP Media. The goal was to assess each company's actual environmental footprint and management of that footprint (including policies and strategies), along with its reputation among environmental experts.

COMPANIES WE RANKED

The U.S. 500 list includes the largest publicly traded U.S. companies, and the Global 100 list (new this year) includes the largest publicly traded companies based in developed and emerging markets. A number of U.S.-based companies appear on both lists. Company size was evaluated according to revenue (most recent fiscal year), market capitalization, and number of employees, all as of March 31, 2010. Changes resulting from various corporate actions, such as mergers, were taken into account until July 1, 2010, when the company lists were finalized to allow time for the rankings to be calculated and compiled.

GREEN SCORE

Companies on each list—the U.S. 500 and the Global 100—are ranked by their overall Green Score. This score is derived from three component scores: the Environmental Impact Score (EIS), the Green Policies Score (GPS), and the Reputation Survey Score (RSS), weighted at 45 percent, 45 percent, and 10 percent, respectively. The Green Score, as well as each component score, is published on a scale from 100 (highest performing) to one (lowest performing).

ENVIRONMENTAL IMPACT SCORE

Based on data compiled by Trucost, it is a comprehensive, quantitative, and standardized measurement of the total environmental impacts of a corporation's global operations (90 percent) and disclosure of those impacts (10 percent). More than 700 metrics—including emissions of nine key greenhouse gases, water use, solid-waste disposal, and emissions that contribute to acid rain and smog—figure into the Environmental Impact Score.

Trucost uses publicly disclosed environmental data to evaluate company performance for each impact metric whenever possible, and uses a proprietary economic input-output model to calculate direct-company and supply-chain impacts in cases where data is unavailable. To fairly assess the impacts of companies operating in more than one industry, Trucost uses a benchmarking system. First, Trucost calculates the total environmental impacts per total economic output (usually in dollars of revenue) for 464 industry sectors. Then, it evaluates the proportion of a company's revenue that is derived from each sector in which it does business. This research is fed into the model, which uses the benchmarks for each of those sectors (for example, total water use of the oil industry per its total economic output) to estimate the company's impacts (in this case, its water use). Trucost draws on any relevant data that's available, such as the EPA Toxics Release Inventory, to further refine the model. Any outside data that Trucost draws in is first scrutinized to ensure it is of good quality, and then stand­ardized before being used.

Once the specific impacts of a company have been quantitatively assessed, Trucost calculates an environmental damage cost for each—a dollar value representing the potential cost to society of resulting damage to the environment—based on a standardized cost per quantity of each environmental input or output that Trucost has developed from valuation studies and other academic literature. The costs for each individual metric are added up to produce a dollar estimate of the company's total environmental impact. Finally, this figure is normalized by company fiscal-year revenue (this allows companies of all sizes to be compared) and factored in as 90 percent of the company's raw EIS.

Trucost's disclosure score credits companies for releasing usable data that cover its global operations for each of the individual environmental-impact metrics that Trucost tracks, weighted according to the relative importance of each impact to the company's overall footprint. For example, if Trucost determines that a given company's footprint is comprised of 50 percent greenhouse gas emissions, 25 percent dust and particle emissions, and 25 percent water use, but that only the first two factors were disclosed comprehensively, then the company would get a disclosure score of 75 percent. This score factors in as 10 percent of the company's raw EIS.

GREEN POLICIES SCORE

Derived from data and analysis provided by MSCI ESG Research, the Green Policies Score is an assessment of how a company manages its environmental footprint. The MSCI ESG Research scoring model measures the quality of each company's environmental reporting, policies, programs, and initiatives. More than 70 individual indicators are incorporated into the Green Policies Score, categorized into the following five issues: climate-change policies and performance; pollution policies and performance; product impact; environmental stewardship; and management of environmental issues. These address, respectively, how well each company manages its carbon emissions; how well each company manages its noncarbon emissions to air, water, and land; the life-cycle impacts of each company's products and services; how well each company manages and uses its local resources; and the quality of each company's track record of managing environmental risks. Data on regulatory compliance, lawsuits, controversies, and community impacts are also among the indicators taken into account within each category.

MSCI ESG Research draws its data from a variety of sources, including company-disclosed information; dialogues with companies; media coverage; and government, NGO, and third-party research. The initial data is used to rate companies on a scale of zero to 100 for specific indicators, and then those factors, weighted according to their importance, are rolled up into scores for each of the five key environmental issues, and then into the overall raw GPS.

CONFIRMING EIS AND GPS DATA

Before the rankings were calculated, MSCI ESG Research and Trucost each sent letters in mid-May to all companies being ranked, inviting them to review each research organization's existing analysis and to provide additional information where appropriate. Responses were accepted until July 2, 2010. Forty-five percent of the U.S. 500 companies and 37 percent of the Global 100 companies responded to MSCI ESG Research. Any information provided by companies after the rankings were assembled could not be included.

REPUTATION SURVEY SCORE

This score is based on an opinion survey of corporate social-responsibility professionals, academics, and other environmental experts who subscribe to CorporateRegister.com. The survey went out to 14,921 validated users and asked each respondent to rate a random sample of 15 companies on a sliding scale (100 to one) from "leader" to "laggard" in three key green areas: environmental performance, commitment, and communications. Of those surveyed, 2,480 individuals were identified as "sector specialists"—those having a specific working knowledge of environmental issues within their industry—and were asked only to score companies in their sector of expertise. Additionally, the CEOs from all companies on the NEWSWEEK U.S. 500 and Global 100 lists were invited to participate in the survey, 90 of whom responded and either took the survey themselves or designated a senior-level representative to do so on their behalf. Survey responses were collected over six weeks, from July 1, 2010, to mid-August.

CorporateRegister.com only accepted responses from individuals whose identity and details had been verified, and any scores given to a company by its own employees or its hired consultants were disregarded. Similarly, any responses with suspicious scoring patterns were disregarded. The survey's response rate was 12 percent, twice that of the 2009 Reputation Survey, and far higher than is typical of most public-opinion polls reported in the media.

Chief-executive scores were given a weight of three, sector specialists a weight of two, and other participants a weight of one. Each company's performance, commitment, and communications scores were then averaged to produce its raw Reputation Survey Score.

RANKING THE COMPANIES

To calculate a company's overall ranking, the three component scores were standardized, combined using a weighted average, and mapped to a 100-point scale for publication.

The raw component scores were first converted to standardized values called Z scores, which reflect how individual companies performed in relation to the average for each of the three scores. These Z scores serve as a common metric, allowing environmental impact, green policies, and reputation—which were measured in very different ways—to be compared, much the way fractions must be converted to have a common denominator before they can be added together.

Finally, a weighted average of the Environmental Impact (45 percent), Green Policies (45 percent), and Reputation Survey (10 percent) Z scores was taken to generate the overall Green Z score. The Green Z score and the three component Z scores for each company were then converted to a scale of 100 (highest performing) to one (lowest performing) for publication. It is important to note that a 45–45–10 weighting applied to the published component scores will not result in the Green Score (the latter is based on the weighted average of the standardized scores, not the scaled display scores).

IMPROVEMENTS THIS YEAR

Two noteworthy changes were made to the Green Rankings methodology this year, both involving the Environmental Impact Score. First, a measure of disclosure was introduced into the EIS. Originally, the EIS entirely reflected a company's environmental footprint; now it is 90 percent footprint and 10 percent disclosure of the factors that contribute directly to that footprint. Secondly, since the companies in which banks and financial-­services companies invest can have significant environmental costs (for example, a bank with funds invested in a utility), the rankings were adjusted to take these additional impacts into account for all firms that have equity under management. Trucost accounted for the impacts of the relative amount of equity ownership in accordance with the World Resource Institute's Accounting for Risk and applied the findings of its recent U.N. Principles for Responsible Investment externalities and universal owners report to the equity ownership portfolios of these companies.

YEAR-TO-YEAR COMPARISONS

Since the NEWSWEEK Green Score and component scores are standardized using Z scores, they reflect how a company performed relative to the universe of companies being ranked. The scores do not reflect performance in absolute terms. As a result, the scores this year are not directly comparable to those of 2009, since the composition of the U.S. 500 list—the universe against which each company is compared—changes from year to year (for example, there are 57 new companies on the 2010 list). For a similar reason, companies that appear on both the U.S and Global lists this year have different Green Scores and component scores—the underlying raw data is the same, but the scores evaluate how the company stacks up against the list of companies they're being compared to, which is different. Furthermore, the methodological changes that were made to improve the quality and comprehensiveness of the rankings add to the difficulty of making meaningful year-to-year comparisons.

PANEL OF ADVISERS

The Green Rankings methodology was created in consultation with an advisory panel convened by NEWSWEEK. The panelists, who served independently of their respective organizations, include John Elkington, executive chairman of Volans and cofounder of SustainAbility; Daniel Esty, Hillhouse professor of environmental law and policy at Yale University; Marjorie Kelly, senior associate at the Tellus Institute and cofounder of Business Ethics; Tom Murray, a managing director at the Environmental Defense Fund's corporate partnerships program; Wood Turner, executive director of Climate Counts; David Vidal, research director of global corporate citizenship at the Conference Board; and Deborah Wince-Smith, president and CEO of the Council on Competitiveness.

FOR MORE INFORMATION

Newsweek: greenrankings2010@newsweek.com
MSCI ESG Research ESGclientservice@msci.com
Trucost greenrankings@trucost.com
Corporate Register info@corporateregister.com