Too big for their boots - Sustainability column


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AEGON's sustainability experts discuss how you can best assess how sustainable a company really is.

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Too big for their boots - Sustainability column

  1. 1. Into the breachLet’s say you want to find out how sustainable a particular company is.Who would you go to? A) The company itself or, B) An independent assessment, carried out by experts?Chances are you’d plump for B. Which explains the rise in recent yearsof specialized sustainability rating agencies.These agencies began with a pretty simple mission: to assesscompanies’ sustainability performance on behalf of investors, and givea clear, honest and impartial verdict.That’s still their mission – but these days rating agencies have taken onan importance unimaginable just a few years ago.Why is that?Much of the explanation lies in the reaction of companies themselves –rather than in anything the rating agencies themselves have done (ornot done).Many companies have embraced ratings as a source of pride. Otherssee a good score as a kind of ‘kite mark’ – outside endorsement of theirsustainability credentials.Even better, rating agencies provided something that companies hadalready been searching for: a way of measuring sustainability in termstheir accountants and auditors would understand.Not surprisingly perhaps, companies have started to use these ratingsin other areas of their business. Many – including AEGON – link bonuses
  2. 2. for executives and senior management to the Dow Jones Sustainabilityindex – probably the best known and most respected.As the influence of rating agencies has grown however, so has thecriticism.Models were wrong – or gave too much importance to one area andnot another.Methodologies were difficult to understand, and the results wereunpredictable.Rating agencies, in short, were getting too big for their boots.In the past few years, agencies – particularly SAM, which publishes theDJSI every year – have also shown they’re not afraid of controversy.In 2010, BP – one of the world’s biggest energy companies – wasbumped from the DJSI World Index because of the oil spill in the Gulf ofMexico. And last year, several household names lost their places too,including Coca-Cola, Hewlett Packard and the German car maker,Volkswagen. (AEGON, meanwhile, lost its place in the European versionof the index).Such independence of spirit, however, should be applauded, notcriticised.At times, much of the griping seems to be a result of wounded pride, onthe part of the companies affected, rather than a consequence oflegitimate concerns.The fact is, rating agencies – SAM and the DJSI particularly – are victimsof their own success. Their influence increased because companies and
  3. 3. investors needed a way to measure and compare sustainabilityperformance. Ratings like the DJSI or the FTSE4Good were simply thebest available. Thirteen years after the DJSI was first launched, they stillare - and will remain so until companies, auditors and regulators agreea workable alternative. If rating agencies are too influential, as someargue, it was companies and their investors who made them so.--------------------------------------------------------------------------------------------------The views and opinions expressed in this document are solely those of theauthor and do not necessarily represent those of AEGON N.V. Thisdocument is for information purposes only and any reliance you place onsuch information is strictly at your own risk. AEGON N.V., its affiliates andthe author cannot be held responsible for the accuracy or reliability of thecontents of this document.