The current issue of Newsweek presents the 2010 Green Rankings of the 500 largest US companies, and the 100 largest companies worldwide. This is the second annual Green Rankings, and like last year, MSCI ESG Research was a core provider of research and analysis for the project. Joel Makower at Greenbiz.com writes that the Green Rankings have “become a major metric in corporate America.” He describes how, in a recent meeting with 30 corporate sustainability officers, almost all of them knew their firms’ positions on the list.

Mr. Makower also provides some points to keep in mind as we compare one company’s ranking to another’s, and compare this year’s list to last year’s. He explains that the methodology changed somewhat since last year; that the scores are normalized so that a “100” score doesn’t indicate perfection, but rather than a firm has done comparatively better than all others; and that there is some “subjectivity” behind the analysis and rankings of each company.

Sharon Squillace, the MSCI ESG Research Analyst responsible for the Green Rankings project, offered to explain some of the thinking behind the Rankings methodology. She writes that the availability of accurate performance data by researched companies helps temper the “subjectivity” of a firm’s Green Ranking:

On August 23, the Wall Street Journal published an editorial by Dr. Aneel Karnani that questioned the value of corporate social responsibility (CSR). His argument was directed against “pleas” and “appeals” for executives to “act voluntarily in the public interest and against shareholder interests.” He called CSR “irrelevant or ineffective,” an “illusion, potentially a dangerous one.” A reader unfamiliar with the term might surmise that CSR is actually a dangerous chemical, like DDT.

The socially responsible investing (SRI) community, as expected, took issue with Dr. Karnani’s column. Social Investment Forum (SIF) CEO Lisa Woll wrote to the Journal, countering the polemic with real-world evidence about the positive impact of corporate sustainability efforts. (With permission from SIF, Ms. Woll’s letter is printed in full at the bottom of this article.)

Besides its empirical shortcomings, Dr. Karnani’s case also betrays a methodological flaw that is both common, and instructive: While we can tell what he takes issue with, it’s never quite clear who he’s talking about. Here is the plainest statement of his thesis about corporate social responsibility:

After ten days of escalating public debate in which the Saudi Arabian government threatened to ban BlackBerry services because of security concerns, the Kingdom relented on August 9. Other governments have also expressed concern over BlackBerry’s stringent data encryption, including the United Arab Emirates, Algeria, Kuwait, Indonesia, India and Lebanon. The UAE has announced a ban on BlackBerry services as of October 11, and India has threatened to suspend all services unless  Indian authorities get access to encrypted communications by August 31.

Some governments believe that access to private communications is a necessary security measure. Critics maintain that Saudi Arabia and the UAE are at least partly motivated by a desire to limit freedom of expression and strengthen their already strict policing of the internet for political content.

This is the latest in a series of “tense standoffs” between governments and private corporations over questions of individual rights and national security, as described by a July 2010 ESG Insight article. Such conflicts include Google’s faceoff with China over questions of internet censorship and Nokia Siemens Networks’ provision of “lawful intercept” capabilities to Iran, which allegedly allowed authorities to monitor and censor internet traffic during the disputed June 2010 elections.

Saudis, Others Want the Same Access as US, Canada

Along with questions about whether Western companies should provide surveillance capabilities to undemocratic regimes, these disputes also highlight a possible double standard. Nations like the US and Canada, home of BlackBerry maker Research in Motion (RIM), are largely understood to have access to personal internet traffic. The US has an advantage in that many encrypted email services such as Gmail and Yahoo have servers on US territory, rendering them subject to court-ordered disclosure.

From WikiLeaks to the “Facebook spy,” government exposure through new media outlets has made headlines this summer. The Internet’s capacity for spreading information threatens secrecy, and thereby weakens the power of those who hold secrets, whether they’re individuals, companies, or governments.

The tense relations between China and Google, among other foreign firms, have shown how a government’s desire for secrecy and control of its citizens can conflict with its need to participate in the global information economy. In January 2010, the US-based search giant balked at Chinese government demands for Google to censor its google.cn search results. Google had in fact previously complied with such demands, but starting in March, the firm automatically redirected visitors to google.com.hk, its uncensored Hong Kong-based site.

In July, however, the two sides compromised. As reported by CNN, Google will retain its license to operate in China, and Chinese users will retain access to google.com.hk. So what grand bargain resolved what the New York Times called a “tense standoff”? Nothing more than an extra click: Chinese google.cn users must now opt to see uncensored google.com.hk results.

On June 21, HBO televised Gasland, a documentary about the environmental impact of hydraulic fracturing, an increasingly common method of natural gas extraction. As described previously by ESG Insight, fracturing, or “fracking,” extracts gas from underground rock formations by forcing drilling fluids into the ground at high pressure. Fracking fluid contains toxic chemicals that can contaminate groundwater, and investors have already called for drilling and energy firms to better account for the risks of this practice.

“Thousands of complaints have been lodged with state and federal agencies by people all over the country whose lives and communities have been transformed by fracking operations,” reports Christopher Bateman in an in-depth article in Vanity Fair.

As part of their coverage of the ongoing Gulf crisis, Forbes and BusinessWeek have each reported on how socially responsible investors (SRI) view BP. Both articles cite sources who mention BP’s positive steps in alternative energy development, among other environmental, social and governance (ESG) initiatives.

The RiskMetrics ESG Analytics team (now part of MSCI) maintains a detailed historical record of the ESG practices of thousands of companies worldwide, including BP. While some investors may have been “vexed” by BP's recent struggles, according to BusinessWeek, our research and evaluations have tracked the firm’s labor safety and environmental issues for years. As described by a previous ESG Insight article, SRI/ESG investors may actually have been more prepared than most for the risks of BP's ESG practices.

In response to client inquiries, we’ve compiled here some of the most relevant RiskMetrics ESG indicators and evaluations regarding BP. Much of this information is proprietary, but we can share a snapshot of our work with ESG Insight readers. [Click here to learn how to gain full access to our data.]

The first response to the Upper Big Branch (UBB) mine disaster has been, as it should be, a massive effort to help its victims and their families in and around Montcoal, West Virginia. But looking beyond the immediate human tragedy, many are considering the implications of the disaster for UBB owner Massey Energy and the American coal sector as a whole.

The Associated Press and others have reported that, while Massey shares have plummeted in value this week, some of its US competitors have benefited. Some investors believe that these companies will take market share from Massey and avoid the consequences of that firm’s poor safety record.

This conclusion, while understandable, may be mistaken. A review of major Appalachian coal mining firms shows that, compared to their global sector peers, their employee safety practices are subpar. Investors and lenders who are now leery of Massey should consider that its closest competitors may harbor serious risks as well.

So far, proponents have been unable to get a 2010 shareholder campaign going on issues involving "net neutrality"—an umbrella term describing Internet service providers' control over access to the World Wide Web.

As shown by the high-level dispute over Google’s presence in China, corporate media practices can have major diplomatic and economic consequences. Indeed, net neutrality advocates include President Obama and Secretary of State Clinton.

But even as leaders proclaim their support for net neutrality overseas, SEC regulators have declined to allow neutrality-related shareholder proposals in the US. Also, a panel of US Court of Appeals judges has ruled that the FCC overstepped its authority in 2008, when it fined Comcast for slowing Web traffic for some users.

A previous ESG Insight article addressed net neutrality, among other 2010 proxy campaigns; this piece provides more detail on a still-pending proposal from Open MIC, the Open Media and Information Companies Initiative.

According to its mission, Open MIC “seeks to use private sector and capital market mechanisms to influence corporate media management policies.” In addition to net neutrality, the group also seeks greater access to broadband data services and better reporting from media and telecom firms on their security, censorship and information access practices.

Investors should note that the government’s position on net neutrality is far from settled.

Tuesday night, Louis Auchincloss died at 92. Widely lauded as a chronicler of the WASP aristocracy, I think he is much better categorized as a novelist of ethics.

As someone who grew up in a family of lawyers, Auchincloss's stories of the dilemmas of a private lawyer resonated. I well remember the evening I stumbled on Tales of Manhattan (1967). I read it in one sitting. The Injustice Collectors (1950) followed a few days later.

Like many of us at RiskMetrics and the former KLD, I belong to LinkedIn groups that address socially responsible investing (SRI). This week, an "SRI Professionals" discussion brought up one of the seminal questions in SRI: What does it cost, compared to investing that disregards corporate environmental, social and governance (ESG) practices?

With permission from Advocacy Investing's Marc Lane, leader of the SRIP group, here is Richard Nash of Investors Group in Vancouver, BC:

"There is not much information available that shows the comparative returns of the FTSE4Good indices against their "non-SRI" index counterparts - i.e. an analysis to gauge the perceived cost of being SRI."

The question of comparative returns is part of why KLD, among other ESG research firms, came into being. Our first index, which is now called the FTSE KLD 400, was created as an ESG-screened counterpart to the S&P 500. Many other FTSE KLD Indexes are similarly based on "non-SRI" benchmarks.

Click here to compare the performance of FTSE KLD Indexes to their benchmarks.

In the right-hand column of the Index home page, click on the name of any Index, and then click "Performance." You'll see a table and a graph indicating the relative performance of each Index and its benchmark.

Other References

Robert Kropp of SocialFunds.com recently wrote about a new Mercer study of ESG's impact on performance:

Studies Find Positive Link Between ESG Integration and Investment Performance

Also see these KLD Blog articles on this topic:

"Are Ethical Investments Good?" New Research on Impact of FTSE KLD 400

The Wages of Social Responsibility: 2008 Moskowitz Prize-Winning Research Paper Studies Long-term SRI Performance

Social Investment Forum Answers Top Ten Questions about SRI/Sustainable Investing