07 Oct 2011Working Paper Summaries

What Environmental Ratings Miss

by Auden Schendler and Michael Toffel

Environmental ratings of companies are based on "green" management efforts and the environmental performance of their operations. In this paper, Michael Toffel and Auden Schendler argue that these ratings neglect companies' actions that seek to influence environmental policy, which can have a much broader impact than their internal efforts. As a result, sustainability ratings risk seriously misleading consumers and investors, and can even enable "greenwashing" by allowing corporations to game the system, gaining high rankings for greening their operations despite advocating for less stringent environmental policy. Toffel and Schendler argue that environmental ratings should factor in political contributions, CEO advocacy work, and engagement with non-governmental organizations, among other actions. This would erode the environmental ratings of companies advocating weaker environmental policy, and bolster the ratings of those advocating more stringent environmental policy. Key concepts include:

Most major corporate environmental ratings and rankings focus on operational impacts such as pollution levels and regulatory compliance, but fail to incorporate political activities that influence environmental regulation.
It is corporate political actions—like lobbying or campaign funding—that can have a vastly greater influence on environmental protection, and arguably represent the greatest impact a company can have on protecting (or harming) the environment.
Exclusive focus on operational greening efforts and performance neglects the far greater need for climate regulation to achieve the dramatic overall reductions of greenhouse gas emissions called for by climate science.