Methodology

Measuring and Learning from the Peers is the essence of the SG Scorecard©

We conducted an impact-research with a motivation to help improve the state of the world by measuring and learning from the peers. To reach our goal of having a more sustainable future, we designed a model which can be utilized as an improvement tool for the companies.

The SG Scorecard assesses the governance quality of the sustainability efforts under four main areas: Providing guidance, implementation, oversight of the board, and continuous learning throughout the cycle. Each of these areas assessed with objective criteria, designed through a lens of governance.

The governance quality of sustainability efforts is directly related to the guidance of the board. The board is the captain of the ship and the ship would approach the right dock only if the captain sets the right degree to the standards rudder. The path that ship will follow is related to setting the right angle to the ship. That is why the captain is quite important for the ship. It is same for the companies. If the board provides right guidance and sets the right direction to the company, the ongoing process will follow the right path. Our Model analyzes whether the board provides the right guidance on sustainability.

If the board provides right guidance and sets the right direction to the company, the ongoing process will follow the right path.

What are the key elements for setting the right direction to the company in terms of sustainability? In this Model, we defined the following criteria for providing board guidance:

  • The values, strategies, policies, charters and/or principles,
  • The coverage of the sustainability related issues and the Sustainable Development Goals (SDGs) in their strategy,
  • The comprehensiveness of the guidance in terms dimensions like human rights, worker rights, environment, social, health and safety etc.,
  • The composition and diversity of the board,
  • The stakeholder mapping and engagement,
  • The review of board with respect to materiality
  • Geographic coverage, value chain coverage including the supply chain and life-cycle impacts of the products
  • Setting the key performance indicators, linking KPIs to incentive schemes for executive compensation,
  • Setting targets for sustainability performance.

The second factor effecting the governance quality of sustainability is the implementation process of the company. Even if the captain sets the right direction, the quality of the journey is directly related to the crews’ performance, controlling the wind on time, doing no harm to the sea, etc. It is no different for the companies. Same as the journey quality of the ship, the implementation quality of the company is related to various factors, such as;

  • Sharing key ESG performance results,
  • Coverage of code of conduct, supply chain, third party review, internal control, incentives, and development efforts,
  • Measuring, sharing, and ESG coverage in executive compensation,
  • Risk mitigation,
  • Consultation with stakeholders.

The SG Scorecard analyzes whether the Appropriate Implementation structure is designed and followed about sustainability.

Following the implementation, the third area we focus in assessing the sustainability governance is oversight of the implementation by the board. Again similar to a captain overseeing all the activities of the crew, any injuries during the journey, the necessity of the maintenance or repair, the board monitors the implementation process of the company.

How can a board oversee the sustainability efforts? The SG Scorecard defines oversight responsibilities of the boards;

  • Setting the critical control points in terms of ESG,
  • Evaluating ESG performance,
  • Considering the ESG KPIs for executive compensation,
  • Ensuring the regular review of the internal control mechanisms and third-party verification

When the ship approaches to the dock, the captain, the crew, the whole ship should have their own conclusion from that journey and learn from each other. This learning environment improves the quality of the next journey of the ship. The same should also be true for the companies. If a learning culture is sustained through the whole cycle in the company, the sustainability governance quality of the company would be improved. The SG Scorecard defines the continuous learning culture with following criteria;

  • The resource allocation for improvement,
  • Benchmarking,
  • Organizational development approach (incorporating learning to orientation, education, promotion, compensation, etc. programs)

Overall, the SG Scorecard© identifies and utilizes measurable criteria for sustainability governance. The essence of the methodology relies on the LOGIC and DSICS approaches. It relies on defining the right direction, measuring the right indicators, evaluating the results and learning from the results and the peers.

The SG Scorecard© encompasses key management issues such as stakeholder engagement, responsible leadership, and integrated thinking through a governance lens.

What differentiates the SG Model from other studies:

There are numerous sustainability indexes. However, these indexes mainly focus on performance rather than the quality of decision making and governance of sustainability issues. Quality of sustainability governance systems is the corner stone for strong responsible business conduct. Therefore, we decided to conduct research to identify best in class examples of various sustainability governance steps based on publicly available data. Also, while such indexes are pass-the-post type of an evaluation, we tried to classify the results by tiers to provide better granularity in order to identify good examples.

We Considered Only Publicly Available Information

We analyzed only 2017 Annual Report, 2017 Sustainability Report, and Governance and Sustainability section of the companies’ Internet Sites in 2018 (reporting 2017 results). We considered only publicly available information.

Here is why…

Reporting can be accepted as a clue on value creation, decision making process, and quality of the governance approach. Quality of reporting is important since stakeholders need useful information to participate and transact with the organizations. Corporate information that is more likely to encourage all counterparties to transact with the company and, all else equal, to transact with a company on better terms (Eccles and Serafeim, 2015) . So, we considered only publicly available information that the company provided in its Internet Site. After the data collection process finalized, we shared our evaluation of the data with the investment relations departments of Global Sustainability Leaders for the review.

Scorecard methodology focuses on mechanisms that should exist in a sound sustainability decision making mechanism which could be defined as the sustainability governance system. The research has been conducted based on publicly available information provided by companies. Disclosure quality and transparency regarding sustainable governance mechanisms are the main focus of the research. It is assumed that, quality of sustainability governance approach determines the quality of decisions made by the organization. Good sustainability governance is key for guiding, overseeing, sound decision making, and continuous learning processes in the company. Therefore, this research has been designed to understand sustainable governance mechanisms of companies and indicators have been determined accordingly.

150 Global Sustainability Leaders are in the Spotlight…

The SG Scorecard is designed as to have an impact on a global level, covering 150 leading public companies trading at key stock exchanges which are signatories of Sustainable Stock Exchanges initiative The scope of the analysis is limited with the companies who are included in the sustainability indices of stock exchanges in China, Germany, South Africa, Türkiye, United Kingdom, and United States of America. 10 sectors are selected among those companies.

We have tried to pick industries which are comparable across countires and not included financial industry as their regulatory standards may vary by country and also tech industry as they are not prevalent in public market of some of the Stock Exchanges we have chosen.

Each of the analyzed companies is a Global Sustainability Leader due to their outstanding efforts to have a more sustainable world (The list of all the Sustainability Leaders is provided in Appendix.2. Company List.).

This global scope provides opportunity to find various best practices from different sectors and countries. The scope and methodology aim to speed up learning from peers by identifying good examples of sustainability governance by leading companies as disclosed in their public reports.

The Scoring is based on a unique approach: Breadth & Depth

The SG Scorecard does not aim to measure the sustainability performance but seeks the presence of an environment and a climate of sustainability governance where sustainability efforts can flourish. In line with this perspective, there are some criteria that all the company should adopt in order to sustain the sustainability climate in the company. We have measured the existence of the sustainability climate as a Breadth Score (What the companies are doing) of the company. The SG Scorecard provides Breadth scores by 5 Tiers (Tier 1 highest, Tier 5 lowest) and the companies are listed alphabetically in each Tier.

Furthermore, the sustainability governance climate could be deployed and deepened within the company. This will lead the company to internalize the essence of the sustainability governance. From this point of view, the SG Scorecard considers the Depth of the sustainability governance. The Depth Scores (How they are doing) are provided in 3 Tiers which is visualized by full moon as the highest, half-moon as the middle, and new moon as the lowest.

We expect our Scorecard Model to provide an opportunity for benchmarking and serve as a guideline for creating effective sustainability governance mechanisms, learning from peers and thereby contributing to deployment of good practices on sustainability.

Dr. Fatma Öğücü Şen, Pınar Ilgaz