Novo Nordisk is the most sustainable company on earth this year, according to a new ranking. But what does sustainability mean, exactly? In business, sustainability is when what is good for a company is also good for the planet, and vice-versa, says Toby Heaps, editor-in-chief of Corporate Knights, a Toronto-based media company.
Corporate Knights just announced its eighth-annual list of the world's most sustainable companies. "For us at Corporate Knights, sustainability is closely tied to what we call 'clean capitalism,' which we define as an economic system in which prices fully incorporate social, economic and ecological costs and benefits, and actors are clearly aware of the consequences of their marketplace actions," says Doug Morrow, vice president of research at Corporate Knights. "Against the global backdrop of what we call mega-trends, and which include continued and more pronounced resource scarcity, increasing government austerity measures, a widening rich-poor divide and growing levels of generalized environmental stress, we believe that companies with superior 'clean capitalism' performance may also generate superior financial performance, or may generate market returns but with reduced volatility."
Corporate Knights worked with three other organizations that do sustainability research to determine the world's 100 most sustainable companies. They teamed up with Global Currents, Inflection Point Capital Management, and Phoenix Global Advisors, which trimmed down an initial list of publicly traded companies from 3,500 to 400, based on financial performance and other criteria. The Corporate Knights research group evaluated those 400 companies using 11 environmental, social and governance performance measures, including energy productivity, waste productivity and CEO-to-average-worker pay ratio. Corporate Knights added employee turnover as an indicator this year, because "low employee turnover is positively associated with employee morale and productivity, efficient preservation of human capital and reduced transactions costs," Heaps says.
"Now that a critical threshold of companies disclose employee turnover, it is possible to make meaningful comparisons and so we include employee turnover among our core clean capitalism metrics," he adds.
Corporate Knights identifies what it considers the top-performing companies in each of several sectors. It relies on the companies to give it accurate data. When a company doesn't provide information for one of the 11 metrics, Corporate Knights assigns it a null score for that category, and penalizes it with an unfavorable transparency score.
"There is no perfect model to measure sustainability in the same way that no financial model can perfectly anticipate movements in share prices," Morrow says. "However, we feel our model is the most sophisticated, objective and data driven approach out there."
Ranking No. 1 this year is the Danish pharmaceutical company Novo Nordisk. Last year it ranked only 16th, but thanks to its disclosure practices and energy productivity performance, it now leads the pack.
"Novo Nordisk scored top quartile performance in energy productivity—meaning that, relative to their same-sector peers, they are able to squeeze more top line revenue and profits out of each unit of energy used throughout their operations—and they have a relatively low ratio of CEO-average employee compensation," Morrow says. "This measure has been shown in various studies to drive improvements in employee motivation and morale, increase retention and lower transaction costs, all of which can be linked to improved profitability. Plus, Novo Nordisk has taken what continues to be a minority practice, albeit a highly effective and, in our view, financially profitable one, of linking at least a portion of the compensation of its CEO to the achievement of sustainability targets."
Jumping from No. 66 in 2011 to No. 2 this year is Brazilian cosmetic company Natura Cosmeticos. Heaps was surprised by the arrival of Brazil as an emerging corporate sustainability powerhouse, clocking in with 3 companies on the 2012 list.
"Within its industry group, Natura became the best performer in terms of energy productivity, compared to the year before, when it was only the third best among the industry group," Morrow says. "It also became the second best performer in terms of waste productivity in this year's assessment, and it was among the bottom ones in 2011."
Last year's top-ranked company, Norwegian oil and gas producer Statoil, fell to the No. 3 spot this year. Danish biotech company Novozymes and Dutch IT firm ASML round out the top 5.
Sixteen of the world's most sustainable firms are based in the United Kingdom—making it the country with the most companies on the list.
"European companies have the best transparency globally and UK companies had some distance from the euro drag that has plagued the continent so their productivity numbers, of which revenue is the denominator, held up better than their mainland compatriot companies," Heaps says.
Japan was second, with 11 companies, while the U.S. and France tied for No. 3, with 8 companies each.
"It's important for companies to be sustainable because over the mid- to long-term it can be shown to be in their very narrow financial interest," Morrow says. "In addition, sustainable business practices can lead to superior outcomes for the environment, local communities and other stakeholders."
1. Novo Nordisk
Sector: Health Care
2. Natura Cosmeticos
Sector: Consumer Staples
5. ASML Holding
Sector: Information Technology
6. BG Group
Country: United Kingdom
9. Norsk Hydro
10. Atlas Copco