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Methodology: How the marks were determined

Corporate Knights assessed the environmental, social, and governance (ESG) practices of Canada's largest companies in the S&P/TSX 60 index using measures drawn from similar criteria used to mark the Global 100, an international ranking of companies with the world's best ESG practices. Because some companies have not yet reported their ESG data for 2009, the marking is based on 2008 data for environmental and social measures and 2009 data for all data points that fall under regulatory reporting requirements.

The 12 indicators assessed by Corporate Knights are given different weightings in the final score, depending on the industry sector each company operates within because some indicators are more critical in some industries than others. For example, companies in energy, mining, industrials and utilities get a greater proportion of their marks from their environmental measures, such as their energy consumption, carbon-dioxide emissions and total water usage. Sectors such as consumer products and financial services, by comparison, have less of their marks based on environmental measures and more based on employee and governance issues. A chart below shows how the categories are weighted for each industry sector.

The rating system is designed to be as transparent and standardized as possible, and to rely exclusively on criteria that can be measured and quantified. This means the marking system cannot capture every sort of social or environmental issue a company may confront, and it means some companies have faced problems that are not captured by the marking system. Rather than assign arbitrary deductions for these controversies, Corporate Knights has instead "red flagged" the issues. Links below explain recent controversies that have arisen at some companies.

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One key issue with the ESG data in Canada is that there is no universal disclosure standard used by companies on all elements related to environmental and social reporting. The result is that a minority of companies provide data in some categories, such as waste production, water usage and workplace injuries. Because of these gaps, companies are scored only on the categories where data is disclosed, which means some companies' scores are based on a smaller number of data points. However, there is also a "modifier" applied to the final score to reflect the quality of a company's disclosure. Further details of the disclosure scoring are provided below.



ENVIRONMENTAL INDICATORS



(Data source: ASSET4, a Thomson Reuters business)

Energy productivity: Annual sales ($US) divided by total direct and indirect energy consumption (measured in gigajoules), compared with the average of other companies in the same GICS Industry Group (from a universe of 3,000 global large-cap stocks). The score is expressed as a percentile rank based on how the company compares with others in its industry group. A rank of 100 per cent means the company is the top performer compared with all peers in the same industry group, while 50 per cent means the company meets the industry average and zero per cent means the company is at the bottom of comparable peers.

Carbon productivity: Annual sales ($US) divided by total carbon dioxide and CO2 equivalents emitted (measured in tonnes), compared with the average of other companies in the same GICS Industry Group. The score is expressed as a percentile rank based on how the company compares with others in its industry group. A rank of 100 per cent means it is the top performer compared with all peers in the same industry group, while 50 per cent means the company meets the industry average and zero per cent means the company is at the bottom of comparable peers.

Water productivity: Annual sales ($US) divided by total water use, not including recycled water (measured in cubic metres), compared with the average of other companies in the same GICS Industry Group. The score is expressed as a percentile rank based on how the company compares with others in its industry group. A rank of 100 per cent means it is the top performer compared with all peers in the same industry group, while 50 per cent means the company meets the industry average and zero per cent means it is at the bottom of comparable peers.

Waste productivity: Annual sales ($US) divided by the total amount of waste produced and generated (measured in tonnes), compared with the average of other companies in the same GICS Industry Group. The score is expressed as a percentile rank based on how it compares with others in its industry group. A rank of 100 per cent means the company is the top performer compared with all peers in the same industry group, while 50 per cent means the company meets the industry average and zero per cent means it is at the bottom of comparable peers.

Note on currency: sales is expressed in $US in order to ensure comparability with global peers.

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How much each category counts toward the final score for companies in each industry sector:



Industry Sector

Energy productivity

Carbon productivity

Water productivity

Waste productivity

Total environment

Consumer Discretionary

7.5%

7.5%

7.5%

7.5%

30%

Consumer Staples

7.5%

7.5%

7.5%

7..5%

30%

Energy

10%

10%

10%

10%

40%

Financials

7.5%

7.5%

7.5%

7.5%

30%

Healthcare

7.5%

7.5%

7.5%

7.5%

30%

Industrials

10%

10%

10%

10%

10%

Information Technology

7.5%

7.5%

7.5%

7.5%

30%

Materials

10%

10%

10%

10%

40%

Telecommunication Services

7.5%

7.5%

7.5%

7.5%

30%

Utilities

10%

10%

10%

10%

40%



GOVERNANCE INDICATORS



(Data source: Corporate Knights Research Group)

Sustainability leadership: Does the company have an ESG/sustainability board committee? A score of 100 per cent means it has a committee; zero per cent means it does not.

Leadership diversity: Does the company have diverse leadership on its board of directors? Half the score is based on the percentage of directors who are women, and half the score is based on the percentage of directors who are visible minorities or aboriginal directors. For example, if a company has 10 directors, two are female, and one is aboriginal, it would receive a score of 30 per cent.

Sustainability remuneration: Does at least one senior executive of the company have a portion of his/her pay linked to sustainability issues? A score of 100 per cent means pay is linked to sustainability, while zero per cent means it is not.



How much each category counts toward the final score for companies in each industry sector:

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Industry sector

ESG committee?

% women on board

% visible minority on board

Executive pay link

Total governance

Consumer Discretionary

10%

5%

5%

10%

30%

Consumer Staples

10%

5%

5%

10%

30%

Energy

10%

5%

5%

10%

30%

Financials

10%

5%

5%

10%

30%

Healthcare

10%

5%

5%

10%

30%

Industrials

10%

5%

5%

10%

30%

Information Technology

10%

5%

5%

10%

30%

Materials

10%

5%

5%

10%

30%

Telecommunication Services

10%

5%

5%

10%

30%

Utilities

10%

5%

5%

10%

30%





SOCIAL INDICATORS



CEO to lowest-paid worker: Ratio of the CEO's compensation in fiscal 2009 compared with pay for a full-time worker earning $10 an hour. (Data source: Report on Business Executive Compensation 2009)



Employee safety: The company's total number of injuries and fatalities including no-lost-time injuries per one million hours worked. If three people die and seven are injured, and the employees worked 10 million hours, the rate would be 1 per 1,000,000 hours. This rate is then compared with the rate for other companies in the S&P/TSX 60 index and a score is assigned on a percentile basis; 100 per cent means the company has the lowest injury rate of its S&P/TSX 60 peers that report. (Data source: ASSET4, a Thomson Reuters business)



Percentage tax paid: Four-year average of a company's percentage of reported statutory tax obligation paid in cash. Taxes are part of the social contract for operating a business in society. Considerable discretion exists as to whether companies take an aggressive or cautious approach to the grey areas of tax minimization. With tax authorities clamping down on legal tax loopholes and other vehicles that permit tax minimization, this metric is intended to show which companies pay substantially lower cash tax as a percentage of their reported statutory rate of income tax relative to their industry peers. It is intended to provide insight into risk factors that could have an impact future cash flows. (Data source: Corporate Knights Research Group)



Pension plan: Does the company offer a defined-benefit (DB) pension plan to its employees? An arbitrary cutoff of $200-million in closing fair value of plan assets was applied to exclude pensions that are focused solely on the executive suite or serve only a small percentage of the employee base. Companies with a DB pension plan receive a score of 100 per cent. (Data source: Corporate Knights Research Group)



Pension funding: If the company has a DB pension plan, is it fully funded? The score is the company's reported funding level for its pension plan. A score of 100 per cent means the plan has assets equal to or exceeding the accrued benefit obligation. Scores below 100 per cent are the percentage solvency funding rate of the plan. (Data source: Corporate Knights Research Group)



How much each category counts toward the final score for companies in each industry sector:



Industry sector

CEO pay to lowest-paid employee

Safety

Taxes

Pension bonus

Pension funding

Total social

Consumer Discretionary

10%

0%

10%

10%

10%

40%

Consumer Staples

10%

0%

10%

10%

10%

40%

Energy

6%

6%

6%

6%

6%

30%

Financials

10%

0%

10%

10%

10%

40%

Healthcare

10%

0%

10%

10%

10%

40%

Industrials

6%

6%

6%

6%

6%

30%

Information Technology

10%

0%

10%

10%

10%

40%

Materials

6%

6%

6%

6%

6%

30%

Telecommunication Services

10%

0%

10%

10%

10%

40%

Utilities

6%

6%

6%

6%

6%

30%







TRANSPARENCY





Transparency modifier: The final score is adjusted based on how well the company discloses its ESG information, with a possible maximum five percentage bonus. Half the transparency score is based on how many voluntary metrics are reported, which includes environmental measures and the company's lost-time injury rate for certain industries. The other half of the score is based on if, and how well, the company reports its ESG performance based on internationally accepted reporting standards developed by the Global Reporting Initiative. Companies with A+ adherence level and third-party checked company reports within the last three years receive 100 per cent.



S&P/TSX60 companies were contacted to verify and augment the data provided to Corporate Knights Research Group. TSX 60 Ranking Project Leaders: Toby Heaps, Melissa Shin.



More from Report on Corporate Responsibility:

  • Few Canadian companies disclose environmental practices
  • Corporate Social Responsibility governance practices rankings
  • Why Loblaw takes top honours for corporate social responsibility
  • In pictures: Top 10 corporate do-gooders
  • In pictures: Corporate Canada's 10 green leaders and laggards
  • Bombardier ranks No. 1 for environmental practices
  • Discussion: How green are Canada's leading companies?
  • Methodology: How the marks were determined
  • Corporate social responsibility by the numbers


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