Approach  and  Structure

The three parts constituted by the research questions are complemented by a fourth introduc-tory part. First, by extracting characteristics and the problem setting of SRs, I show that the composite indicator framework is an applicable research framework. Second, I identify steps in the construction with a direct influence on the results of composite indicators in general, and explain how a one-dimensional measure for corporate sustainability is constructed to an-swer (RQ2). Third, based on steps and decisions during the construction, I formulate transpar-ency criteria of SRs to answer (RQ1). Fourth, I demonstrate the application of my criteria in an empirical review of SRs to answer (RQ3) for five SR agencies.

The structure of this thesis represents the four-fold approach. The composite indicator frame-work and the SR approach are compared in chapter 2. The SR approach is introduced in sec-tion 2.1 and the composite indicator framework is introduced in secsec-tion 2.2. Secsec-tion 2.3 demonstrates the equivalence of their constituents and their problem settings. An application of the composite indicator framework to SRs has not been carried out before. In order to ana-lyze SRs, it is necessary to have a research framework that I can rely on to identify crucial aspects of an SR’s construction and to use findings from this field of research.

Chapter 3 identifies and presents crucial steps in the construction of composite indicators to explain how a single measure for corporate sustainability is constructed. Five crucial steps are identified to be relevant for the interpretation of SRs (section 3.1). These are the theoretical framework¹ (section 3.2), the data selection (section 3.3), the derivation of weights (section 3.4), the normalization (section 3.5), and the aggregation of indicators (section 3.6). At the end of this chapter, I will have shown how a single measure – which represents a multi-dimensional phenomenon like corporate sustainability – is constructed, corresponding to (RQ2). A major part of the used literature analyzes assessments of sustainable development concerning nations. Its findings are applicable to equivalent assessments of companies. Based on its applicability, I use insights from the composite indicator literature to find out which methods are used and which decisions are made during the construction of an SR. This litera-ture is complemented with insights from ESG-literalitera-ture, statistical offices, and lifecycle anal-ysis where appropriate.

Once the construction of SRs has been analyzed, the identification of information necessary to interpret SRs is a simple transfer. These elements of information form the transparency crite-ria. In a formal exercise, they will be reasoned (section 4.1). Section 4.2 presents the transpar-ency criteria and section 4.3 justifies the criteria by anticipating two kinds of criticism.

In chapter 5, the application of the transparency criteria is demonstrated empirically. For the review, I apply the transparency criteria to five SR agencies that have voluntarily been certi-fied by a standard called Arista 3.0 in order to counter criticism concerning their quality and transparency. This “voluntary quality standard for responsible investment research” is a con-crete effort by the SR industry to “stimulate transparency” among SR agencies (Association

1 Please note that ‘theoretical framework’ refers the first step in the construction of a composite indicator. The ‘composite

for Responsible Investment Services (Arise), 2012a, p. 3). The application of my transparency criteria identifies (1) whether the standard ensures enough transparency to enable the interpre-tation of SRs and (2) where improvements are needed. The certification process requires the publishing of a so-called transparency matrix, where agencies answer questions about their SRs. This suggests that crucial parts of the construction are published. However, the empirical analysis finds that the transparency matrices do not enable the interpretation of the SRs. The empirical part is presented as a separate part of the thesis, thus a hypothesis (section 5.1) and a literature review (section 5.2) is presented in chapter 5. I introduce Arista 3.0 and the data source in section 5.3. After a presentation of the results (section 5.4), I discuss them in depth (section 5.5).

Many other interesting questions in the context of SRs are explicitly excluded from this thesis.

It is tempting to evaluate the quality of SRs and whether their scope of ESG issues is suffi-cient. One could create a ‘correct’ SR, which then is compared to existing SRs in order to identify deficiencies. To do so would be an elaborate endeavor – one that has been made by SRs in the past two decades. It would also be a subjective analysis, given that there is no uni-versally accepted definition of corporate sustainability.

Without setting up one’s own SR, one may compare the concepts of corporate sustainability represented by different SRs. I found that there is insufficient published information to do so in a satisfactory way. Thus, I refrain from speculating about the quality of SRs and their inter-pretation. The interpretation of an SR requires information about its construction, i.e. a proce-dure encompassing various methods and decisions. I analyze which information is published without analyzing the content released by this transparency. In other words, I do not evaluate the construction of SRs, but rather the availability of information concerning the construction.

I also excluded the analysis of SR agencies at an institutional level. An institutional analysis looks at the ownership of an agency, its affiliations, and incentives created by its business model. This could identify causes for more or less transparency of an SR’s construction.

Again, my analysis is restricted to the transparency concerning the construction. I avoid spec-ulating about the causes for more or less transparency. My empirical conclusions compare the transparency criteria to the information published by SRs. The conclusions can only state whether an agency’s transparency is sufficient to interpret its SR.