The CK Research team is now screening companies for sustainability-related fines, penalties and settlements

Last April, Corporate Knights ran a story about the three leading potash producers in North America signing a $97.5 million settlement in a class-action lawsuit. It stemmed from eight private antitrust suits brought by purchasers of potash in the agricultural sector, alleging that these companies were operating as a cartel through their wholly owned exporting and marketing firm Canpotex. Although the companies involved did not directly admit to any wrongdoing, it was quantifiable evidence of questionable corporate behaviour.

Should this have affected whether or not these companies are considered for the Best 50 Corporate Citizens in Canada ranking?

Balancing our desire to measure companies from an environmental, social and governance standpoint with the limitations of measurable data is a constant struggle for the CK Capital research team. Being reliant on publicly disclosed indicators allows for comparisons between industry peers, rewards companies for their transparency and sets simple benchmarks for measuring progress over time. It also means that our definition of what constitutes a top corporate citizen is somewhat constrained.

Flagship Corporate Knights rankings like the Best 50 will continue to be product agnostic, working to identify the best corporations in each sector regardless of the merits or impact of that specific industry. To supplement this, however, we have decided to institute a sanctions screen involving each company considered for inclusion.

This screen is applied by tallying up the sum total of sustainability-related fines, penalties and settlements paid out by each corporation over the past year. If this amount is in the top 25 per cent of fines paid (compared to other companies in that specific industry group), the company is eliminated from contention on the Best 50.

Fines, penalties and settlements have been added to our Best 50 toolkit because they capture, in part, different aspects of corporate performance. There are many ways wherein a company can perform well on our 12 indicators, yet still act as a poor corporate citizen. Corporate Knights has long written about these issues from an editorial standpoint, but many of these factors – human rights violations, bribery, monopolistic practices – do not easily lend themselves to objective measurement. The addition of the fines screen for the Best 50 ranking is part of an ongoing effort to expand the scope of the methodology.

As a result, four companies were excluded from the list this year: Agrium, PotashCorp, Barrick Gold and Industrial Alliance. Potash and Agrium were disallowed due to their participation in the antitrust settlement, while Industrial Alliance paid a $165,000 fine to Quebec financial regulators for alleged sales violations. Even though the sum paid by Industrial Alliance was itself quite small, when contrasted against fines paid by other insurance companies in 2013 it grew in significance.

The case of Barrick Gold is perhaps the most interesting, as the firm placed fourth in last year’s Best 50 ranking. Its disclosure record remains impressive, while its resource productivity indicators are among the leaders in the materials industry group. In spite of that, our new screen identified several large environmental fines levied against the firm in 2013.

Three gold mines in northern Nevada – all subsidiaries of Barrick – were ordered by the U.S. Environmental Protection Agency to pay $618,000 for neglecting to disclose multiple toxic chemical releases from 2005 to 2008. A portion of that money will be donated to an environmentally beneficial project.

In Chile, Barrick’s troubled Pascua-Lama gold project suffered yet another setback when the Chilean environmental regulator ordered the project suspended last May. It followed on the heels of an earlier court ruling making the same recommendation. The regulator also fined Barrick $16 million for what it deemed to be “serious environmental violations” that negatively impacted local water supplies. Barrick managed to have the amount reduced 25 per cent by making quick payment.

Screening Canadian companies based on financial penalties paid out over the past year is far from perfect. It places faith in a range of different regulations from varying jurisdictions, which are often inadequate or unevenly enforced. Another constraint is the need to wait until the amount is definitive. Only after all potential avenues for appeal have been exhausted can Corporate Knights consider the penalty in question.

Even with these caveats, Corporate Knights remains convinced that this new addition to the methodology adds a valuable dimension to our ongoing evaluation of corporate sustainability performance.

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