Modified Measure: The Z Rating

A negative impact rated “Z” results in all points related to positive impacts being ignored in the calculation of the impak Score™.

 

impak’s methodology is constantly evolving with reviews from peers, experts, and clients, alignment with new standards, updates, and more. As a matter of fact, it is in our DNA to co-create, to rethink, and to be transparent about our work. Given the innovative nature of our work, these updates are quite frequent, but they will decrease through time from every six months currently to every year at maturity.

Please find below a summary of the most recent changes regarding the Z rating, which is detailed in the updated version of the impak rating methodology available on www.impakfinance.com.

Motivation to Modify This Measure
In the context of a transition towards social and environmental impact, the consequence of the previous iteration of our methodology was that there was no difference between companies who were rated “Z: does cause harm” and “Z: may cause harm”, which led to inconsistencies in results. Furthermore, there was no difference between a company who quickly put corrective actions in place after a negative outcome that had been rated Z, and a company that didn’t plan anything to acknowledge and mitigate the Z-rated outcome in the future. This led us to re-think the application of the Z-rating into the impak ScoreTM.

Before – IMP Aligned
As suggested by the Impact Management Project framework, on which our methodology is based, if a company had a negative impact rated Z (does or may cause harm), all its potential points for this specific negative impact as well as its positive impacts were brought to zero. The reason is that we did not want for instance a company that had been convicted for child labor to be able to score points on the positive impacts it generates.

There are two ways to get a Z, either the company has been convicted or it admits guilt (does cause harm) OR the company doesn’t provide any information regarding mitigation of a specific negative impact resulting in it being impossible for our analysts to determine whether this material impact is mitigated or not (may cause harm).

Now – Taking Into Account the Type of Z, Company History and Corrections
Given there are no consensus* or standards on how to categorize different levels of harm (e.g. institutional modern slavery is probably worse than a single isolated case of bribery, but what about institutional bribery v.s. banks’ interest-rate fixing?), we based the Z evaluation on a decision tree.
The first distinction is whether the company does or may cause harm.

Does cause harm
Following the ‘does cause harm’ path, the analyst must find out if a corrective measure has been applied or not to the outcome for which a Z was obtained.
If the company applied a corrective measure, the analyst will look at repetitions of Zs per year over a period of 3 years for the same outcome since it first appeared. No Z in the past would decrease the positive impact score by 20%, whereas 3 Zs or more in the past (for the same outcome) would decrease the positive impact score by 50%.
If no corrections have been applied, depending on the number of Zs the company has had for the same outcome in the last 3 years, its positive impact score could decrease between 40%-100%. The worst case scenario would be if a company doesn’t correct its negative outcome for which it got a Z and if it had several Zs in the past for this specific outcome.

May cause harm
If a company doesn’t provide enough information to determine if it mitigates a material negative outcome, the outcome will be rated Z. After that, the same logical branching applies, which means the analyst will look at repetition of Zs the company has had for this same outcome over the last 3 years. If it had no Zs in the past, the positive impact score would decrease by 30 %, and if it accumulated several Zs in the last 3 years, the positive impact score would decrease by 50%.

Finally, another small modification was made to a specific score question related to negative impacts, for which the weight was modified to better picture the ZABC rating. The effect on the negative impact score is minimal (0.6% max change).

* We are currently looking to establish a group of experts to discuss topics and issues such as this regarding our methodology and its ongoing improvements.


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