TheCorporateCounsel.net

March 31, 2020

Making Use of ESG Ratings

As is often said – beauty is in the eye of the beholder – some might say the same about ESG ratings, then again maybe not – it wasn’t too long ago that Liz blogged about how ESG ratings and funds were causing so much confusion – and frustration.  The idea of a rating sounds great – evaluate a bunch of company-specific factors and calculate a rating so investors can evaluate companies based on their particular ESG interests and areas of focus.  But, it’s not that simple because, among other things, we don’t have standard disclosure and reporting frameworks in place, raters use varying methodologies, investors use them differently, etc.

A recent BNY Mellon report based on a survey of 335 investor relations professionals says that only a small percentage of survey respondents agree with ESG rating providers’ analyses of their company.  In 2019, slightly over half of survey respondents had communicated with an ESG rating provider in the past 12 months, which was up from 34% in 2017.

BNY Mellon’s report says that IR departments are increasingly monitoring their company’s ESG ratings, even more so at companies with higher market caps as they presumably have more staff.  One reason companies might want to monitor ESG ratings is that investors often raise ESG questions during engagement meetings so it’s helpful to know which ratings your investors track and understand those raters’ methodologies.  The BNY Mellon report summarizes the increase in investor ESG questions by topic and industry sector so you can see the types of questions you might hear this year.

I’ve heard suggestions that one way ESG ratings might be more useful would be if the ratings assessed the evolution of a company over time and its trajectory toward sustainability rather than comparing firms, even in the same industry.

For now, the usefulness of ESG ratings as stand-alone information seems questionable as one rater might rate a company high and another might rate the same company low.  If anything, companies can find usefulness in the ratings to prepare for investor engagement meetings by understanding which ratings investors are tracking and the related rating methodologies.

Glass Lewis Approach to Governance During Pandemic

Not long ago, I blogged over on our “Proxy Season Blog” about Glass Lewis’s updated policy on virtual-only shareholder meetings.  Glass Lewis recently posted another blog – this one about its approach to governance during the coronavirus pandemic. In its governance blog, Glass Lewis touches on compensation and balance sheets – which is the area where it expects to see most near term concerns and issues, board composition and effectiveness, activism and M&A, oil & gas, shareholder proposals & ESG, how Glass Lewis uses discretion and how a company’s disclosure can impact Glass Lewis’s use of discretion.  Here’s some of the proxy advisor’s commentary on board composition amid the pandemic:

For boards, we see particular risk in the lack of age and gender diversity among company directors.

Much like shareholder concerns with overcommitment this lack of diversity presents a systematic risk to portfolios, given directors typically sit on several boards and one sick or deceased director can have a compound effect on the capacity of other directors at those companies, which then spreads to the other companies those directors sit on, and so on.

Ultimately, the ability of boards and management to successfully navigate the crisis and outperform their competitors will highlight the stark differences in the effectiveness of boards, directors and their governance structures. In our experience during past crises, well governed companies who made the right decisions during the good times are well prepared and durable during a crisis, and far better positioned to deliver shareholder returns afterwards.

Transcript: “Conduct of the Annual Meeting”

We have posted the transcript for our recent webcast: “Conduct of the Annual Meeting.”

– Lynn Jokela