February 12, 2021

Prep Time for Potential ESG Ratings Questions

Yesterday, I blogged about how investors want to see companies enhance ESG reporting. ESG ratings are just one information source but it’s an area highlighted by investors for improvement. Some ratings firms release a “combined ESG” score at no charge and now, Refinitiv is one ratings firm taking things a step further. Recently, Refinitiv began making its ESG rating information available for free on its website and this includes sub-theme scores within each of “E”, “S” and “G” beyond just the overall combined ESG rating. Refinitiv has an extensive database – this blog post says it provides access to ESG scores on 10,000 companies.

With Refinitiv’s sub-theme scores freely available, investors and other stakeholders can find a company’s Refinitiv score for human rights, product responsibility, innovation, etc. Even if a company’s major investors don’t typically cite Refinitiv scores, with thematic scores freely available, this information could become fodder for questions during shareholder engagement meetings and it’s possible ESG ratings questions could start coming from directors, employees and other stakeholders. For example, if a company talks up its commitment to community, knowing Refinitiv’s “community” sub-theme score can be helpful and if it doesn’t seem to jive, check out whether Refinitiv has pulled accurate information to generate its score.

Dealing with ESG rating challenges can seem like climbing a never-ending hill and for companies without a chief sustainability officer, ESG ratings challenges might increase the odds that they start thinking about appointing one. Given the usual responsibilities of corporate secretaries and IR professionals, it’s hard to imagine either would have time to dive into ESG ratings to the extent needed. If other rating firms follow Refinitiv’s lead in sharing ESG thematic scores freely, anyone dealing with understanding and validating ESG rating provider data just got a whole lot more work.

A recent Paul Weiss memo discusses implications from ESG ratings and serves as a reminder of actions companies can take to protect themselves from ratings inaccuracies. As a first step, companies should actively monitor their current ESG ratings and develop an approach to engage with ESG rating agencies to ensure an accurate assessment of the company’s ESG performance. This includes confirming that ESG rating agencies are using correct data for their analysis.  In addition to Refinitiv, the memo identifies MSCI, ISS, RobecoSAM, Sustainalytics and RepRisk AG as common ESG ratings firms but also says there are at least 125 organizations providing ESG ratings and research.

Chief Sustainability Officer Focus: Doing Good or Doing Less Bad

I blogged back in December about continued growth in ESG investing and that’s another reason, among many, helping motivate companies to appoint a chief sustainability officer. Appointing a CSO is one way companies can show various stakeholders that they’re prioritizing and focused on sustainability. This INSEAD Knowledge blog notes CSOs are fast becoming a fixture and provides insight about the impact of the CSO.

The blog discusses research of 400 large US companies that found CSOs have an impact by improving a company’s sustainability record. What was interesting to me was a finding about the degree of a CSO’s impact on company engagement in “socially responsible” activities versus reducing “irresponsible” activities. Here’s an excerpt:

As expected, companies with a CSO engage in more socially responsible activities (e.g. investments to reduce carbon emissions) and fewer socially irresponsible activities (e.g. polluting the environment). Significantly, we found that CSO presence has a greater effect on companies ‘doing less bad’ than ‘doing more good.’  This effect is particularly pronounced in companies in so-called “sin” or culpable industries like tobacco, and, notably, in companies with a board committee for sustainability.

The researchers attribute this to more condemnation companies would likely receive it they were found to have polluted a river than the goodwill they would earn from granting more generous sick leave. The blog also says that they’ve found ‘doing good’ pays and they hope the study’s findings spur companies to design CSO contracts to incentivize the CSO to channel more resources to socially responsible activities even while striving to reduce those that are irresponsible.

January-February Issue of “The Corporate Counsel” – New Podcast!

The January-February Issue of “The Corporate Counsel” newsletter is in the mail (try a no-risk trial). It’s also available now online to members of who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment.  The issue includes articles on:

– Virtual Reality: Investors Want More from 2021 Virtual Meetings

– Form 10-K Tidbit: Can You Drop Rule 3-09 Financial Statements?

– A Form 8-K Pitfall: Fallout from Changes to Section 162(m)

– Wither The Integration Doctrine? A New Approach Dawns this Spring

For those who haven’t previously subscribed to the newsletter, you may not realize what a wealth of information these publications provide. That’s part of the reason our intrepid editors, Dave Lynn & John Jenkins, also got together to tape this 28-minute podcast about the latest issue. The podcast is available to all members. Check it out!

– Lynn Jokela