Low Carbon Transition Rating
Corporate Governance Research
Methodology and Scoring Overview
Sustainalytics assesses governance-related risks and opportunities by determining the extent to which a company’s governance practices detract from or add to the company’s ability to execute on its business strategy. This page includes an overview of the research approach and of the scoring methodology used for this product.
Sustainalytics’ Corporate Governance Research (CGR) evaluates the governance structures, practices, and behavior of companies and their ability to build sustainable, long-term value that can be delivered to shareholders and other stakeholders in a fair and transparent manner.
The CGR framework is structured into six key Corporate Governance issues:
- Board/Management Quality and Integrity
- Board Structure
- Ownership and Shareholder Rights
- Audit and Financial Reporting
- Stakeholder Governance
Each key issue is examined with the help of indicators that assess multiple underlying data elements in a more holistic light. Using indicators (between 6 to 15) to analyze the underlying data, key issue assessment insights can be gained as to how a company’s governance practices connect to each other and to its overall business trajectory.
Assessments often incorporate views of the company’s practices relative to market norms, and relative to global governance standards, respectively.
Sustainalytics’ Corporate Governance profiles are built on quantitative data structured around indicator-level data points. The largest companies and companies involved in significant events are covered by Corporate Governance reports. These include qualitative analyses for each key Governance Issue, providing opinion and insight on how the issue relates to the company’s business drivers, together with our outlook on the company and for each key issue, respectively. Reports also include an overall analysis that highlights the most important issues and a holistic overview. The research and scoring methodology is equally applicable across both full reports and profiles.
Research Scoring: Philosophy & Structure
The Corporate Governance Research (CGR) report includes three types of scores:
- Indicator scores
- Key Issue scores
- Overall scores
Each type of score is represented on a scale from 0 (zero) to 100: where 0 (zero) represents the lowest negative assessment, 50 represents a “neutral” assessment and 100 represents the highest positive assessment of the company. Each score is anchored at multiples of 10 points, and analysts may override quantitative scoring calculations while calibrating the final ratings model.
CGR (indicator, key issue, and company-level) scores may be described as bi-directional: with 50 acting as the “neutral” score, the interpretation is that scores lower than 50 are sub-optimal and scores above 50 are above optimal. In that sense, any score above 50 is a positive feature of the CG systems that the company has in place, and very rarely do indicator-level (and other scores) reach 80, 90, or 100.
Scores provide a quantitative evaluation of the company, and they contribute to the representation of the Outlook rating.
Indicators are scored based on the underlying data elements documented as bulleted items for each indicator (further broken down into “criteria sets”). Formulas combine these elements, thereby calculating the indicator score – which also includes an assessment of the interactions between the different elements comprising an indicator.
Key Corporate Governance Issue Scores and Overall Scores
Key Issue scores are calculated using a weighted average of the underlying indicators contained within the key issue. In its turn, the overall company score is calculated as a weighted average of the underlying key issue scores.
For both Key Issue scores and the Overall scores, we apply an overlay to the weighted average scores, through which specific pairings of indicators are targeted. This may serve to additionally raise or lower the scores. For instance, the board tenure and board diversity indicators are a pairing: if both indicators have “negative” (i.e., below 50) scores, the overlay calculation will further reduce the Board Structure Key Issue score. Similarly, “positive” scores (i.e., above 50) in a pairing may raise the Key Issue score.
The Outlook rating reflects our qualitative judgment on the overall trajectory of the company’s performance and with respect to key Corporate Governance issues. This judgment looks at both recent performance and future expectations along the issue, and it is generally assessed over a multi-year timeframe.
↑ Positive outlook reflects corporate governance practices that suggest strengthening of corporate governance performance, or the persistence of strong performance.
→ Neutral outlook reflects corporate governance practices that do not lead to a strong judgment either way regarding the trajectory or prospects for corporate governance performance.
↓ Negative outlook reflects corporate governance practices that suggest weakening of corporate governance performance, or the persistence of poor governance performance.