Low Carbon Transition Rating
Corporate Governance Research
Frequently Asked Questions
Introduction
Strong oversight and accountability are crucial to the management of material ESG issues (MEIs) as well as a company’s ability to execute its long-term business strategy. Sustainalytics’ Corporate Governance Ratings capture how well a company is managing governance challenges and opportunities.
Sustainalytics’ Corporate Governance Rating is designed to evaluate 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 Corporate Governance Rating scoring model has six components. Please find them listed below along with a brief description of what each component is designed to assess.
1. Board and management quality and integrity
Does the board’s experience, track record and behavior sufficiently demonstrate its ability to provide strategic leadership and oversight?
2. Board structure
Does the organization and structure of the board provide sufficient oversight, representation, and accountability to shareholders?
3. Ownership and shareholder rights
Does the constitution of the company and its ownership structures respect the right of outside shareholders relative to the board, management, and major holders.
4. Remuneration
Do the company’s remuneration policies and practices provide appropriate incentives for management to build value?
5. Audit and Financial reporting
Are the company’s financial reports reliable and subject to appropriate oversight?
6. Stakeholder governance
Does the company’s management of extra financial risks and broader stakeholder relationships raise concerns regarding its governance of long-term value creation?
The model is designed to capture global best practices while considering regional differences.
The Corporate Governance Rating report provides in-depth, contextual analysis of a company’s performance.
The report includes the following details:
- Snapshot of the overall performance
- Benchmark overview: Leading companies and peers
- Absolute scores of the key Corporate Governance issues
- Relative positioning: Comparison to market peers and to industry peers
- CG Pillars write-ups: Summaries of key topics per each Pillar
- For a subset of companies: CG Analyst Views and Outlooks (overall and Pillar-level)
As of September 2022, over 4,000 public companies had a Sustainalytics Corporate Governance Rating.
The coverage universe for the Corporate Governance Rating product is defined by the large- and mid-capitalization indices that we research. Sustainalytics covers the constituents of over 25 global and regional indices.
Sustainalytics incorporates the Corporate Governance Rating into the Sustainalytics ESG Risk Rating (Comprehensive Framework only) across all sectors as a foundational material ESG issue (MEI) component of the ESG Risk Rating scoring model. The Corporate Governance MEI is scored based on the scores of the six components of the Corporate Governance Rating:
- Board/Management Quality & Integrity
- Board Structure
- Ownership & Shareholder Rights
- Remuneration
- Audit & Financial Reporting
- Stakeholder Governance
Sustainalytics’ Corporate Governance ratings include three types of scores:
- Indicator
- Pillar
- Overall
Each type of score is defined on a scale from zero to 100, with 50 acting as the “neutral” score. A score below 50 is considered sub-optimal while a score above 50 is viewed as optimal. Within the model, indicator scores feed into the pillar scores, which in turn form the basis for a company’s overall score.
Individual indicators within a pillar are regionally weighted, based on the company’s listing and incorporation. The pillar score is a weighted average of those indicators.
Furthermore, within pillars, different combinations of indicators may further adjust the scoring outcome to reflect the interdependency of those indicators. For example, if a company performs worse than average on both board tenure and board diversity, the pillar score is further reduced for Board Structure beyond what the individual indicator weighting would suggest. This enables the rating to incorporate interactions between specific indicators. Pillar scores are then regionally weighted to form the overall score.
Indicators are scored based on the underlying data elements documented as bulleted items for each indicator.
We do not disclose the exact scoring formula for each indicator due to the proprietary nature of this information.
The maximum scores for Corporate Governance indicators vary.
All indicators* begin with a score of 50. Each indicator has a set of negative and positive criteria that if met can add or deduct points from the starting score of 50. The maximum score for each indicator is dependent on country and/or region.
*Stakeholder Governance indicators are scored on a 0-100 scale
Controversy indicators are designed to assess if a company is involved in any controversial practices related to each of the pillars. There are five controversy indicators. If a company does not have a controversy in this area, then they score a 50. If they have one or more controversies, then the score will be between 0 and 50, depending on the severity of the controversy.
- Board/Management Quality & Integrity
- CG.1.8 Executive/Board Misconduct
- CG.1.9 Business Practices Controversies
- CG.1.10 Governance Controversies
- Remuneration:
- CG.4.4 Pay Controversies
- Audit & Financial Reporting:
- CG.5.6 Reporting Irregularities
All Stakeholder Governance indicators are scored on a 0-100 scale, with 100 being best in class.
The indicators within the Stakeholder Governance pillar are researched as part of the ESG Risk Rating annual update. These indicators are included in the Management Indicators Feedback Report (applicable for companies assessed under the Comprehensive Rating framework). As such, we collect company feedback as part of the ESG Risk Rating annual update process.
Weights are determined based on location due to regional variation in corporate governance practices.
Sustainalytics does not disclose the weightings of each indicator and pillar due to the proprietary nature of this information.
Sustainalytics’ Corporate Governance research incorporates assessments of a company’s practices relative to market norms, in addition to practices relative to global standards.
For example, board independence norms vary widely from market to market. A board with four outsiders in Japan, for instance, fails to meet the global standard of independence, but exceeds local market practice, improving the company’s relative assessment. In contrast, a widely held company with a 60%-independent board in the U.S. meets the majority independence standard, but lags market practice, which in turn negatively affects its relative assessment.
Sustainalytics updates our Corporate Governance Rating annually. Please note that the Corporate Governance and ESG Risk Rating management indicators are researched separately. Therefore, the timing of these annual updates may not necessarily coincide.
We may update the Corporate Governance Rating in the event of major or extraordinary developments at a company. These include any events that impact a company’s governance performance, policies and structures, or developments that may generate governance risk. Examples include incidents or controversies involving board members or senior executives, developments related to mergers and acquisitions, executive management changes and major financial events.
To check the expected timing of your company’s Corporate Governance Rating update, please contact Sustainalytics’ Issuer Relations team.
Sustainalytics uses both publicly available and internal documents (non-material, non-public). These include but are not limited to the following:
- Annual / integrated reports
- Corporate Governance reports
- Corporate governing/foundational documents (by-laws, charters, constitutions)
- Corporate governance policies
- Shareholder meeting materials
A company can provide any comments on the Corporate Governance Rating by requesting the Corporate Governance Report from Sustainalytics' Issuer Relations team.
To obtain the Corporate Governance Report, please contact Sustainalytics’ Issuer Relations team.
After reviewing the report, please feel free to provide comments at your convenience.
Comments can be added directly to the Corporate Governance Report PDF via the PDF “sticky note” function.
- Please email the PDF with comments to Sustainalytics’ Issuer Relations team.
- Sustainalytics will review all comments carefully before determining whether to update or revise the evaluation and score.
This feature is not yet available. We hope to introduce this feature in 2023.
Sustainalytics prefers that all comment be sent by email.
Sustainalytics does not update the research based on new information released after your company's latest annual update (except in the case of major developments). The newly disclosed information will be incorporated during the next annual update.
However, we encourage you to share any details related to your company’s Corporate Governance at any time. Please note that this information must NOT consist of confidential information or materially non-public information. If you have any questions, please contact Sustainalytics’ Issuer Relations team.
No. For Corporate Governance research, we can only review publicly available documents.
Please refer to Sustainalytics’ guidance on supporting documents here.
Sustainalytics’ Stakeholder Governance research examines whether a company has appropriate structures in place to manage ESG issues generally, and whether it is transparent about these. For instance, does the company’s management of extra financial risks and broader stakeholder relationships raise concerns regarding its governance of long-term value creation?
The Research team accepts both publicly available documents and internal documents, providing they are not material.
While we aim to update the Corporate Governance assessment in accordance with the AGM schedule where possible, we are unable to commit to updating it within a specific period given that the AGM season is extremely concentrated in many markets.