Sustainalytics’ ESG Risk Ratings issue – Product Governance – focuses on how companies manage risks related to product governance issues such as product quality and safety, service safety and responsible marketing practices. The assessment of this material ESG issue helps to inform investors about the degree of exposure companies face regarding product governance and the extent to which this exposure is managed.
The importance of Product Governance
Product and service safety is crucial for any business. Delivering safe and reliable products and services help to maintain customer satisfaction and loyalty and reduces the risk of replacing faulty goods. Research has shown that ensuring customer retention by offering high quality products is profitable in the long-term as existing customers have a 60-70% conversion rate, while new customers have a 5-20% rate. Furthermore, maintaining robust product quality builds brand reputation and minimizes product recalls. Active product oversight requires quick access to reliable data, continuous monitoring, and collaboration across the business. Companies in highly regulated industries such as healthcare, food & beverage, financials, transportation, and aerospace & defence will need to meet stringent product and service safety standards and meet minimum quality requirements. Failure to do so could result in product liability lawsuits and loss of licence to operate.
Assessing the Unmanaged Risk of Product Governance by Industry
The risk rating for the Product Governance MEI combines the risk a company cannot completely manage due to its business model and product offering with the risk that it is not actively managing due to the lack of implementation of relevant programs and policies. Applying our consistent and comparable ESG Risk Ratings model, we see that the MEI Product Governance is material for 3462 companies in our comprehensive universe, spanning 35 industries. Exhibit 1 shows the average unmanaged risk score for Product Governance at the industry level in Sustainalytics ESG Risk Rating. Pharmaceuticals peer group has the highest average unmanaged risk score, followed by Automobiles and Healthcare.
Exhibit 1. Product Governance: Unmanaged Risk by Industry
Source: Sustainalytics, data as of January 2022
As investors, regulators and customers become more aware of the risks relating to product governance, how it affects product sales and customer confidence, companies will face increased scrutiny on how they are addressing these issues in their own operations. Using our ESG Risk Rating framework, investors can clearly see which companies are most exposed to this important issue and how well they are managing their related risks.