ESG ratings

We highlight that Sustainalytics' ESG Risk Ratings are based on Sustainalytics' own assessment of our risk exposure (uncontrollable) and risk management (controllable). Approximately one quarter of our latest ESG Risk Rating is outside our control ('unmanageable risk exposure'), with the remainder heavily influenced by Sustainalytics' own assessment of the risk exposures that are manageable.

Sustainalytics' ESG Risk Rating also reflects events that, in their view, may negatively impact our stakeholders or operations. We estimate that approximately one quarter of our latest ESG Risk Rating is driven by the ‘controversies’ identified by Sustainalytics. We have provided feedback to Sustainalytics that many of these events are: (i) based on unsubstantiated allegations where no competent authority has found wrongdoing; (ii) immaterial (one example relates to a US$1,000 fine in a joint ventures); and (iii) are a number of years old but continue to be considered if referenced in more recent news reports.

Users should be aware that Sustainalytics' ESG Risk Rating report does not provide the detail supporting each controversy and only presents the headlines in the core report. We would recommend users of Sustainalytics' analysis review the separate Controversy Report in detail and reach their own conclusions as to the relevance, accuracy and financial materiality of the events identified by Sustainalytics.

ISS defines ‘key issues’ for every industry, reflecting the industry’s most challenging social and environmental issues. Indicators assessing our performance in the key issues identified by ISS account for 67% of the overall rating. A number of the indicators used to assess these key issues have a high weighting. For example, only 15 indicators account for 50% of our overall ISS ESG Corporate Rating.

Furthermore, the ISS ESG Corporate Rating also includes an assessment of the impact of a company’s product and service portfolio on social and environmental sustainability objectives, based on the UN Sustainable Development Goals ('SDGs'). The overall grade is determined by the estimated share of net sales generated with relevant products or services contributing to or obstructing the achievement of the most material objectives for a company's business model. These indicators (percentage of revenue) are similar to those required under various 'taxonomies' that are being introduced around the world. Taxonomies are classification systems which help companies identify and report on the share of revenue earned from defined sustainable economic activities. The key challenge is that many companies, including Vodafone, do not currently report financial performance on an activity-by-activity basis or in the manner sought by ISS. The grading is therefore affected by limited public disclosure.

Whilst the ISS ESG Corporate Rating us updated annually; we are only invited to engage in the formal feedback process every 2-3 years. We engaged with ISS for the first time in 2022. We are able to share updates at any time but this is after the normal annual update process.

Refinitiv's ESG scores are primarily focused on a company's operations, rather than the impact of its products or services throughout the company's value chain. This is because Refinitiv recognises that it is much harder for companies to report on the social or environmental impact of their products and services in an objective and measurable way as reporting standards are still evolving.

Refintiv's ESG scores are relative and based on a percentile rank scoring methodology to calculate the 10 category scores. This methodology considers three key factors: (i) How many companies are worse than the current one?; (ii) How many companies have the same value?; and (iii) How many companies have a value at all?.

Refinitiv's database is updated on a continuous basis and data is refreshed every week, including the recalculation of the ESG scores. Updates could include a brand-new company being added to the database (and hence impacting the relative scoring for a company in the same industry), the latest fiscal year update or the inclusion of new controversy events. In most cases, reported ESG data is updated once a year in line with companies’ own ESG disclosure.

Whilst Refinitiv's ESG scores are primarily based on company-disclosed data, Refinitiv also provides 'controversy' scores based on impact and conduct reported by global media sources. We are not provided the ability to review or share feedback on the accuracy or relevance of controversies identified by Refinitiv. If the controversy score is less than the ESG score, Refinitiv produces an "ESG Combined Score" which is based on a simple average of the controversy score and the ESG score. This Combined Score is not freely available but we would advise users that because it is based on a simple average, the weightings assigned to the material indicators reflected in the ESG score are effectively halved, no matter the number or materiality of the controversies identified by Refinitiv.