The Presentation of Results: Transparency & Disclosure Of CGRS

Effective communication and transparency about the criteria and methods used in assessing companies for inclusion in a CG index are essential building blocks for an index’s credibility.  The disclosure of evaluation results is equally desirable and important for securing an index’s credibility.

Transparency of index disclosure is determined by two components:

  • Disclosure of methodology: Criteria and methodology are disclosed in most existing indices (China’s SSE does not publish a qualifying threshold or details of a methodology), but the degree of detail and ease of accessibility differs substantially. All stock exchanges have dedicated pages for their CG or ESG indices on their websites. However, these pages do not always include access to the index rating agencies, universities and not-for-profit institutions. In reality, a number of mixed models exist, often pairing a university with a rating provider. South Africa’s SRI index, for example, is the result of a collaboration of rating agency EIRIS and the Business School of the University of Stellenbosch.
  • Disclosure of rating results: The disclosure of detailed results, ideally including the rating report, is important for an index’s credibility. It is also critical for investors to know whether the criteria not met by a company are those important for their investment decisions. It is important to note that this does not apply to governance listing tiers, where the adequate presentation of the special listing rules and company disclosure is sufficient to ensure that a company complies with all governance-related listing requirements.

Despite the importance of transparency in this field, none of the six threshold indices from around the world disclose a significant degree of their rating results. The major obstacle to increased disclosure is the reluctance of companies to have detailed reports and scores published, since it would effectively rank them against other companies.

The two indices disclosing a limited part of the rating are South Korea and Turkey.  However, the South Korean Index only discloses the rating (in letter grades ranging from B+ to A for qualifying companies), not the underlying report. Turkey’s ISE index used to be the only index disclosing the full rating report on the website of the Turkish Corporate Governance Association. However, this practice has now been discontinued for non-members of the association. Companies are still free to individually publish their rating reports.

In sum, apart from Brazil and Italy as listing segments, and the JSE SRI Index for its index setup and methodology, no existing stock exchange CG index even reaches the condition of full transparency of disclosure for the index methodology let alone the rating results.