How Well Are FTSE Firms Governed?

Governance
often
ends
up
as
the
silent
“G”
in
ESG,
but
it
is
a
key
element
of
sustainable
investing.
How
well
a
company
is
governed,
and
how
well
it
manages
external
(and
internal)
governance
risks,
affects
both
its
longer-term
prospects and
your
returns
too.

Listing
rules
in
the
UK
are
currently
being
reviewed,
and
governance
is
an
important
part
of
this,

as
my
colleague
James
Gard
explained
this
week.

To
that
end
we’ve
used
Morningstar
Sustainalytics’
Governance
Risk
Score
to
assess
just
how
exposed
FTSE
100
companies’
revenues
are
to
governance-related
issues
–
but
also
how
well
their
leadership
teams
manage
ESG
risk
overall.

On
the
regulatory
side,
to
be
listed
on
the
London
Stock
Exchange
and
included
in
the
FTSE
100,
companies
must
have
certain
governance
procedures
in
place
in
areas
such
as
auditing
and
board
structures.
So
when
pitted
against
the
Governance
Risk
Score
scale,
such
companies
often
score
better
than
smaller
but
similar
companies.

The
Sustainalytics
scores
are
displayed
as
a
number
between
0
and
100,
though
most
scores
range
between
0
and
25.
For
FTSE
100
companies,
the
highest
score
is
12.64,
and
belongs
to
mining
giant
Glencore
(GLEN).

This
score
measures
the
degree
to
which
a
company’s

economic
value
may
be
at
risk
because
of
governance
factors.
Governance
risk
represents

unmanaged
governance
risk
exposure

after
taking
into
account
a
company’s
management
of
such
risks.

However,
Morningstar
Sustainalytics
also
takes
into
account
how
well
these
risks
are
managed
by
the
company
in
its
overall
ESG
Risk
Management
Classification.
To
take
Glencore
as
an
example
once
more,
its
management
is
found
to
be Strong
(over

Weak
and

Average).
This
score
can
be
a
helpful
guide,
especially
when
considering
companies
that
operate
in
sectors
considered
to
be
morally
or
ethically,
or
environmentally
high-risk.

This
also
goes
for
the
second-
and
third-highest
scoring
companies:
British
American
Tobacco
(BATS)
and
Lloyds
Banking
Group
(LLOY).
Admiral
(ADM)
is
considered
to
have

Average
ESG
risk
management,
and,
as
it’s
number
four
in
terms
of
governance
risk-exposed
revenue,
is
the
company
with
the
highest
score
among
those
with
average
management.

In
the
FTSE
100,
20
stocks
are
classified
as
having
average
ESG
risk
management.
The
largest
by
market
capitalisation
is
betting
company
Flutter
Entertainment
(FLTR),
which
has
by
far
the
highest
risk
exposure
in
the
consumer
cyclical
sector.

The
next
two
by
market
cap
are
Ashtead
(AHT)
and
Sage
(SGE),
both
rated
by
Morningstar
(Ashtead
is
trading
at
fair
value
while
Sage
is
slightly
overvalued,
Morningstar
analysts
say).

While
the
management
of
risk
is
considered
to
be
average
for
these,
both
have
relatively
low
exposure
to
governance
risk,
at
5.34
and
4.92,
respectively.
For
reference,
the
portfolio
governance
risk
score
of
a
FTSE
100
tracker
fund
is
around
6.70.

Breaking
down
the
average
scores
of
each
sector
shows
just
how
varied
each
category
can
be.
The
largest
disparity
is
basic
materials
–
the
average
score
for
the
eight
companies
in
this
sector
is
5.40,
but
this
ranges
from
one
of
the
overall
lowest-scoring
companies,
Mondi
(MNDI),
at
2.50,
to
highest-scoring
Glencore
at
12.64.

At
the
opposite
end,
the
utilities
category
is
the
narrowest
between
minimum
and
maximum
(a
standard
deviation
of
0.44
for
those
interested).
The
average
score
for
the
five
FTSE
100
utilities
firms
is
4.30.

The
largest
sectors
are
consumer
cyclical
(17
stocks),
financial
services
(17
stocks)
and
industrials
(16
stocks).
The
first
two
sectors
have
particularly
large
spreads,
but
financial
services
firms
have
by
far
the
highest
average
governance
risk
score.

Compared
with
the
scatterplot
higher
up,
the
financial
services
companies
in
green
account
for
several
of
the
higher-risk
companies,
explaining
the
average
of
9.02.
Aviva’s
(AV.)
low
score
helps
offset
some
of
this
at
5.04.

What
Next
for
Governance
Risk
Management?

Earlier
this
week,
Morningstar’s
director
of
policy
research
Andy
Pettit
wrote
about

the
changes
coming
for
product
governance
and
the
declining
attractiveness
of
the
London
Stock
Exchange
as
a
listing
venue
of
choice
for
public
companies.

The
UK
Corporate
Governance
Code,
or
CGC,
is
a
key
part
of
UK
listing
rules
and
the
Financial
Reporting
Council
is
expected
to
publish
an
updated
version
of
the
code
imminently.
Transparency
and
disclosure
are
key
tools
to
balance
the
risks
of
a
new
regime,
providing
enough
information
and
the
chance
to
influence
companies’
behaviour.
Morningstar
Sustainalytics’
data
can
also
assist
in
building
this
picture.

But
Pettit
also
highlights
thatthe
FRC
is
keen
to
explore
ways
of
ensuring
reporting
requirements
and
guidance
are
proportionate,
and
maintaining
effective
corporate
governance
and
stewardship
to
promote
growth
and
competitiveness.

To
that
end,
it
also
wants
to
engage
with
stakeholders
on
a
review
of
the
UK
Stewardship
Code,
as
envisaged
in
the
white
paper

Restoring
Trust
in
Audit
and
Corporate
Governance,
including
understanding
how
it
works
in
practice
and
what
changes
may
be
required.