What Russia’s Invasion of Ukraine Says About ESG Ratings

By Tom Corfman

The largest company that assigns Environmental, Social and Governance rankings is obviously taking the invasion of Ukraine very seriously.

MSCI cut its ESG rating of Russia two notches, from BBB to B, one rung above the lowest level on its seven-point scale. What does Russian President Vladimir Putin have to do to earn his country a CCC, the lowest rating?

If an unprovoked invasion of a sovereign nation is not enough, what about shelling nonmilitary targets, resulting in the hundreds of civilian deaths and injuries? MSCI doesn’t say. But it has put the Russian bear on a “negative outlook,” so stay tuned.

Maybe Putin wants to put a “P” at the end of CCC to restore the abbreviation for the former Soviet Union, whose unraveling 30 years ago appears to be driving his attack.

Russia’s ESG rating didn’t reflect the heightened risk of damage to its economy posed by the practices that the ratings were intended to measure. This comes amid mounting questions about the accuracy of corporate ESG ratings.

MSCI’s action underscores a dilemma — though a less dramatic one —  that corporate communicators face about ESG, the largest investment trend in years. The ratings are an important checklist item for stock analysts, institutional investors and investment managers. But the ratings have little meaning to employees, customers and the public — increasingly important audiences for ESG.

The news media is also interested in ESG, even if the reports don’t use those magic letters. Yet companies find it hard to stand out amid the crowd of competitors clamoring for attention.

What’s a communicator to do? The answer in part is to concentrate on what your organization is doing on ESG — not grades, ribbons and badges. Of course, Russia is likely content to focus on its B rating and ignore what it is actually doing. But those who care about ESG should use the data submitted to ESG ratings agencies as the structure for stories that feature the folks doing the work or those benefiting from it.

“Data and story, however, need not be at odds. In fact, when properly woven together, they lend credibility to strong ESG reporting and serve to reinforce a company’s purpose, mission and aspirations,” a former director of communications and marketing for the Rainforest Alliance has said. “By using data to support their stories, companies have an opportunity to engage all stakeholders — not only investors and analysts — around their ESG efforts.”

Employees, customers and the public care about ESG because it’s an example of companies showing concern for something other than maximizing profits. Take advantage of that. Use the data to show your audience how your company has done on key ESG topics. Simply disclosing how things are now isn’t meaningful.

Set goals and explain with concrete steps and financial commitments how you will reach those goals. Then hold yourselves accountable. Be candid about obstacles you encounter along the way. If you do, you’ll earn great trust.

For public relations and internal communications people, focusing on ratings alone is a losing game. As the Wall Street Journal notes, “The various components and subcomponents of ESG are often rolled up into a single metric, just as we do in our model, and that tends to wash out differences among companies.”

Moreover, there are mounting questions about whether ratings measure what they claim, the Russian example aside. The ratings have become corporate participation trophies. Everyone gets a passing grade, unless you are a real screw-up.

MSCI, with an estimated 40% share of the market for ESG data, also downgraded Belarus, from BB to B, tied with Russia. Since Belarusian President Alexander Lukashenko’s record of human rights violations didn’t earn the county a downgrade, that seems particularly unfair. All Lukashenko did was host an invasion, not participate in one.

And the country has a plan to recycle 90% of its municipal solid waste by 2035.

Update: On the day after this story was published, MSCI downgraded its rating on Russia to CCC, the company’s lowest level.

Tom Corfman is an attorney and senior consultant with Ragan Consulting Group, where he leads the ESG practice.

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