ESG risks can cost a CEO’s job

ESG as a topic is clearly getting more attention both in the general public as well as amongst investors. And with that increased attention come increased job risks for CEOs and executives who don’t take the topic seriously. 

I have long been a fan of RepRisk, the firm that measures the reputational risks in the ESG space for companies worldwide and I use the company’s ratings when managing the Liberum Climate Portfolio as an additional input to manage reputational and ESG risks. 

In my experience, RepRisk scores help you avoid situations where ESG risks can become so extreme that the performance of a stock starts to suffer materially. As a rule of thumb, I use a threshold of 35 points out of 100 to start avoiding a stock. Once the RepRisk indicator climbs above that threshold things have gone really wrong, and a company is probably in the spotlight of the media and investors.

And apparently, such high risk scores also have implications for company executives. A study of the link between RepRisk scores and CEO turnover showed that once the RepRisk score of a company increases above the extreme value of 60 points, the probability that a CEO will lose his or her job in the next 12 months explodes.

In fact, there seem to be three regimes when it comes to reputational risks and ESG risks. For RepRisk scores below 35 points, the risk of a CEO losing his or her job is below one in five. Between 35 and 60 points, it climbs from one in five to one in four. And once it climbs above 60 points, the risk of a CEO turnover jumps to 35% and finally to 60%. 

Probability of CEOs losing their job as a function of ESG risks

Source: Colak et al. (2020)

Of course, you now want to know which companies are at such high levels of reputational risk right now. Well, I can’t disclose the full list or the RepRisk risk scores here for copyright reasons, but let me give you a few companies that have crossed that threshold recently and are experiencing rising ESG risks right now. In alphabetical order, these are Airbus, AstraZeneca, McDonald’s, and Total.