Telefonica SA Exposes Investors to a Complex Mix of ESG Risks

By Damion Rallis, Senior Research Associate

A recent spate of regulatory fines, investigations, and tax issues at Spanish telecommunications provider Telefonica SA (MCE:TEF; NYSE:TEF) should compel investors to take a close look at the company’s ESG risks and the reliability of its reported financials. By gobbling up its competitors and expanding its global reach, Telefonica “seemed poised to create a telecommunications empire.” It appears, however, that the company has spread itself too thin, as the rapid expansion has exposed it not only to increased regulatory risk but also to recessionary trends in certain markets.

Currently, Telefonica’s “C” rating for ESG reflects moderate risk, but continuing regulatory actions could result in a downgrade. Telefonica’s AGR Rating—a measure of the integrity of accounting and governance practices—is “Aggressive.” Further, GMI Ratings’ Litigation Risk model has been showing warning signs for Telefonica for several rating periods. The company’s score is 1 (on a scale from 1 to 100), meaning “High Risk.” This places the company in the 1st percentile of all companies in Western Europe, indicating higher shareholder class-action litigation risk than 99% of all rated companies in this region.

Specifically:

  • Board & Compensation Practices — Telefonica has employment agreements with company executives that provide them with payments worth three times their current salaries in the event their employment with the company is terminated following a change in control.
  • Ownership & Control Red Flags – Telefonica’s by-laws include a 10%-voting cap.

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