ESG Risk Ratings

Built on a transparent methodology, Sustainalytics’ ESG Risk Ratings empower investors with a coherent and consistent approach to assessing financially material Environmental, Social and Governance (ESG) data and issues that affect the long-term performance of their investments at both the security and portfolio level.

ESG RISK RATINGS METHODOLOGY >

INFORMATION FOR CORPORATE ISSUERS >

Building trust through transparency

Our methodology for assessing a company’s ESG risk is transparent. This facilitates an open dialogue about what we consider material ESG data and why, building the trust our clients need to leverage our insights as a part of their investment decision-making processes.

Taking the ESG journey together

We are committed to helping our clients on their ESG journey, which is why we have built one of the most experienced and largest client advisory teams dedicated to ESG.

A single unit for measuring ESG risk

The ESG Risk Ratings introduce a single measurement unit to assess ESG risks. Unlike other ESG ratings that are based on a best-in-class approach, the ESG Risk Ratings consists of ESG data that provides a powerful signal of a company’s absolute ESG risk that is comparable across peers and subindustries while allowing for aggregation at the portfolio level.

The ESG Risk Ratings uses a rule-based methodology to measure a company’s unmanaged ESG risks driven by its exposure and management of material ESG issues. To help investors interpret a company’s rating, we created five risk categories that indicate the level of ESG risk to a company’s enterprise value:

Companies are categorized into different risk categories:

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Two-dimensional materiality framework measures a company’s exposure to industry-specific material risks and how well a company is managing those risks.

ESG Ratings Elements

Comprised of three central building blocks: corporate governance, material ESG issues, and idiosyncratic issues (black swans).

ESG Ratings Categories

The ESG Risk Ratings are categorized across five risk levels: negligible, low, medium, high and severe. Ratings scale is from 0-100, with 100 being the most severe.

Coverage 12,000 companies

Sustainalytics’ ESG Risk Ratings span more than 12,000 companies and encompass most major global indices.

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The ratings framework is supported by 20 material ESG issues that are underpinned by more than 300 indicators and 1,300 datapoints.

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The ESG Risk Ratings are available through Global Access, Datafeeds and API as well as several third-party distribution platforms.

Depiction of exposure and risk captured by ESG ratings
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We start with exposure, where exposure to each material ESG issue is initially determined at the subindustry level.
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Next, we look at the management dimension, which measures how well the company is mitigating its exposure.
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For some companies, a portion of its risk may be considered unmanageable. For example, an oil company is not able to fully eliminate all its risks related to carbon emissions so that is factored out of the calculation.
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For the portion of risk that is manageable, a company’s performance is reflected by its policies, programs, practices and quantitative performance measures.
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Controversies have a discounting effect on the company’s management score, as they show that the company’s programs and policies have not been completely effective and could lead to increasing risk.
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Overall a company’s ESG Risk Rating is calculated by adding the amount of unmanaged risk for each material ESG issue.

Daily News Monitoring

Artificial Intelligence

AI-powered Digital Content Curation
Research analysts leverage smart technologies to enable them to monitor more than 60,000 media sources, and up to one million news articles daily.

Robust Annual Update Cycle

Research Cycle

  • Company profiles updated annually with corporate reporting cycle
  • Alternative data sources, like regulatory filings on product recalls and NGO sources, augment self-reported corporate data
  • Analysis by a team of over 200 ESG research analysts supported by artificial intelligence powered descriptive and predictive analytic capabilities
  • Robust quality control mechanisms with peer reviews by senior analysts and company feedback mechanisms

ESG Risk Ratings White Papers:

The ESG Risk Ratings: Moving up the Innovation Curve
This white paper explains the underlying rationale behind the methodology, the approach to materiality and how it can affect portfolio performance.

The ESG Risk Ratings: Exploring the Internet Software and Services Subindustry
This white paper explains methodology by focusing on the internet software and services subindustry using Facebook as an example.

The ESG Risk Ratings: Potential Applications for Investors
This white paper explores possible approaches to applying the ESG Risk Ratings in investment strategies, including WACC adjustments, industry tilts and smart beta strategies.

Contact us to receive your free copy and visit or Knowledge Centre and blog for more great content.

HOW TO USE THE ESG RISK RATINGS

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ESG Integration

Multi-dimensional ESG risk scores can be incorporated into equity or bond valuation models and aggregated at the portfolio-level

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Best-in-Class Investment Analysis

Comparable company scores support flexible applications for best-in-class analysis, including sub-industry, sector or regional approaches.

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Screening and Benchmarking

Overall Risk Ratings and material ESG issue scores support risk-based ESG screens and enable robust benchmarking across and within sectors and sub-industries.

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Thematic Investing

Material ESG issues scores support thematic investment themes and provide meaningful new input for fun or index creation.

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Engagement and Voting

Material ESG issue framework effectively supports engagement with companies on priority ESG issues and informs voting decisions on E&S shareholder resolutions.

Reporting

Reporting & Communication

Communicate sustainability performance and commitment through ESG reporting and leverage the Morningstar Sustainability RatingTM to send the right message to investors about your firm’s funds.

ESG data report page 1
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1. Company ratings are categorized across five risk levels: negligible, low, medium, high and severe

2. A company’s risk is measured against its industry peers and against the global universe

3. The magnitude to which a company is exposed to ESG Risk and how well the company is managing that risk is measured and explained

ESG data report page 4
ESG data report page 3

4. Material ESG Issues (MEIs) are identified and brought into focus

5. Transparency into Company Events that may impact a company’s operations, stakeholders or the environment

Material ESG Issues

What are Material ESG Issues?

Material ESG issues are the central building block of Sustainalytics’ ESG Risk Ratings. Underpinning our 20 material ESG issues are 300 ESG indicators and over 1,300 data points, which enable investors to understand how exposed companies are to specific issues and how well companies are managing these issues.

Hover on the icons below to learn more

The Environmental and Social Impact of Products and Services

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The Environmental and Social Impact of Products and Services

The Environmental and Social Impact of Products and Services – refers to how well companies are managing the environmental or social impacts of their products or services. This can include inherent characteristics of input materials, both positive and negative, and impacts during use, disposal and recycling.

Human rights

2

Human Rights

Human Rights – focuses on how companies manage and respect fundamental human rights within their own operations. This issue emphasizes measures taken to protect civil and political rights as well as economic, social and cultural rights, including child and forced labor.

data privacy

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Data Privacy and Security

Data Privacy and Security – examines data governance practices, including how companies collect, use, manage and protect data. The issue focuses on measures taken to ensure safe and secure use and/or maintenance of customers’ personally identifiable data.

Business Ethics

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Business Ethics

Business Ethics – assesses the management of general professional ethics, such as taxation and accounting, anti-competitive practices and intellectual property issues. Business ethics may include bribery and corruption for subindustries that do not have bribery and corruption as a separate material ESG issue.

bribery and corruption

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Bribery and Corruption

Bribery and Corruption - focuses on the management of risks related to alleged or actual illicit payments, such as kickbacks, bribes and facilitation payments to government officers, suppliers or other business partners, as well as the receipt of those payments from suppliers or business partners.

basic services

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Access to Basic Services

Access to Basic Services – focuses on the management of access to essential products or service such as healthcare services and products to disadvantaged communities or groups.

community relations

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Community Relations

Community Relations – examines how companies engage with local communities (including indigenous peoples) through community involvement, community development and/or measures to reduce negative impacts on local communities.

Emissions, Effluents and Waste

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Emissions, Effluents and Waste

Emissions, Effluents and Waste – assesses the management of emissions and releases from a company’s own operations to air, water and land, excluding greenhouse gas emissions.

Carbon – Own Operations

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Carbon – Own Operations

Carbon – Own Operations – refers to a company’s management of risks related to its own operational energy use and greenhouse gas emissions (scope one and two). It also includes parts of scope three emissions, such as transport and logistics.

Carbon – Products and Services

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Carbon – Products and Services

Carbon – Products and Services – evaluates a company’s management of the energy efficiency and/or greenhouse gas emissions of its services and products during the use phase.

Human Rights – Supply Chain

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Human Rights – Supply Chain

Human Rights – Supply Chain – focuses on a company’s management of fundamental human rights issues occurring in its supply chain.

Human Capital

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Human Capital

Human Capital – assesses the management of human resources. It includes the management of risks related to scarcity of skilled labor through retention and recruitment programs and includes career development measures such as training programs. Additionally, it includes labor relations issues, such as the management of freedom of association and non-discrimination, as well as working hours and minimum wages.

Land Use and Biodiversity

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Land Use and Biodiversity

Land Use and Biodiversity – looks at how companies manage the impact of their operations on land, ecosystems and wildlife. Topics covered include land conservation, land rehabilitation and forest management, as well as the protection of biodiversity and ecosystems.

Land Use and Biodiversity – Supply Chain

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Land Use and Biodiversity – Supply Chain

Land Use and Biodiversity – Supply Chain – focuses on how companies manage the impact of their suppliers’ operations on land, ecosystems and wildlife.

Occupational Health and Safety

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Occupational Health and Safety

Occupational Health and Safety – assesses the management of workplace hazards affecting a company’s own employees and onsite contractors.

ESG Integration – Financials

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ESG Integration – Financials

ESG Integration – Financials – includes all ESG integration activities by financial institutions that are either driven by financial downside risk considerations or by business opportunity considerations. This issue includes an institution’s own current assets, including direct investments, corporate credits or stakes in project financing, as well as assets managed for clients. Product offerings can span a wide spectrum of product types, starting with ESG investment funds, microfinance products, etc.

Product Governance

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Product Governance

Product Governance – looks at how companies manage their responsibilities vis-à-vis clients (quality and/or safety of their products and services). This issue puts an emphasis on quality management systems, marketing practices, fair billing and post-sales responsibility.

Resilience

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Resilience

Resilience – focuses on the financial stability and the management of related risks in the financial services industry, with a concentration on compliance with capital requirements.

Resource Use

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Resource Use

Resource Use - focuses on how efficiently and effectively a company uses its raw material inputs (excluding energy and petroleum-based products) in production and how it manages related risks. Though water use is a focus, the issue can also include the management of critical raw materials that are either scarce or difficult to access, through recycling programs, the substitution of less scarce materials and/or eco-design.

Resource Use - Supply Chain

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Resource Use - Supply Chain

Resource Use - Supply Chain – looks at how efficiently and effectively a company manages risks related to water scarcity and raw material inputs (excluding energy and petroleum-based products) in its supply chain.

How to Access the ESG Risk Ratings

Global Access

Sustainalytics online research portal

Data Services

Regular data feed (SFTP/FTP) or API

Third Party Platforms

Integration with several third-party platforms

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