ESG Risk Ratings Methodology

The ESG Risk Ratings measure the degree to which a company’s economic value is at risk driven by ESG factors or, more technically speaking, the magnitude of a company’s unmanaged ESG risks. A company’s ESG Risk Rating is comprised of a quantitative score and a risk category.

Exhibit 1 ESG Spotlight July 2020

ESG Spotlight | The COVID-19 Incidents Curve: Corporate Events and Impacts

Sustainalytics’ new ESG Spotlight Series report, The COVID-19 Incidents Curve: Corporate Events and Impacts, explores emerging ESG trends related to COVID-19 corporate incidents tracked since January 2020.

Hot Assets: Global Equities and Physical Climate Risk

In this report, we build on investors’ mounting interest in climate risk analysis by assessing relevant company disclosures and risk mitigation programs.

Managing data privacy risk: comparing the FAANG+ stocks

Collecting and processing personal data has become one of the most significant drivers of financial value in today’s economy. But as the upside of personal data grows, so too does the downside risk associated with data security, management and privacy.

Beware of Bears: A Look Back at the Downswing of 2018

Overlaying Sustainalytics’ ESG Risk Ratings onto the FTSE AW Index, we found that 24 percent of the benchmark’s market cap was rated as having high to severe levels of ESG risk. In addition, over the course of Q4 2018 the negligible to low ESG risk companies outperformed the benchmark by 55 basis points. Our sample portfolio containing 300 best-in-class ESG performers would have returned 77 basis points more than the benchmark in Q4.

Blue Investing: Searching for solutions to ocean plastics

Overlaying Sustainalytics’ ESG Risk Ratings onto the FTSE AW Index, we found that 24 percent of the benchmark’s market cap was rated as having high to severe levels of ESG risk.

Emerging Markets Equities: Key Sources of ESG Risk

Based on our analysis, we find that investors in the FTSE Emerging Index are exposed to over 14 percent more unmanaged ESG risk than those in the FTSE Developed Index. The ESG risk gap between these indices is largest on the issue of data privacy and security. In addition, investors in select equity markets, such as China, may face a trade-off between chasing higher economic growth and mitigating portfolio ESG risk.

New Frontiers: African Sovereign Debt and ESG Risk

In New Frontiers: African Sovereign Debt and ESG Risk, we leverage our Country Risk Ratings to analyze ESG risk among African countries. Our findings show country-level ESG risk and average sovereign credit ratings exhibit a strong positive correlation.

The Budding Cannabis Industry: A first look at ESG Considerations

While investors are being drawn to the cannabis industry by the lure of an expanding market and profit potential, uncertainties around regulations, scalability and potential stock price corrections remain. Underexplored ESG risks could also present material concerns for management teams and investors entering the industry.

The State of Pay: Executive Remuneration & ESG Metrics

With investors increasingly incorporating ESG considerations into their investment decisions, many are looking into how corporate leadership may be incentivized to pursue an ESG agenda. This report offers insights to global equity investors considering pay-links as a topic for corporate engagement.

ESG Spotlight | Assault Weapons: assessing exposure to the firearms trade

The Parkland shooting prompted a swift reaction from many influential corporations and investors. A growing list of corporates, including Delta Air Lines, Enterprise, Symantec and First National Bank of Omaha, have cut ties with the National Rifle Association.

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ESG Spotlight | The rise of gender equity: momentum building in key markets

A recent wave of popular movements has drawn unprecedented attention to the longstanding issue of gender equity. In cities around the world, women have marched to demand political and economic equality, while the #MeToo movement has amplified calls for an end to discrimination and harassment.

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ESG Spotlight | Fake news, social media and the value of credible content

Social media networks, which currently have an estimated 2.3 billion users worldwide, are facilitating a surge in the dissemination of fake news.

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ESG Spotlight | CRISPR: Adapting investment strategies to a biotech revolution

Having already attracted more than USD 1bn of venture capital and other sources of funding, CRISPR – a breakthrough technology in gene editing – is revolutionizing biotechnology.

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ESG Spotlight | Strengthening corporate governance in the Japanese market

In this Spotlight report, we summarize Japan’s corporate governance environment and deploy a composite metric to rank Japanese companies on their adaptability to strengthening corporate governance practices in Japan.

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ESG Spotlight | ESG compatibility: a hidden success factor in M&A transactions

This report explores how environmental, social and governance (ESG) compatibility may contribute to the financial success of mergers and acquisitions (M&A). Although M&As can present synergistic opportunities, firms involved in such deals are prone to several risks.

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ESG Spotlight | Money laundering and tax evasion

Policies to counteract money laundering and tax evasion activities have long been mandated by regulation, but a series of recent controversies, including Lux Leaks (2014), Panama Papers (2016) and Russian Laundromat (2017), has put banks’ programmes in these areas under unprecedented scrutiny.

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ESG Spotlight | Game of bonds: reassessing sovereign credit ratings

In this Spotlight report, we build on this interest by developing a new approach for connecting ESG and credit rating agency (CRA) data. The first part of our analysis looks at the correlation between ESG scores and CRA ratings,