Material ESG Issues Resource Center

Unraveling the variety of risks associated with company ESG issues has never been more important in the context of our current market environment. Material ESG issues are the central building block of Sustainalytics’ ESG Risk Ratings. Underpinning our 20 material ESG issues are more than 250 ESG indicators, which enable investors to understand how exposed companies are to specific issues and how well companies are managing these issues.

View Transcript

Hello my name is Wilco Van Heteren and I'm an executive director of ESG research at Sustainalytics.

The current Covid-19 pandemic has shined an intense spotlight on the importance of taking ESG issues into account as a part of making more informed investment decisions and Material ESG issues are at the heart of Sustainalytics ESG Risk Ratings as we assess companies on them. We consider an ESG issue to be material within our rating if it's likely to have a significant effect on the enterprise value of a company.

Sustainalytics believes assessing companies on material ESG issues is critical given the importance of focusing on areas that have the most potential to endanger enterprise value. Academic studies have identified that companies that focus on material ESG issues are more likely to outperform the market. We recognize companies have different levels of exposure to various issues and we understand for investors it is vital to understand what specific issues are driving exposure and how a company is managing those specific issues. Our 20 Material ESG Issues can be considered as individual units of risk, that can then be consolidated to give you a holistic picture of company level ESG risks.

To give you some background on how this works in practice we first determine which material ESG issues are relevant for each sub-industry. For each sub-industry we then assess a company's exposure to the issue and how well a company is managing an issue. Then this rolls up into the amount of ESG risk on a specific material ESG issue that a company leaves unmanaged.

Although they contribute to the overall rating, Sustainalytics material ESG issues can also have value as standalone assessments. They contribute to understanding which risks are not manageable and investors can perform comparisons on an issue across companies and sectors and gain insight on the frequency of controversies on an issue, just to name a few examples.

In the coming months we will examine the significance of specific material ESG issues given current market conditions, the frequency of issues across industries and spotlights industries and companies to highlight the risk and opportunities that Material ESG Issues pose to companies.

We look forward to showing you how we can help you unravel the dimensions of ESG risks.

Spotlight on Sustainalytics’ 20 Material ESG Issues

Over the next several months, Sustainalytics will highlight the importance of a specific material ESG issue in the context of current market conditions, provide rich analysis on each issue and focus on companies that perform well.

View Transcript

[Sustainalytics logo slides into screen. Screen then switches to Jonathan Smith]

Hello, everyone.

My name is Jonathan Smith, and I lead oil and gas research here at Sustainalytics.

Today I'll be speaking about carbon as a material ESG issue, focusing specifically on products and services.

The carbon impact of products and services refers to greenhouse gas emissions that are released during the use stage of either a product or service life.

Although not all products and services produce greenhouse gas emissions, those that do tend to be responsible for a significant portion of emissions released globally.

Companies whose business models rely on the sale of fossil fuels generally face the most exposure to this issue, and, as a result, are most exposed to risks relating to the energy transition. However, other types of companies also face exposure to this issue. Examples include natural gas utilities, automotive manufacturers, and aircraft manufacturers.

Although progress has been made in a number of these sectors, much remains to be achieved as such Sustainalytics assesses the management of carbon products and services through one individual material ESG issue.

Our approach to assessing the management of product or service related carbon risk focuses on how companies are improving either the efficiency or design of their offerings in a way that mitigates the release of greenhouse gas emissions depending on the industry, this specific assessment will look different.

For instance, in the automotive industry, a key metric that we look at is the average greenhouse gas emissions associated with a company's vehicle fleet.

This also includes looking at the trend of fleet emissions, so whether vehicle emissions are going up or down as the years go by.

Our approach to this issue also includes accounting for differences and exposure to risk based off of a company's specific business model. So, for instance, for oil and gas producers, we acknowledge that companies who primarily focus on natural gas relative to oil face somewhat less exposure to transitional risks in the near term given that the carbon impact of natural gas is less than that of oil.

Given the growing urgency of addressing climate change, companies who don't manage these risks can face significant business risks and the loss of competitiveness in the market, this makes the carbon impact of products and services a key ESG issue that investors should be mindful of.

Thank you for listening.

[Video ends with Sustainalytics logo animation.]

Explore All Material ESG Issues

Download Definitions