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Understanding Environmental, Social and Governance ratings

Overview of ESG

Environmental, Social and Governance (ESG) is an approach to sustainable investing.

Interest in ESG has been steadily rising over time. Environmental, Social, and Governance (ESG) is an approach to evaluating businesses that goes beyond the sole focus of shareholder return. Instead, an ESG framework takes into consideration the ecosystem, both internal and external, that businesses operate in and how they affect each other.

The ESG criteria are a set of standards for a company’s operations that help you proactively assess potential investments.

The combined ESG score is an overall company score based on the reported information in the Environmental, Social and Corporate Governance pillars. It measures to what extent a company’s economic value is potentially at risk from unmanaged ESG factors.

Webinar: Understanding ESG ratings with sustainalytics

Presented by: Sustainalytics

How our platform can help you

We’ve connected with Sustainalytics, a Morningstar company, to provide you with ESG ratings for covered ASX 200 companies and selected ETFs here on our website.

To find a Company or Exchange Traded Fund’s ESG rating, simply search the company or ETF name or code via Quotes & Research > Research > Company.

Not all companies and ETFs are covered due to the underlying company data not being accessible to accurately report on ESG.

3 Pillar Scores

The reported information category scores are rolled up into 3 pillar scores: Environmental, Social & Governance (E, S, G).

The ESG pillar score is a relative sum of the category weights, which vary per industry for the environmental and social categories. For Governance, the weights remain the same across all industries.

The pillar weights are normalised to percentages ranging between 0 and 100.

Environmental

Environment is concerned with the biosphere and ecosystems of our planet, and the preservation of our natural world. This includes:

Climate change
Carbon footprint, including Greenhouse gas (GHGs) emissions
Air pollution
Deforestation
Energy and water consumption
Waste output
Nature usage
Environmental policies

Social

Social considerations include taking into account humans and our interdependencies – both inside and outside the organisation. This includes:

Community relations, including the connection and impact on the local communities in which the company operates and serves
Comparative living wages
Diversity and inclusion percentage
Gender pay gap
Employee engagement and relations
Reskilling and training
Health and safety
Human rights
Charity
Wealth generation

Governance

Governance is about the logistics and operations of running a business or organisation. This includes:

Executive’s pay ratio
Board composition, including diversity and structure
Quality of governing body
Ethics and anti-corruption policy
Tax paid
Ecosystem ESG

ESG FAQs

Do I need a research subscription to access ESG ratings?

No, ESG ratings are complimentary and will be accessible to all customers for selected companies and ETFs. Not all companies and ETFs are covered due to the underlying company data not being accessible to report on ESG accurately.

How often do the ESG ratings change?

Sustainalytics continually analyse company ratings. The ‘As at’ date at the bottom of the tool reflects the updated date of the ratings. For more information on the methodology of the underlying ratings, please view the Sustainalytics ratings methodology PDF.

How are the 3 ESG pillars calculated?

For more information on the methodology of the underlying ratings, please view the Sustainalytics ratings methodology PDF.

Where does Sustainalytics get their data?

Sustainalytics is a Morningstar company which compiles research, ratings and data from a variety of sources, including public corporate filings and reports, relevant media sources, reliable third-party sources such as acknowledged industry publications, specialised providers, and renowned non-governmental organisations.

Why is ESG important for companies?

ESG is important for a number of reasons, including fulfilling increased investor expectations, managing financial risks, responding to investor pressure, improving public relations, and being sustainable. Companies that perform well in terms of ESG may be better positioned for the long term and may be better able to plan for uncertainties.

What does the ESG score mean?

A company's vulnerability to unmanaged environmental, social, and governance risks is shown by its ESG score. A score under 20 in the Sustainalytics system would likely be seen as favorable and be an indication that the company was adhering to best practices in reaching relevant ESG goals or had a lower exposure to unmanaged ESG risks.

What to consider when looking at a company’s ESG rating?

What ESG factors matter most to you?
How much weight will you give these factors?
Does the company align with your investment goals or the ESG issues that matter most to you?

How is a Company’s ESG risk rating calculated?

How does ESG affect risk management?

ESG practises are risk management practices, hence they have an impact on risk management. Effective ESG initiatives, for instance, can reduce a company’s risk to supply chain disruptions and increase corporate transparency. They might also discover that they can react to ESG incidents more effectively.

What ESG Risk Rating categories can companies fall under?

Negligible (0-9.99 points)
Low (10-19.99 points)
Medium (20-29.99 points)
High (30-39.99 points)
Severe (40 and higher points)

How does the ESG rating work in practice?

ESG Risk Ratings are based on non-financial data. The rating takes into account environmental, social and governance variables, measuring sustainability and ethical impact of an investment in a business or company.

The purpose of the rating is to provide investors with a signal that indicates how much exposure to ESG risks and how well those risks are managed. The ratings provided improve the reliability of actions and risk assessment in making conscious investment decisions.

Important Information

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© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ) at www.morningstar.com.au/s/fsg.pdf and www.morningstar.com.au/s/fapds.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. The publications, ratings and products should be viewed as an adfditional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782.

© 2022 Sustainalytics. All Rights Reserved. The information, data, analyses and opinions contained herein: (1) includes the proprietary information of Sustainalytics; (2) may not be copied or redistributed except as specifically authorized; (3) do not constitute investment advice nor an endorsement of any product or project; (4) are provided solely for informational purposes; and (5) are not warranted to be complete, accurate or timely. Sustainalytics is not responsible for any trading decisions, damages or other losses related to it or its use. The use of the data is subject to conditions available at https://www.sustainalytics.com/legal-disclaimers.

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