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Face, Graphics, Art
Face, Graphics, Art

ESG Ratings: your questions answered

Our Q&A will help you understand how ESG ratings are calculated and how they are used.

Here we break down what an ESG rating is, how they are used and the impact they will have for the asset management industry.

What is an ESG rating?

An ESG rating is assigned to a company and is an evaluation of its focus and direction when it comes to environmental, social and governance (ESG) issues.

This rating factors in how well the company proactively manages ESG issues that are most material to its business.

Many investment managers and third-party firms have devised their own ESG ratings and framework, which are generally based on a grading or risk scale.

How is an ESG rating determined?

Companies span many different sectors, so most third-party ESG ratings are assessed against a set of industry-specific criteria, relative to their peers. These include material ESG factors that can impact stakeholder value for the company.

Those investment firms with a large research team and the depth of corporate access can gain unique insight into a company’s ESG performance and progress, and rate them accordingly.

These ratings are updated regularly, which allows analysts to monitor progress or deterioration against set goals and update their assessment.

What type of company would receive a high ESG rating?

Attributes that may allow a company to receive a high ESG rating could include:

–   regularly disclosing relevant ESG information

–   having effective management systems in place to address ESG risks

–   not being involved in significant ESG controversies or risk events

–   having strong management oversight and understanding of material ESG risks and opportunities.

How do ESG ratings provide insight to investment managers?

When ESG ratings are built on the back of a large investment research network with access to senior management, they provide a unique insight into how corporates are performing on ESG-related issues.

If these insights are built into their analyst ratings system, it can help investment managers by:

–   providing a forward-looking view of factors that are influencing a company’s ESG performance and direction

–    identifying which companies are following best practice, and which are laggards

–    not being involved in significant ESG controversies or risk events

–     allowing them to consider the non-financial risks and opportunities associated with sustainable investing.

Research shows that companies that follow ESG best practice are more likely to perform better in the long run – and identifying these companies can help investment managers to build and protect investment returns for investors.

This article is written by Fidelity International.

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