Understanding ESG Ratings: A Brief Primer From Celent

The Reuters database is an open platform that can share propriety data and engage with partners such as TruValue Labs, an AI-powered ESG data provider. Its ESG score is based on algorithms and 150 content research analysis and ranges from A to D.

Morningstar. Company-level data is provided by Sustainalytics, 40% of which was acquired by Morningstar last year. Sustainalytics provides the company-based data which measures three factors –  preparedness (policies in place), disclosure (relative to regulation and/or global standards) and  performance (qualitative and quantitative) – plus a quantitative controversy scored based on scanning thousands of media sources, industry reports and more.

ESG scores range from 0 to 100; controversy scores from 0 to 5, and Sustainalytics then normalizes scores across sectors.

Morningstar then does an asset-weighted rollup of company ESG scores with deductions for holdings with controversies when 50% of a portfolio’s assets have corporate ESG scores. It calculates sustainability ratings for over 38,000 managed products including ETFs, mutual funds, SMAs for equity and corporate bonds and collective investment trusts (CITs).

In order for a fund to receive a sustainability rating, at least 10 funds in a particular Morningstar category must have a sustainability score. Fund sustainability ratings range from zero to five globes, with one global indicating the bottom 10% and five globes the top 10%.

Morningstar recently added an asset-weighted carbon risk score for portfolios where 67% of assets have a Sustainalytics carbon risk score. It uses 70 carbon fund-level metrics including low-carbon designation.

FactSet. OpenFacetset allows clients to buy individual data feeds on ESG reporting, including TruValue Labs and Reprisk and soon Quantopian.  FactSet also has its own proprietary data feeds having acquired Revere Data in 2013 for supply chain data.  Clients can learn if supplier is on a sanctions list.

Engaged Tracking.  This London-based firm publishes carbon rankings of the world’s largest companies and their supply chains, covering over 4,000 companies and 30,000 securities. The carbon ratings measure Scope 1 (self-reporting by company), Scope 2 (energy emissions) and Scope 3 (everything else such as upstream and downstream activities for oil and gas companies.

Raymond James has created customized strategies selecting 40 stocks from the Europe 300 using Engaged Tracking. The portfolio is rebalanced quarterly and its carbon data is reviewed at least once a year based on Engaged Tracking’s annual carbon ratings.

In addition to these ESG ratings described by Celent  is a new Carbon Price Risk-Adjusted Index Series recently launched by S&P Dow Jones Indices, which already has a Carbon Scorecard that measures the carbon footprint of  major global index benchmarks, an as well as several ESG Indexes.

The S&P Carbon Price Risk-Adjusted Index Series focuses on the potential carbon-related risks for companies by 2030, a year targeted by EU countries, China, Russia and other signatories to the Paris Climate Accord as a deadline for substantially reducing their carbon emissions. The accord, in turn, is focused on limiting the rise in average global temperature to no more than 2 degrees Celsius from pre-industrial levels.

According to S&P Dow Jones Indices report, “$1.3 trillion may be at risk” for S&P 500 companies, or 5.6% of the indexes’ market capitalization, by 2030.