How sustainable is your portfolio?

ESG
Ida Kassa Johannesen

Head of ESG investments, Saxo Bank.

Summary:  The interest for sustainability and responsible investment is growing as the world faces pressing environmental, societal and governance issues. To help clients make better informed decisions that are aligned with their values, ESG risk ratings for stocks have been added to Saxo's platforms. ESG risk ratings measure a company's exposure to material environmental, social and governance risks and how well a company manages those risks. The ratings will help you assess how sustainable your portfolio is.


Find out how sustainable your portfolio is with ESG Risk Ratings


As the world faces pressing climate, societal and governance challenges, more and more investors are showing an interest in sustainability. Therefore, to make it easier for our clients to identify sustainable companies and help them make investment decisions that are aligned with their values, we have added ESG ratings on Saxo’s platforms. 

    What are ESG Risk Ratings and how to use them

    ESG ratings are measures of how well a company manages material environmental, social and governance risks it is exposed to. Environmental risks (E) are associated with greenhouse gas emissions, waste management and pollution. Social risks (S) involve employees’ safety and wellbeing, as well as diversity, equity and inclusion. Governance risks (G) cover transparency, anti-corruption, business practices and the board of directors’ composition and independence. 

    Sustainalytics, Saxo's choice of ESG rating provider

    The ESG risk ratings shown on Saxo’s platforms are provided by Sustainalytics, a Morningstar company. The rating is based on two dimensions: (i) exposure to material E, S or G risks specific to the company and its sub-industry and (ii) how well the company manages those risks. Companies are assigned both an ESG Risk Score and an ESG Risk Category.

    • The ESG Risk Score ranges from 0 to 100. The lower the score, the better: (0) is equivalent to no risk and (100) corresponds to the most severe risk.
    • There are 5 ESG Risk Categories:
    1. Negligible
    2. Low
    3. Medium
    4. High
    5. Severe


    Negligible and low categories are assigned to companies that manage their ESG risks well, whereas high and severe categories are assigned to companies that manage their ESG risks poorly. A medium rating means that some risks are managed well, while other risks are managed poorly. 

    ESG Risk categories are absolute, which means that a bank can be directly compared with an oil company, or any other type of company.

    Filtering for sustainable stocks on Saxo’s platforms

    In addition to reviewing a company’s ESG risk rating, it is possible to screen for stocks using a specific ESG risk category. The screener will then only return the list of stocks that meet the specified criteria. 

    Ratings challenges

    Ratings are typically based on historical data, thus they are backward-looking and shouldn’t be used to forecast return potential.

    Also, as there are no standards for assessing a company’s ESG practices, providers use different methodologies, which are at times subjective and can result in major differences. Ratings correlations between the major providers are as low as 0.45 (Source Brandon, R. G., P. Krueger, and P. S. Schmidt. 2021. “ESG Rating Disagreement and Stock Returns.” Financial Analysts Journal 77), which is substantial. In comparison, the correlation between credit agencies' ratings is above 0.9 and perfect correlation is 1. This divergence makes comparison difficult, but it can also serve to highlight problem areas that should be further researched by investors.     

    Conclusion

    ESG ratings are valuable in evaluating how a company manages its material ESG risk. They should be viewed as additional due diligence and used in conjunction with traditional financial analysis to make long-term informed investment decisions. The ratings, however, do not tell the full story. They are backward-looking and shouldn’t be used to forecast the future. Lastly, investors are advised to check ESG ratings from time to time to ensure they are still in line with their values. 

    Quarterly Outlook

    01 /

    • Macro Outlook: The US rate cut cycle has begun

      Quarterly Outlook

      Macro Outlook: The US rate cut cycle has begun

      Peter Garnry

      Chief Investment Strategist

      The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
    • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

      Quarterly Outlook

      Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

      Althea Spinozzi

      Head of Fixed Income Strategy

    • Equity Outlook: Will lower rates lift all boats in equities?

      Quarterly Outlook

      Equity Outlook: Will lower rates lift all boats in equities?

      Peter Garnry

      Chief Investment Strategist

      After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
    • FX Outlook: USD in limbo amid political and policy jitters

      Quarterly Outlook

      FX Outlook: USD in limbo amid political and policy jitters

      Charu Chanana

      Chief Investment Strategist

      As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
    • Commodity Outlook: Gold and silver continue to shine bright

      Quarterly Outlook

      Commodity Outlook: Gold and silver continue to shine bright

      Ole Hansen

      Head of Commodity Strategy

    • FX: Risk-on currencies to surge against havens

      Quarterly Outlook

      FX: Risk-on currencies to surge against havens

      Charu Chanana

      Chief Investment Strategist

      Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
    • Equities: Are we blowing bubbles again

      Quarterly Outlook

      Equities: Are we blowing bubbles again

      Peter Garnry

      Chief Investment Strategist

      Explore key trends and opportunities in European equities and electrification theme as market dynami...
    • Macro: Sandcastle economics

      Quarterly Outlook

      Macro: Sandcastle economics

      Peter Garnry

      Chief Investment Strategist

      Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
    • Bonds: What to do until inflation stabilises

      Quarterly Outlook

      Bonds: What to do until inflation stabilises

      Althea Spinozzi

      Head of Fixed Income Strategy

      Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
    • Commodities: Energy and grains in focus as metals pause

      Quarterly Outlook

      Commodities: Energy and grains in focus as metals pause

      Ole Hansen

      Head of Commodity Strategy

      Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

    Disclaimer

    The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

    Please read our disclaimers:
    Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
    Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
    Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

    Saxo Bank (Schweiz) AG
    The Circle 38
    CH-8058
    Zürich-Flughafen
    Switzerland

    Contact Saxo

    Select region

    Switzerland
    Switzerland

    All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

    This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

    The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

    If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

    Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.