Head of ESG investments, Saxo Bank.
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.
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.
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 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.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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