How to read an ESG rating How to read an ESG rating How to read an ESG rating

How to read an ESG rating

ESG
Ida Kassa Johannesen

Head of ESG investments, Saxo Bank.

Summary:  Environmental, Social and Governance (ESG) risks refer to the potential negative impact a company can have on the environment and society. Companies’ ESG risk ratings can help you reduce risk and enhance long-term performance, but do you know how to interpret such ratings? Check out the article below to get a better understanding of how to read an ESG risk rating.


How to read an ESG risk rating


ESG risk ratings measure a company’s exposure to ESG factors and how well a company manages those risks. ESG risk ratings are used by investors to identify companies with strong ESG practices and can help investors make better informed decisions. The ratings which are made up of a score and a category are available on Saxo’s platforms under the sustainability tab. 

What are ESG risk scores and how to interpret them 

In addition to the ESG risk score, there are 3 individual scores: an Environmental score, a Social score and a Governance score. The ESG risk score (the “score”) is made up of the 3 ESG pillars and is the sum of the individual Environmental, Social and Governance scores. The score which focuses on ESG risk, ranges from 0 to 100. The lower the score the better as this indicates low risk. A score of 0 is equivalent to no risk, while a score of 100 indicates severe risk. In the example below, Tesla's ESG risk score is 25 and the E, S and G scores are 3.3, 14.1 and 7.8 respectively. Tesla falls in the medium risk category.

    What do Environmental, Social and Governance scores measure?

    The Environmental score, the Social score and the Governance score measure the degree to which a company's value may be at risk driven by ESG factors.

    • Environmental factors include carbon footprint, use of natural resources, pollution and management of waste

    • Social factors are associated with workers’ safety and well-being, diversity, equity and inclusion, supply chain management and community engagement

    • Governance factors cover ethics and transparency, corporate practices (accounting, risk and audit), executive remuneration and the board of directors’ composition and quality

    What are ESG risk categories 

    There 5 ESG categories: Negligible, Low, Medium, High and Severe. Negligible and low categories are above average, Medium risk is average and High and Severe risks are below average

    • Negligible risk is assigned to companies with ESG risk scores ranging from 0-10 and is associated with the color dark green on Saxo's platforms
    • Low risk is assigned to companies with ESG risk scores ranging from 10-20 and is associated with the color light green on Saxo's platforms
    • Medium risk is assigned to companies with ESG risk scores ranging from 20-30 and is associated with the color yellow on Saxo's  platforms
    • High risk is assigned to companies with ESG risk scores ranging from 30-40 and is associated with the color orange on Saxo's platforms
    • Severe risk is assigned to companies with ESG risk scores ranging from 40-100 and is associated with the color red on Saxo's platforms

    The risk categories are absolute as they reflect the level of unmanaged ESG risk a company is exposed to. This means that companies from different sectors can be compared based on their category. 

    A company will have a good ESG risk rating score either because it is well-governed and manages its ESG risks well or because it is involved in activities that have low exposure to ESG risks.

    How to read an ESG risk rating 

    Which one is better? a company with a score of 25 or one with a score of 30? Based on Sustainalytics’ methodology, the company with the lower score is better than the company with the higher score, in terms of ESG risk. Looking at the scores below, Tesla, which has a score of 25 and is in the medium risk category, ranks better than Amazon which has a score of 30 and falls within the high risk category.

    It is worth noting however, that there are nuances to ESG risk scores. Investors who care about particular ESG factors should take a closer look at the individual components of the scores, namely the E, the S and G scores. For example, though Tesla and Alphabet have almost identical scores, 25 and 24 respectively, there are differences when it comes to their respective Environmental and Governance scores. Surprisingly, Alphabet’s E score is better than Tesla’s. Though Tesla’s contribution to a greener world is unrivalled, Alphabet has made significant strides over the years, achieving carbon neutrality in 2007 and matching 100% of its global electricity usage with renewable energy since 2017. 

    Where to find ESG risk ratings on Saxo's platforms

    ESG risk ratings are available on Saxo’s platform under the sustainability tab. The ratings are provided by Sustainalytics, an independent 3rd party owned by Morningstar. To find out more about a company's ESG scores, one could dig even deeper by reviewing the company's sustainability report, to get a better understanding of the ESG risks a company is exposed to, and the ESG practices used to handle those risks.   

    Disclaimer

    The Saxo 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 is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, 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 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 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 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 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 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.

    Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
    Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
    Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

    None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

    Saxo Markets
    88 Market Street
    CapitaSpring #31-01
    Singapore 048948

    Contact Saxo

    Select region

    Singapore
    Singapore

    Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

    Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

    The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

    The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

    This advertisement has not been reviewed by the Monetary Authority of Singapore.

    Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.