The ESG risk rating of your investments

Environmental
Social
Governance
What is the ESG risk rating of your portfolio?

Your quarterly report will include an infographic as shown above, albeit likely with different figures.
- Item 1 shows several bars.
• The blue section shows the overall risk exposure. This is the total ESG risk to which all the companies in your portfolio are exposed.
• The grey section shows the controlled risk. That is the part of the risk that the companies in your portfolio can control.
• The green section shows the risk they cannot control. That is the ESG risk rating of the companies in your portfolio, so in the above case the ESG risk rating is 52 – 34 = 18. - Item 2 shows you the number 18 again in green with a grey number next to it, which is the benchmark. The ESG risk rating above is well below the benchmark, which is good.
- Item 3 is a bar showing the classification of your ESG risk. 18 is in the 'low' category. You can also see that the weighting of this classification rises quickly: from 40 onwards, the ESG rating is already 'very high'.
ESG research
Building block 1: Corporate Governance
Building block 2: Material ESG issues
The next building block consists of research into so-called 'material ESG issues'. They focus on the business processes, the sector and the location. Certain factors that may have a major impact are examined in that regard. These factors include:
- Access to basic services
- Bribery and corruption
- Business ethics
- Community relations
- Data privacy and security
- Emissions and waste
- Human rights
- Health and safety
Building block 3: Idiosyncratic ESG issues
The last building block involves research into idiosyncratic ESG issues. These are ESG issues that emerge in companies unexpectedly, and are known as 'black swans'. Of course, controversies may occur in relation to the aforementioned factors. If there is an oil leak at an oil company, the company will receive a higher 'emissions and waste' rating. This risk is a known problem, but what if an oil company suddenly has a 'data privacy and security' issue with its customer data? An unpredictable event of this kind is not expected in that sector, which is why it is called an idiosyncratic ESG issue.
The company will also receive a higher rating for this issue. Sustainalytics then examines whether this could also pose an unexpected risk to other companies within the same industry. The method then generates the ESG risk exposure. Sustainalytics subsequently examines how well these risks are managed. The ESG risk refers to risks that can't be properly controlled or which are not controlled properly. The lower the rating, the better.