SONA ANALYTICS INSIGHTS
LEADING ORGANISATIONS IN ESG AND SUTAINABILITY ANALYTICS
Companies operating in the ESG and Sustainability Analytics Marketplace
Morningstar Sustainalytics is an independent ESG and corporate governance research, ratings and analytics firm that supports investors with the development and implementation of responsible investment strategies. For more than 30 years, the firm has been developing innovative solutions to meet the evolving needs of global investors.
Today, Sustainalytics works with asset managers and pension funds who incorporate ESG and corporate governance information and assessments into their investment processes. Sustainalytics also works with hundreds of companies and their financial intermediaries to help them consider sustainability in policies, practices, and capital projects.
Sustainalytics’ ESG Risk Ratings are designed to help investors identify and understand financially material ESG risks at the security and portfolio level and how they might affect the long-term performance for equity and fixed income investments.
ESG Risk Ratings Output
- Company ratings are categorized across five risk levels: negligible, low, medium, high, and severe and represented by ESG Globes icons.
- A company’s risk is measured against its industry peers and against the global universe.
- The magnitude to which a company is exposed to ESG Risk and how well the company is managing that risk is measured and explained.
- Material ESG Issues (MEIs) are identified and brought into focus.
- Transparency into Company Events that may impact a company’s operations, stakeholders or the environment.
In addition to ESG Risk Ratings, Sustainalytics also offer ESG Research solutions, Analytics and Reporting Solutions, various Corporate Solutions (including sustainable finance and investing, supply chain and Banking services), and company ratings from a research universe of over 12,000 company ratings.
MSCI is a provider of critical decision support tools and services for the global investment community, with experience in research, data and technology, and solutions that clients use to gain insight into and improve transparency across the investment process.
MSCI ESG Ratings are designed to help investors understand ESG risks and opportunities and integrate these factors into their portfolio construction and management process. MSCI assesses thousands of data points across 35 ESG Key Issues, focusing on the intersection between a company’s core business and the industry issues that can create significant risks and/or opportunities for a company.
Companies are rated on a AAA to CCC scale relative to the standards and performance of their industry peers.
The MSCI ESG Ratings model focuses only on issues that are determined as material for each industry. A risk is material to an industry when it is likely that companies in a given industry will incur substantial costs in connection with it (for example: regulatory ban on a key chemical input, thereby requiring reformulation). An opportunity is material to an industry when it is likely that companies in a given industry could capitalize on it for profit (for example: opportunities in clean technology for the renewable energy industry).
MSCI ESG Ratings Methodology
To arrive at a final ESG Rating, the weighted average of individual Environmental and Social Key Issue Scores and the Governance Pillar Score is calculated and then normalized relative to ESG Rating industry peers. After any committee-level overrides are factored in, each company’s Final Industry-Adjusted Score corresponds to a rating between best (AAA) and worst (CCC). These assessments are not absolute but are explicitly intended to be interpreted relative to a company’s industry peers.
In addition to ESG Ratings, MSCI also specialise in Analytics solutions, Climate Investing solutions, Factor Investing solutions, and Research and Insights.
KPMG Impact & ESG
KPMG IMPACT is the accelerator for KPMG’s global ESG strategy. It is a platform that supports and empowers KPMG professionals as they assist clients in fulfilling their purpose, achieving their ESG goals, and supporting the world’s attainment of the UN Sustainable Development Goals.
KPMG IMPACT ESG solutions include:
- ESG Advisory – Developing an ESG Strategy towards becoming a sustainable business.
- Climate Change and Decarbonisation – Understanding what climate risk means for your business and accelerating your decarbonisation plans.
- Economic and Social Development – Measuring Impact and enabling companies to grow in an equitable way.
- Sustainable Finance – getting ESG finance decisions right for lenders, investors, borrower, or insurers.
- ESG Assurance & Audit – Advising on the importance of ESG auditing as part of a leadership agenda.
- ESG in Tax and Legal Services – Advising on ESG Tax and Regulatory matters.
McKinsey & Co.
McKinsey act as an advisor on sustainability, climate, energy transition, and environmental, social, and governance (ESG) with a goal to help all industry sectors transform to reach net zero by 2050 by leveraging thought leadership, innovative tools and solutions, top talent, and a vibrant ecosystem of industry associations and knowledge platforms focused on innovation.
Consulting services provided by the company include Net Zero & ESG Strategy, Green Business Building, Decarbonisation Transformation, and Net Zero Financial Institutions (including climate risk management, climate and ESG strategy and sustainability-oriented products and services).
As part of its work on the usefulness of climate related financial impact information, the Task Force for Climate Related Financial Disclosures asked several credit rating agencies to provide a short submission on how climate risks and opportunities factor into their credit rating processes. These submissions are summarised below:
AM Best’s approach to assessing climate risks and opportunities includes consideration of an (re)insurer’s climate exposures, their strategic business plans, and how these exposures can positively or negatively affect their creditworthiness over the short-to-medium term. For climate risks, AM Best explicitly considers the impact from physical, transition, and liability climate-related risks. AM Best’s evaluation considers the financial impact of climate risks and opportunities across the building block assessments, namely balance sheet strength, operating performance, business profile, and enterprise risk management.
Risk management plays an important role in the company’s ability to effectively model weather-related events and factor climate risk into the pricing and modelling of risks. A key area for consideration is the availability of appropriate data and analytical tools to accurately model weather-related events. Overexposure, inadequate modelling, or insufficient protection arising from an event are concerns if losses fall outside of AM Best, or company expectations.
Financial disclosure on climate risks are becoming a mainstay in many insurance markets with an increasing number of (re)insurers using the TCFD framework. AM Best uses both public and non-public relevant information gathered through engagement with management, company sustainability reports, regulatory reporting submissions, and other sources as part of the credit rating analysis.
Since March 2020, AM Best has been disclosing whether environmental, social, and governance (ESG) factors have been key to any positive or negative change in ratings. Approximately 9% of AM Best’s global rating movements have been as a result of ESG factors, of which climate risk has been a key driver.
Fitch provides a comprehensive, systematic approach to communicating how climate risks and opportunities influence ratings at a sector, issuer, and transaction level. Analysts incorporate climate-related risks that could affect credit profiles into their forecasts, including increased focus on carbon-transition policies and lower long-term oil price assumptions, partially due to increasing transition risk.
Over 150,000 ESG Relevance Scores (ESG.RS) have been applied by Fitch’s 1,500 global credit analysts to over 11,000 issuers or transactions since their launch in 2019. ESG.RS tracks the credit relevance of environmental factors including GHG emissions, energy management, and exposure to environmental impacts, firmly embedding the transparent display of climate risk impacts within ratings reports and research.
Fitch Ratings’ ESG.RS provide a tool to prioritize research and engagement around the most financially material factors for rated entities or transactions, which is of heightened importance under the new EU Sustainable Finance Disclosure Regulation.
Financial materiality of climate issues can be compared across a peer group, distinguishing entities who are actively managing climate risks from those whose exposure affects their credit rating, in line with the “strategic planning risk management” at the core of the TCFD.
Fitch recognizes the emerging, latent nature of many climate risks, as well as widespread gaps in disclosure. Its global ESG research team undertakes detailed thematic research on climate and ESG themes at macro, sector, and entity/transaction levels to better understand the credit implications of these emerging risks across diverse areas such as industrial decarbonization, deforestation, and sustainability-linked debt.
Regulatory landscape In line with the TCFD recommendations, Fitch uses scenario analysis and stress testing methodologies to explore the implications of a changing regulatory landscape. Its ESG Vulnerability Scores (ESG.VS) use a plausible policy stress scenario (the UN PRI’s Inevitable Policy Response) as a starting point to test exposure to long-term regulatory tightening in response to climate change. Fitch then overlays this with analysts’ detailed knowledge of sectoral and regional drivers of supply and demand, as well as issuer-specific fundamentals such as cost recovery mechanisms, local policy environments, cost competitiveness and asset age, as well as climate risk strategy. This enables Fitch to form a long-term view (2025–2050) of the relative exposure of issuers to changing regulation and financial materiality of the changes, in line with the TCFD recommendations.
Moody’s Investors Service assesses the credit considerations of ESG risks including climate change, alongside all other relevant credit drivers and mitigating factors, in the determination of its credit ratings. It has introduced ESG issuer profile scores and ESG credit impact scores as well as Carbon Transition Assessment scores to assist in the assessment of these risks and their impact on credit ratings.
Moody’s Investors Service’s transition and physical risk scores are informed by quantitative metrics, including some forward-looking data and projections. The final scores are determined by analysts who also qualitatively consider the materiality of transition and physical risk for an entity and information about that entity’s business strategy and operating environment.
This augmentation of data and exercise of judgment is necessary because, at present, TCFD-inspired and similar disclosures are generally not sufficiently detailed, forward looking, or consistent on a global — or even on an industry — basis to support a mechanistic, quantitative scoring approach.
S&P Global Ratings incorporates environmental, social, and governance (ESG) credit factors, including climate-related credit factors, into its credit analysis across all sectors if it believes the factors are material and relevant to its opinions of creditworthiness. As one of the key ESG credit factors, the potential effect of climate-related issues depends on how much they affect the capacity and willingness of an obligor to meet its financial commitments.
S&P Global’s credit analysis may incorporate climate-related short-, medium-, and long-term information — both qualitative and financial. Qualitative information predominantly influences its country and industry assessments as well as its evaluation of management and governance in case of non-financial corporates.
Forward-looking financial information provided by issuers that is material to S&P Global’s analysis may not only affect an entity’s key metrics such as the cash flow/leverage ratios of a non-financial corporate, but also its assessment of an entity’s competitive position among its peers.
S&P Global Ratings incorporates climate-related credit factors into its credit analysis if it believes the factors are material and relevant to its opinions of creditworthiness. S&P Global continues to monitor the changes in climate-related policy landscape and evaluate any potential impact on all obligor’s creditworthiness. As new information emerges, S&P Global captures and incorporates risks and opportunities through the surveillance and review of existing and future information that is relevant to the issuer.