Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access both platforms from your single Saxo account.
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.Latest Market Insights
Quarterly Outlook
-
-
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... -
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 ... -
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... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
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... -
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... -
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... -
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 ... -
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/en-gb/legal/disclaimer/saxo-disclaimer)