Our ESG research methodology - Version changes

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GENERAL

On this page we outline the important changes in our ESG research methodologies, including indications on how this impacts ESG ratings. Out methodology is updated annually. All rating methodology changes in a system based on materiality implies that adding/removing areas will reduce/increase the importance of others as the sum of weights always shall be 100%. In the following, when we say the ESG rating would worsen, it is true if the average weighted ESG rating before adding the new risk areas is higher then the rating of the added risk areas.

1.sustainAX ESG risk rating methodology changes

v6 – Used on 2023 information in 2024 season
  1. Change: Introduced geopolitical risk.
    Impact on ESG ratings: Companies with geopolitical risk would see their ESG rating worsen.
    Examples: Companies operating in or having important supply chain geopolitical sensitive areas like China, Russia, Middle East and in Non-democratic countries.
  2. Change: Introduced #washing risk (#green washing and #socialwasing)
    Impact on ESG ratings: Companies with #washing risk would see their ESG rating worsen.
    Examples: Companies doing a lot of bold E and S claims without justification, here we also consider the SDG communication pertinence rating.
  3. Change: Introduced sustainability governance risk in addition to the BOD involvement on sustainability.
    Impact on ESG ratings: Companies with no or low sustainability governance  would see their ESG rating worsen.
    Examples: Relevant for all companies.
  4. Change: Added a corporate covernance risk “kicker” reducing the G rating further if the corporate governance is very weak on the balance of power, transparency on their work and skills.
    Impact on ESG ratings: Companies with bad corporate governance would see their ESG rating worsen.
    Examples: Relevant for all companies, but hits more very small companies than larger companies.
  5. IMPACT SUMMARY: In this update only 3 risk indicators were added, all being quite general, so no important ESG risk rating impact for specific sector or types of  companies. As this is our v6, there is no surprise that the methodolgy is stabilising and we would expect future changes to be rather small. That said, there is no guarantee that ESG risk areas will not develop differently and quicker than we think today.
v5 – Used on 2022 information in 2023 season
  1. Change: Increased the number of nature/biodiversity risk elements, implying higher risk allocation to nature/biodiversity. The biodiversity theme is growing and stakeholder focus is increasing.
    Impact on ESG ratings: Companies with weight allocated to these indicators without risk mitigating action would see their ESG risk rating worsen.
    Example: Very relevant for companies in the food and beverage sector.
  2. Change: Increased significantly the number of E risk areas in the upstream/supply chain. The supply chain theme is growing and stakeholder focus is increasing.
    Impact on ESG ratings: Companies with weight allocated to these indicators without risk mitigating action would see their ESG risk rating worsen.
    Examples: sectors with rawmaterials or bought products with important E issues; Capital Goods.
  3. Change: Increased significantly the E risk that Fossil fuel sector companies cannot mitigate without changing activity to 15%.  
    Impact on ESG ratings: All Energy sector companies saw their ESG risk ratings worsen. 
    Examples: Relevant for companies producing oil&gas, oilservice companies and fossil fuel shippers and distributors.
  4. Change: Reduced the weight for Responsible Investing in asset management and increased the weight for ESG risk integration in credit processes and other underwriting activity.  
    Impact on ESG ratings: Companies in the financial sector saw their ESG ratings worsen.
    Examples: Relevant for all Finance sector companies with credit/underwriting activities.
  5. IMPACT SUMMARY: We noticed that particularly companies with heavy adverse E impacts in the supply chain saw their ESG rating worsen notably. Of course, adding weight for new indicators implies that the weight of the previous set of indicators must be reduced by the same weight. The impact is therefore negative if the rating for the new is lower then the previous ESG risk rating.
  6. General: Added new metrics, now 149 in total (+28), changes are based on experience from the 150 ESG research jobs during the year. Now scoring in average 90 metrics per company, while 40-60 used in our own ESG scores. Widened PAI data coverage to voluntary E and S indicator lists, Started to build an ESG research SaaS “made by ESG analysts”: https://www.sustainax.com/index.php/esg-research-methodology-process-and-system-saas/
v4 – Used on 2021 information in 2022 season
  1. General: Added ESG risk areas and published library on our web site, Added new metrics, now 121 in total, Readjusted materiality from a top down perspective for sectors, Merged scoring into the research process instead of separate process, New design and structure for the ESG research reports, Started Activity/Product/Practice screening data build.

Previous versions were updated at a higher frequency as we had just started the company and each version had small changes. This is old and we do not see this as relevant to detail today.

2.sustainAX UN SDG communication pertinence rating methodology changes

v6 – Used on 2023 information in 2024 season
  1. Change: Added Contribution Context assessment to reflect to what extent the claimed impact is addressing the real SDG challenges. This is region/country based.
    Impact on SDG ratings: Companies having activities with positive impact in regions or countries where the targeted SDG have an important gap to the objective will see their rating improve.
    Example: Adressing health and education in developing countries had higher Context relevancy then in the developed countries. 
v5 – Used on 2022 information in 2023 season
  1. Change: Added negative impact transparency assessment for claimed SDG impacts.
    Impact on SDG ratings: Companies claiming SDG impacts that do not KPI correctly or that are not transparent on the negative SDG impacts they have alongside the positive claimes impact see a negative impact on their SDG rating.
    Examples: Relevant for all companies claiming positive SDG impact.
v4 – Used on 2021 information in 2022 season
  1. General: The SDG communication pertinence rating was introduced for the first time due to client demand Only relevant for companies communicating on SDGs.

3.sustainAX Net Zero communication pertinence rating methodology changes

v6 – Used on 2023 information in 2024 season
  1. No changes
v5 – Used on 2022 information in 2023 season
  1. General: The Net Zero communication pertinence rating was introduced for the first time. It replaced a historic TPI (Transition Pathway Initiative rating). The reason for the replacement was that TPI only targets the sectors that has the most important need to transite, while the Net Zero is relevant for all companies and hence more interesting for our clients.