ESG risks

What are ESG risk ratings and how do they work?

An ESG risk rating assesses the impact of environmental, social and governance (ESG) factors on a company’s performance. It is based on two criteria:

• ESG risk exposure measuring a company’s vulnerability to these ESG risks.
• ESG risk management assessing how the company manages these risks.

What is the quantitative score in an ESG rating?

The quantitative score measures a company’s level of unmanaged ESG risk. The lower the score, the more effectively the company is managing its ESG risks. It is calculated by subtracting the level of risk management from the company’s total exposure to ESG risks. This score is between 0 and 100.

What are the different ESG risk ratings?

Companies are classified into five ratings based on their unmanaged risk score:

• Negligible risk (0 to 9.99)
• Low risk (10 to 19.99)
• Medium risk (20 to 29.99)
• High risk (30 to 39.99)
• Severe risk (40 or higher)

Why is the ESG rating important for investors?

The ESG rating helps investors assess the risks associated with a company’s environmental, social and governance factors. These factors can have a significant impact on the long-term performance of the company. Taking these elements into account allows investors to better anticipate future risks and make more informed choices.

Are ESG risks assessed on an ongoing basis?

Yes, ESG assessments, made by Morningstar Sustainalytics, are updated annually to reflect socio-economic, geopolitical and technological developments. This annual review by Morningstar Sustainalytics ensures that ratings are always relevant.

Do ESG risks have a direct impact on the financial performance of stocks?

ESG risks do not always have an immediate impact on a stock’s performance, but can influence its long-term stability. For example, poor management of ESG issues can lead to sanctions, reputational damage or other issues that will impact the company’s profitability in the future. The impact may be gradual, but it is essential to take it into account for a sustainable investment strategy.

Does a high ESG score mean the company is a bad investment?

A high ESG score indicates that the company is more exposed to potential risks, but this does not mean that it is a bad investment. Some high-scoring companies may have robust strategies to mitigate these risks, which can make them attractive long-term investments. It is therefore important to carefully assess how the company manages these risks before making an investment decision. Conversely, a good ESG score does not mean that the company is safe from issues in other areas (finance, technology, etc.). It is important to look at the company as a whole, evaluating its performance in different areas. Investors should also be aware of other factors that may affect the long-term profitability or stability of the company.

Are ESG criteria applied in the same way across all industries?

No, ESG criteria are applied according to the specifics of each industry. For example, environmental risks will have a greater weighting in sectors such as energy or agriculture, while social and governance issues will be more crucial for industries such as finance or technology. Each sector has its own ESG challenges, and these are taken into account in the assessment.

Where do the ESG scores used to evaluate stocks at Keytrade Bank come from?

The ESG scores used by our bank come from Morningstar Sustainalytics. Sustainalytics sub-industries are defined within Morningstar Sustainalytics’ own classification system. The number of sub-industries in this classification system is 135.