Sustanalitics vs MSCI

Question 1

What does Sustainalytics measure

Answer 1

measures the degree to which a company’s economic value is at risk driven by ESG factors or, more technically speaking, the magnitude of a company’s unmanaged ESG risks.

Question 2

Sustainalytics 5 categories

Answer 2

1. negligible; 0-10
2. low; 10 -20
3. medium; 20-30
4. high; and 30 -40
5. severe. 40 -50+

Question 3

Sustainalytics categories are absolut or industry relative

Answer 3

These risk categories are absolute, meaning that a ‘high’ risk assessment reflects a comparable degree of
unmanaged ESG risk across the research universe, whether it refers to an agriculture company, a utility or any other type of company.

Question 4

How does Sustainalytics define material and relevent ?

Answer 4

“material’ within the ESG Risk Rating if its presence or
absence in financial reporting is likely to influence the decisions made by a reasonable investor. (not legal required to disclose)

‘relevant’ in the risk rating, the issue must have a potentially substantial impact on the
economic value of a company

Question 5

Sustainalytics includes what additional dimension

Answer 5

the exposure
dimension. It reflects the extent to which a company is exposed to material ESG risks identified at industrylevel and affects the overall rating score for a company as well as its rating score for each material ESG issue.

Question 6

The ESG Risk Rating’s second dimension is

Answer 6

management. ESG management can be considered as a set of
company commitments and actions that demonstrate how a company approaches and handles an ESG
issue through policies, programmes, quantitative performance and involvement in controversies, as well as
its management of corporate governance.

Question 7

Sustainalytics ESG rating proccess

Answer 7

1. the starting point is exposure;
2. the next stage is management; and
3. the final stage is calculating unmanaged risk, using the concept of risk decomposition.

The final ESG risk rating score is a measure of

unmanaged risk:
unmanageable risk, which cannot be addressed by company initiatives; and

▶ the management gap, which represents risks that could be managed by a company through suitable initiatives
but which may not yet be managed.

Question 8

Calculating the final unmanaged risk score (sustainalitics)

Answer 8

Unmanagble risk = Total Exposure LESS Managable Risk

Mgmt Gap = Managable Risk LESS Managed Risk

Unmanaged Risk = Total Exposure LESS managed Risk

Question 9

MSCI ESG Rating, ESG risks and opportunities are posed by:

Answer 9

▶ large scale trends (e.g. climate change, resource scarcity or demographic shifts); and

▶ the nature of the company’s operations.

Question 10

MSCI Risk and Opportunity Materiality

Answer 10

A risk is material to an industry when it is likely that companies in a given industry will incur substantial costs in
connection with

An opportunity is material to an industry when it is likely that companies in a given industry could capitalise on
it for profit

Note that this definition of ‘materiality’ is different to that of Sustainalytics, but still a judgment

Question 11

MSCI assess material risks and opportunities for

Answer 11

ach industry through a quantitative model that compares ranges and average values in each industry for externalised impacts (such as carbon intensity, water intensity and injury rates).

Question 12

Final MSCI ESG Ratings are derived by the weighted averages of the key issue scores. These scores are
aggregated and

Answer 12

companies’ scores are normalised by their industries. After any overrides are factored in, each
company’s final industry-adjusted score corresponds to a rating between the best (AAA) and the worst (CCC).

No absolute, but relative to company industry

Question 13

MCSI considers 2 aspects

Answer 13

risk management and risk exposure (a high rating is relative - High exposure require high mgmnt, low exposure could be more modest

Question 14

MSCI data is from

Answer 14

Macro data and company disclosure