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Our Updated ESG Risk Atlas And Key Sustainability Factors: A Companion Guide

What Is The ESG Risk Atlas?

The ESG Risk Atlas provides the global relative positioning of sectors to environmental and social exposures and regional analysis of natural disaster risk, social standards, and governance standards. Our ESG Risk Atlas sector and governance scores are ranked from '1' (low exposure) to '6' (high exposure).

The sector and regional ESG Risk Atlas provides the foundation of our ESG Evaluation analysis, helping us to calibrate between sectors. We have today published the second edition of "The ESG Risk Atlas", and will continue to monitor and update it in the future as ESG risks evolve.

What Is An ESG Evaluation?

As defined in our "Environmental, Social, And Governance Evaluation Analytical Approach," published June 17, 2020, S&P Global Ratings' environmental, social, and governance (ESG) Evaluation is a cross-sector, relative analysis of an entity's capacity to operate successfully in the future and is grounded on how ESG factors could affect stakeholders, potentially leading to a material direct or indirect financial impact on the entity. ESG factors typically incorporate the entity's impact on the natural and social environment and the quality of its governance.

First, we establish an ESG Profile for a given entity, which assesses the exposure of the entity's operations to observable ESG risks and opportunities, and how the entity is mitigating these risks and capitalizing on these opportunities. Our ESG Profile analysis starts with an assessment of the entity's ESG-related exposure by sector and location.

Second, we assess the entity's long-term preparedness, namely its capacity to anticipate and adapt to a variety of long-term plausible disruptions.

How We Use The Risk Atlas In Our ESG Evaluations

More than 40% of the ESG Profile is driven by how we apply our macro sector and regional analysis to an entity, which is what enables the ESG Evaluation score to be consistent across sector and region.

In our ESG Evaluation analysis, the ESG Risk Atlas provides the foundation for our macro sector and regional analysis. In particular:

  • For the environmental profile analysis, a sector score reflects a sector's exposure to material environmental risks and opportunities, while a region score reflects a region's exposure to natural disasters.
  • For the social profile analysis, a sector score reflects a sector's exposure to material social risks and opportunities, while a region score reflects a region's exposure to natural disasters as well our view of the region's social standards.
  • For the governance profile, a region score reflects the region's governance standards, practices, and quality of ESG-focused regulation.

We then apply the Risk Atlas sector and governance scores to the operations of an entity to derive a sector region score out of 50 for environmental and social factors (left-hand scale in the chart below) and a region score out of 35 for governance (right-hand scale).

After arriving at this sector-region starting point, we layer on entity-specific analysis that compares the company to its global sector peers on a variety of environmental, social, and governance factors. These peers will generally have comparable sector-region starting points, but may not be similar due to the operations mix of the different entities. This combination leads to the ESG Profile score of our ESG Evaluation.

Chart 1

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What Has Changed From May 2019 Risk Atlas?

The updated ESG Risk Atlas:

Now incorporates sectors from public finance, which are included in our analysis of: 

  • Utility networks
  • Power
  • Real estate/public housing
  • Services/education
  • Transportation infrastructure
  • Health care

Has a revised structure that is better aligned with GICS classification.   It will enable us to better integrate the data on the 7,200 companies across all sectors provided by SAM, which joined S&P Global in January 2020. This results in enriched benchmarking analysis in our ESG Evaluation.

Includes some score revisions, including:  

  • Some technical revisions due to some sectors being grouped differently. For example, we have regrouped power (previously power generation coal and power generation excluding coal).
  • Some revisions to incorporate a variety of ESG risks and opportunities that we believe have grown or lessened. No score has moved by more than one point up or down. Such revisions include, for example, oil and gas infrastructure (previously referred to as midstream: both environmental and social scores were revised to '4' from '3', reflecting the higher environmental and social risks linked to their positioning within the oil and gas value chain).
  • Some revisions resulting from some sectors being grouped differently, with scores consequently updated, and which now include public finance sectors. This is the case, for example, for real estate, which now includes both real estate operators and homebuilders and developers from the previous risk atlas, as well as public housing. The environmental score for real estate is now '3' (previously' 2' for real estate operators and '3' for homebuilders and developers) and the social score is also '3' (previously '1' for real estate operators and '3' for homebuilders and developers).

What's Next: Key Sustainability Factors For ESG Evaluations

We are releasing supplementary deeper dives into each sector of the ESG Risk Atlas. These deeper dives are a summary of the relevant environmental and social issues per sector, look at which environmental and social key performance indicators (KPIs) are most important, and assess the relative importance of the different environmental and social factors of our ESG Evaluation framework.

We refer to these sector deeper dives as Key Sustainability Factors for ESG Evaluations (KSFs).

The KSFs will enhance the transparency and the quality of our ESG Evaluation analysis. While the ESG Risk Atlas provides the cross-sector calibration, these KSFs will ensure comparability within sectors. Finally, the KSFs will improve the relevance of our interactions with companies' management teams and board members on our ESG Evaluation analysis.

We are inviting market feedback on the main environmental and social issues, KPIs, and factor weights that we have identified and summarized in our KSF for consumer goods. We will continue to ask for feedback as we release further KSFs on other sectors, with the aim of concluding the feedback exercise early next year.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Florence Devevey, Paris (33) 1-4075-2501;
florence.devevey@spglobal.com
Secondary Contacts:Hans Wright, London (44) 20-7176-7015;
hans.wright@spglobal.com
Bernard De Longevialle, Paris (33) 1-4075-2517;
bernard.delongevialle@spglobal.com
Michael T Ferguson, CFA, CPA, New York (1) 212-438-7670;
michael.ferguson@spglobal.com
Karl Nietvelt, Paris (33) 1-4420-6751;
karl.nietvelt@spglobal.com
Michael Wilkins, London (44) 20-7176-3528;
mike.wilkins@spglobal.com

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