The good management of long-term ESG risks may aid in the reduction of financial risks as companies hedge against negative impacts from, for example, natural disasters, volatile energy prices, or labor-related controversies.
The ESGF Rating provides additional insight into companies’ financial quality as viewed through the ISS EVA lens alongside their assessed ESG performance. It thereby serves as a data point that helps determine which companies have both strong levels of risk-adjusted profitability as well as a positive ESG profile.
Data and research from the ISS ESG Corporate Rating and the ISS Economic Value Added (EVA) framework are leveraged to calculate the ESGF Rating. The overall assessment, as well as all underlying data points, are graded on a twelve-point scale from A+ (very good performance) to D- (poor performance). The letter grades correspond to numeric scores ranging from 1.0 (D-) to 4.0 (A+) in 0.25 increments.
The ISS ESG Corporate Rating captures and evaluates companies’ management of ESG risks, opportunities, and impacts along the entire value chain, including a detailed assessment of impacts from products and services, as well as their involvement in controversial practices. Applying an industry-specific materiality approach, each issuer is evaluated on approximately 100 indicators. This allows for highly relevant, material, and forward-looking ESG performance assessments.
The ISS ESG Financial Rating leverages data from ISS EVA, an established standard in measuring, analyzing, projecting, valuing, and discounting a firm’s underlying economic profit rather than its accounting profit. Like the ISS ESG Financial QualityScore (FQS), the Financial Rating is based on EVA Profitability (P) and Risk (R) measures. The difference is that FQS is based on the industry-relative performance, while the Financial Rating is an absolute assessment. The Profitability factor consists of EVA Profitability Level (P1) metrics along with EVA Profitability Trends (P2) measured over the last quarter, year, and three years. The Risk factor is calculated based on the Volatility (R1) of EVA Profitability and the three-year standard deviation of the stock price. The second Risk component, Vulnerability (R2), evaluates free cash flow generation and balance sheet leverage. Figure 1 below has example scores to show the calculations that constitute the Financial Rating score.
Figure 1: Financial Rating Factors