At BNP Paribas Asset Management, we are committed to generating long-term sustainable investment returns for clients, while having a positive impact on the environment, the economy and society.
We believe that environmental, social and governance (ESG) considerations, when combined with traditional financial analysis, can help investors to understand a wider set of risks and opportunities and, in turn, make better-informed investment decisions.
Our proprietary ESG scoring framework quantifies these considerations. Specifically, it produces:
- A company-level score based on a firm’s performance on material ESG issues relative to peers.
- A global ESG score that aggregates the average ESG scores of the companies in a portfolio.
HOW WE ASSESS COMPANIES
We score more than 12 000 issuers of securities using a four-step process. The scores are made available internally to facilitate ESG integration, investment stewardship and more.
OUR FOUR-STEP PROCESS
1- ESG metric selection and weighting
To arrive at ESG scores that provide useful insights, we select metrics using three criteria:
- Materiality: We reward companies that score highly on ESG issues that are material to their business, based on the expertise from our Sustainability Centre as well as frameworks such as SASB and empirical studies.
- Measurability and insight: We prefer insightful performance metrics over policies or programmes.
- Data quality and availability: We favour metrics for which data is of reasonable quality and readily available so that we can compare issuers fairly. We use numerous research inputs and data sources (e.g. Sustainalytic, ISS & Trucost) to determine companies ESG scores.
The metrics we use are a blend of common and sector-specific.
2- ESG assessment vs. peers
Our assessment is primarily sector-relative, reflecting the fact that ESG risks and opportunities are not always comparable between sectors and regions. For instance, health & safety is less important for an insurance company than a mining company.
The 12 000+ companies under coverage are therefore divided into 20 sector groups and 4 geographical areas, leading to 80 ESG scoring peer groups of geographical and sector peers.
Each issuer starts with a baseline ‘neutral’ score of 50. We then sum its score for each of the three ESG pillars – Environmental, Social and Governance. An issuer receives a positive score for a pillar if it performs better than the average of its peer group. If it performs below average, it receives a negative score.
However, two universal issues that impact all companies are not scored relative to peers, introducing a deliberate ‘tilt’ for the most exposed sectors. These are:
- Carbon emissions – As the world faces an absolute carbon emissions problem, we implement an absolute carbon emission measure, creating a positive bias towards issuers and sectors with lower carbon emissions.
- Controversies – Sectors that are more prone to ESG controversies have slightly lower scores, reflecting increased risk (‘headline’, reputational or financial risk).
The overall result is a quantitative ESG score that ranges from zero to 99, with the ability to see how each ESG pillar has added to or detracted from the company’s final score.
3- Qualitative review
In addition to proprietary quantitative analysis, we also integrate information from third-party sources, our Sustainability Centre’s in-depth research on material issues (e.g. climate change) and our investment teams’ knowledge and interaction with issuers.
4- Final ESG score
Combining both qualitative and quantitative inputs, we reach an ESG score ranging from zero to 99, with issuers ranked in deciles against peers. Issuers that are excluded from investment through our Responsible Business Conduct policy are assigned a score of 0. Scores are updated monthly.
UNDERSTANDING GLOBAL ESG SCORE: A PRACTICAL EXAMPLE
The global ESG score combines the average internally calculated ESG scores of all the companies in the portfolio. The ESG contribution table shows the global average contribution of each of the three pillars: Environmental, Social and Governance.
The reference score around which the contributions are calculated is 50. When the contribution is positive, it means that on average the pillar score of the companies in the portfolio is above the average score of their respective peer groups. When the contribution is negative, it means that on average the pillar score of the companies in the portfolio is below the average score of their respective peer groups.
Using this methodology, we arrive at a global ESG score ranging from zero to 99, with the ability to see how each ESG pillar has contributed and whether or not the portfolio is above or below benchmark.
SASB: Sustainability Accounting Standards Board
Investment made in these funds are submitted to market fluctuations and risks inherent to securities investment. Value of investments and earned income may record uptrends and downtrends, and investors may not recover the full amount of initial investment. Funds described all contain a certain risk of capital loss. This material is issued and has been prepared by the investment management company. It contains opinions and statistical data that are considered lawful and correct on the day of their publication according to the economic and financial environment at the time. This material does not constitute investment advice or form part of an offer or invitation to subscribe for or to purchase any financial instrument(s) nor shall it or any part of it form the basis of any contract or commitment whatsoever. This material is provided without knowledge of an investors’ situation. Prior to any subscription, investors should verify in which countries the financial instruments referred to in this material refers are registered and authorised for public sale. In particular financial instruments cannot be offered or sold publicly in the United States. Investors considering subscriptions should read carefully the most recent prospectus and Key Investor Information Document (KIID) agreed by the regulatory authority, available on the website. Investors are invited to consult the most recent financial reports, which are also available on the website. Investors should consult their own legal and tax advisors prior to investing. Given the economic and market risks, there can be no assurance that the financial instrument(s) will achieve its investment objectives. Their value can decrease as well as increase. In particular, changes in currency exchange rates may affect the value of an investment. Performance is shown net of management fees and is calculated using global returns with time factored in, with net dividends and reinvested interest, and does not include subscription-redemption fees.