A Guide to ESG Ratings

A pillar of our investment process

A Guide to ESG Ratings

ClearBridge's proprietary Environmental, Social & Governance (ESG) ratings system has for years been an integral part of its process for generating investment recommendations.


What are ESG ratings and why were they developed?

Environmental, Social & Governance (ESG) factors are an important part of ClearBridge's investment process, formally recognized in an internal ESG ratings process across our equity research platform.

ESG ratings are proprietary scores intended to signal to investment teams how well a company has executed its ESG practices. ClearBridge analysts have integrated ESG factors into their processes for generating investment recommendations for many years. ESG integration has also been formally included in the analyst performance reviews and the analyst compensation structure.

Evaluation and analysis of Corporate Governance practices, for example, are a core part of our fundamental research process and are done for every company in our coverage universe. The Social factor is equally considered as labor/hiring practices, community involvement and reputational issues inform our overall analysis of a company’s attractiveness as an investment. Environmental performance is integrated to different levels, depending on the industry, with it playing a significant role for companies in highly regulated industries such as utilities.


Do ESG ratings reflect just the ESG characteristics of a company or more broadly reflect the risk/reward?

First and foremost, our proprietary research process seeks out quality companies with sound fundamentals. ESG is a critical part of the normal due diligence we perform as part of our fundamental analysis. With the ratings, we are pulling this out of the process and highlighting it with a specific, codified rating. The research and ratings process are integrated but produce two outputs: an investment recommendation and an ESG rating. Our ESG ratings are formulated independent of individual stock recommendations. However, ESG ratings do factor into an investment conclusion. An ESG rating by itself is not a recommender or disqualifier. For example, an AAA-rated company may not be considered for investment due to valuation or other factors. Conversely, a company may be B-rated from an ESG standpoint but recommended as an investment due to attractive fundamental characteristics.

 

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IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

Discussions of individual securities are not intended and should not be relied upon as the basis to buy, sell or hold any security. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.