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.