The process of calculating ESG risk scores for a portfolio can be broken into the following steps.
Clarity AI’s ESG Risk scores are built bottom-up from the material metrics of a portfolio’s constituent securities, as follows:
- Scores of each of the constituents of the security :
- Quantitative, qualitative and controversies data are taken into account.
- Scores 1-100 for each metric within the industry, based on GICS4 classification. Material metrics are identified based on the materiality matrix, which identifies the level of materiality for a given metric, which is applied on a sub industry by sub industry basis, as determined by GICS4 in the case of companies. Performance on these material metrics are compared for all companies within the specified sub industry, and are then scored from 1 (worst) to 100 (best).
- Aggregation of organization scores based on materiality
- Aggregation of organization scores bottom up to security level :
- The portfolio score is the factor-weighted average of the scores of all companies and governments that compose it. The factored weights take into account both the allocation percentage of each organization in the portfolio, and the differences in materialities across sub-industries of each ESG issue. This method allows bottom-up calculation of the portfolio score at the metric, sub-category, category or pillar level.