ESG Insights (Jul 2022)

Upstream Resources Extraction has Severe ESG Risk

ESG has become an increasingly important element in investment decision-making for the purpose of risk identification and management. One quantitative measure that is used in?indexing is ESG risk rating, which measures a company’s exposure to and management of ESG risks. In this article, we base our analysis of ESG risk ratings on those of an international ESG research provider. There are five categories of ESG risk ratings, with higher scores representing greater risk: Negligible (0 to 10), Low (10 to 20), Medium (20 to 30), High (30 to 40), and Severe (>40). Among the HSLMI, which represents the listed LargeCap & MidCap stocks, six industries have a Medium level of risk, four have a High level of risk and two have a Severe level of risk.

We observe that those industries related to upstream resources extraction tend to have higher ESG risk. The three industries with the highest average level of ESG risk are Energy, Materials and Conglomerates.

Energy has the highest average ESG risk score at 47.3 (range spans from 35.7 to 55.3), due mainly to identified material ESG issues such as ‘Community Relations’, ‘Carbon - Product & Services’, and ‘Emissions, Effluents & Waste’. For instance, oil and gas companies might operate industrial activities near populated areas and have adverse environmental, social and even health impacts on the community, leading to higher chances and risk of conflict with the local community. In addition, as the world is transiting towards low-carbon development, reliance on sales of non-renewable fuel products and services also exposes these companies to higher ESG risk.

Materials has the second-highest average ESG risk score at 40.5 (range spans from 25.2 to 56.0). Apart from ‘Community Relations’ and ‘Emissions, Effluents & Waste’, some companies also have high risk for ‘Occupational Health & Safety’ and ‘Resource Use’. Similar to the Energy industry, Materials industry operations might have adverse impacts on the surrounding community and environment, thereby increasing their potential ESG risk. In addition, materials production processes often involve hazardous chemicals and machinery, and employee health & safety is therefore a key contributor to Materials companies’ ESG risk. The substantial amount of resources used in materials manufacturing is also a concern given resource scarcity issues, particularly those related to water shortages worldwide.

Conglomerates has the third-highest average ESG risk score at 37.8 (range spans from 28.8 to 52.4), due mainly to ESG issues falling under the ‘Carbon - Own Operations’, ‘Corporate/Product Governance’, and ‘Business Ethics’ categories. Energy usage and management is one of the key sources of ESG risks for conglomerates given their diversified business nature, and types and number of facilities they manage and operate.

In contrast, we note a lower risk for the Properties & Construction industry, with an average risk score of only 21.1 (range spans from 9.4 to 50.7). The high end of the wide range in this sector is due mainly to higher risk scores for a handful of construction companies. The lower average ESG risk is attributable to the industry’s low exposure to most of the material ESG issues. Nevertheless, this sector is exposed to relatively higher physical climate risk. The use of materials with high-carbon footprints during construction, as well as carbon emissions from electricity used in property operations, are also significant contributors to this sector’s ESG risk.?

Find out more from "ESG Insights" with publication date 12 Jul 2022

Disclaimer

The information contained herein is for reference only. Hang Seng Indexes Company Limited (‘Hang Seng Indexes’) ensures the accuracy and reliability of the information contained herein to the best of its endeavours. However, Hang Seng Indexes makes no warranty or representation as to the accuracy, completeness or reliability of any of the information contained herein and accepts no liability (whether in tort or contract or otherwise) whatsoever to any person for any damage or loss of any nature arising from or as a result of reliance on any of the contents of this document, or any errors or omissions in its contents and such contents may change from time to time without notice.

Hang Seng Climate Change 1.5°C Target Index (the ‘Index’) is published by HSIL. HSIL has jointly-developed the Index with Wilshire Opco UK Limited (‘Wilshire’). HSIL has contracted with Arabesque S-Ray GmbH, UK Branch (‘Arabesque’), ISS ESG, and Sustainalytics Australia Pty. Ltd (‘Sustainalytics’) to use the data from Arabesque, ISS ESG, and Sustainalytics which forms part of the data included to maintain and calculate the Index. Wilshire has contracted with ISS ESG to use the data from ISS ESG which forms part of the data included to maintain and calculate the Index. Arabesque, ISS ESG and Sustainalytics are trademarks of Arabesque, ISS ESG and Sustainalytics respectively and have been licensed for use by HSIL or Wilshire as aforesaid mentioned. The Index is not owned, sponsored, endorsed or promoted by Arabesque, ISS ESG and Sustainalytics and they do not make any representation regarding the advisability of investing in products that are based on such Index or otherwise relying on such Index for any purpose and neither Arabesque, ISS ESG, Sustainalytics, Wilshire nor HSIL shall have any liability for any errors or omissions in the Index or any values thereof.

The information contained herein does not constitute any express or implied advice or recommendation by Hang Seng Indexes for any investments. Investment involves risks. Prospective investors should seek independent investment advice to ensure that any of their decisions is made with regard to their own investment objectives, financial circumstances and other particular needs. Prospective investors should also note that value of securities and investments can go down as well as up and past performance is not necessarily indicative of future performance.

? Hang Seng Indexes Company Limited 2022. All rights reserved.