Materiality of our Equitics© Research
(1) Integrating Material ESG Issues into our Generic Model:
• Our ESG Research Framework begins with a Generic Model derived from international reference texts and standards.
• This model is periodically updated over time to bring in (or refine) indicators on existing, evolving and emerging ESG issues.
• This model currently contains 38 criteria organised within 6 domains (Human Rights, Human Resources, Community Involvement, Environment, Corporate Governance and Business Behaviour).
• Vigeo Eiris is currently using version 15 of its Generic Model for Equitics © research.
• Recent evolutions (2015 - present) at this Generic Model level include the inclusion of updated questioning on: Tax Transparency, Offshore Financial Centres, the Integration of ESG issues into all elements of Corporate Governance, Human Rights Due Diligence, Supply Chain Due Diligence indicators, additional indicators on the Prevention of Corruption, Environmental Strategy, Non-Discrimination and Diversity, the Physical Impacts of Climate Change and more.
• These updates are collaborative efforts requiring the inputs of Thematic Expert Leaders as well as the Director of Research, the Director of Methodology and Institutional Relations and other relevant stakeholders in the organisation.
(2) Sector Specific Frameworks:
• An additional task for our ESG Research teams is the installation of a SECTOR SPECIFIC framework for researching a company. This process takes our Generic Model, and makes it more material for the sector under review.
• Through this process, our generic reference moves from 38 criteria to the concrete analysis and activation of around 22 (on average) criteria per sector.
• Today, Vigeo Eiris has 41 sector models in place: e.g. Specialised Retail, Diversified Banks, Mining and Metals etc. Within these 41 sectors models, there are also sub-sectors.
• Part of this step requires the ‘weighting’ of criteria in order to determine what the most material elements for the assessment of a company are. There are three components that are used in this weighting process.
(a) Component 1 – the Nature of Stakeholders Expectations:
- this is assessed on a 3 level scale.
- Fundamental expectations, Essential expectations, Legitimate expectations.
(b) Component 2 – the Vulnerability of Stakeholders:
- this is assessed on a 3 level scale.
- High, medium and low levels of vulnerability.
- When making this determination in the Environmental section of our research, we examine the volume of related flows/emisisons (high, medium and low).
(c) Component 3 – the Risks/Opportunities that companies might face linked to their management of these issues:
- Using our risk typology, we determine which of the following types of risk might be linked to the company’s management of this issue (legal, human capital cohesion, reputational risk, operational efficiency, market, and transparency).
Following this process:
- Criteria effectively end with a weight of 0-1-2 or 3.
- Criteria with a weight of 0 are not activated (not-analysed) for a sector as they are not considered to be material.
- The Overall Score of a company is calculated on the Weighted Average of the Performance in Criteria.
- This ensures that the overall score of a company is based predominantly on the criteria that are considered to be the most material.
(3) Materiality in our Risk Analysis : The Mitigation Index
- As well as providing ESG scores to clients, built upon the most material elements of a company’s ESG performance, we also provide a range of risk metrics to clients.
- Therefore, as well as weighting all criteria in our methodology, we also provide a Risk Class Weighting to each criteria.
- This follows the logic that a strong level of performance on Water Management is more likely to have a positive material impact on a company’s operational efficiency (reducing costs) than it is on its Human Capital cohesion.
- Effectively, through this process we determine the link between performance on an ESG criteria and risk management.
- As a result of this, another dimension of materiality is added to our assessment of companies based on a Risk Mitigation Index.
(4) Materiality in our Risk Analysis : The Risk Matrix.
- For all companies rated in the Equitics© methodology, we also develop a RISK MATRIX at the close of their rating.
- This matrix shows the ‘weight’ of the criteria under review (1-2-3) as well as the level of performance of the company (weak-limited-robust-advanced)
- Based on this matrix, analysts are able to provide commentary to our clients on how a company’s ESG performance enables them to manage (or not) ESG risks and opportunities.
Organisationally, there is a continuous monitoring of material issues:
- Our Sector Teams are required to continuously monitor material ESG issues within their sectors and propose where necessary, evolutions in aspects of the analysis framework.
Vigeo Eiris has 8 sector teams today:
- Food and Health Team.
- Energy Team.
- Basic Resources Team.
- Finance Team.
- Services Team.
- Telecommunications Technology and Hardware Team.
- Infrastructure Team.
- Industrials Team.
- Our Thematic Expert Groups are required to continuously monitor material ESG issues within their thematic context and propose where necessary, evolutions in aspects of the analysis framework. Vigeo Eiris has eight Thematic Expert Groups in place today: Human Rights, Human Resources, Corporate Governance, Business Behaviour, Environment, Community Involvement, and Emerging Issues.
- Proposals for evolution can vary in terms of complexity and scope from refinement of a single indicator, to the inclusion of new KPIs, the creation of a new block of questioning, the creation of a new criterion or the refinement of scoring instructions for analysts.
- All of this work is overseen by the Director of Methodology