ESG ratings

What are the challenges and

opportunities for companies?
17th November 2021
Deloitte Sustainability Consulting Central Europe
Speakers

Irena Pichola Katarzyna Średzińska Emilia Michałowska Daphne van Osch Luca Molinari
Partner, Deloitte Manager, Deloitte Senior Consultant, Deloitte Manager Senior Associate
Sustainability and Economics Sustainability and Economics Sustainability and Economics Sustainalytics Sustainalytics
[email protected] [email protected] [email protected] [email protected] [email protected]

© 2021. Deloitte Advisory sp. z o.o. sp. k. 2

CONTENT

1 Why be rated?

2 Types of ESG ratings

3 ESG screening in practice

4 Sustainalytics’ presentation

5 Deloitte’s support in ESG improvements

© 2021. Deloitte Advisory sp. z o.o. sp. k. 3

Reasons to be rated regarding ESG

Regulations ESG Integration into M&A due diligence

Keep up with regulatory developments ESG values are being integrated into the corporate analysis,
i.a. European Union’s Sustainable business decisions and therefore into investment decisions
Finance Disclosure, Taxonomy, CSRD and M&A processes(also pressure from investors site)

Why
New opportunities be rated?
Increasing awareness
Possible new business models; potential
opportunities - not only in financial perspective, ESG-related value becoming also important for
but also human, customer and social implications employees, other stakeholders and customers

© 2021. Deloitte Advisory sp. z o.o. sp. k. 4

ESG as a tool for value creation

Advantages of having an ESG rating

Positive perception by investors Importance of brand New needs – Resilience

and reputation evolving expectations
ESG focus can help management Consumers expect more Fidelity’s study showed that stocks
Increase credibility of the activities reduce capital costs and improve of companies today, and their values with higher ESG ratings are less
related to the ESG strategy the firm’s valuation [1] are shaping their willingness-to-pay prone to market volatility
for products
ESG fund managers report that
Shareholders have significantly focussing on non-traditional risks
grown as a catalyst – pushing and screening for ESG-focussed
for change and exerting pressure stocks proved a determining factor
on boards to act [2] in resilience during the COVID-19
downturn [3]

Sources:
Principles for Responsible Investment, 2018. How ESG engagement creates value.

[[1] Harvard Business Review, 2020. Social-Impact Efforts That Create Real Value.
[2] FT, 2021. DWS hits back at greenwashing allegations.
[3] S&P Global, 2021. Most ESG funds outperformed S&P 500 in early 2021 as studies debate why.

© 2021. Deloitte Advisory sp. z o.o. sp. k. 5

Question 1

What are - from your perspective- the advantages of having an ESG rating?
good reputation
better perception by investors
improved ESG performance
designation of areas for improvement in the ESG performance
perception by customers and the market

© 2021. Deloitte Advisory sp. z o.o. sp. k. 6

Types of ESG data providers and ESG ratings

Types of data providers and ESG ratings: BENEFITS

• Fundamental data providers: These ESG agencies Fundamental data ESG ratings
usually offer a broad range of publicly available raw - provide assessments that are the same for each sector
data, usually from company reports or company and industry, therefore they offer scores that are
websites. comparable between all companies. Most of them,
however, is conducted on the basis of algorithms which
use publicly available data.

• Comprehensive data providers: These mostly offer

a combination of publicly available data from media, Comprehensive data ESG ratings
non-governmental organizations and company offer assessments that vary depending on the sector and
reports, and own proprietary questionnaires as well industry. Scores are adjusted to the economic environment
as curated data processed by the agencies’ own that companies operate in which allows for better
analysts. Comprehensive data providers span all ESG understating of ESG maturity. Assessment is conducted
aspects. on the basis of publicly available data and information that
are provided by the company, therefore all of the material
issues are usually addressed and reliable.

• Specialized data provider: These mostly offer

in-depth and highly contextualized data covering one Specialized data ESG ratings
or two ESG aspects, such as human rights or climate allow for maturity assessment of a particular area, i.e.
change. environmental maturity. Such scores are usually the most
important for investors who examine particular area
of maturity in the company. Also, such ratings provide
a framework for in-depth reporting and disclosure.

© 2021. Deloitte Advisory sp. z o.o. sp. k. 7

ESG Ratings - industry-specific type

Environmental, social, and governance (ESG) criteria are being weighted to assess companies’ non-financial performance.
These criteria cover a broad spectrum of issues, from environmental concerns to labor practices and data security – anything
that might affect the sustainability of the business. ESG Ratings offer a means of assessing the performance of a business
beyond market value and financial performance.

There is no general ESG Rating framework.

Consequently, there is a lack of methodology
standardization. R AT I N G S A R E I N D U S T R Y - S P E C I F I C

ESG Ratings are sector-relative scores assigned to an individual entity

The methods and how to measure and weight accordingly to its performance against a weighted set of sustainability
particular ESG factors have been developed indicators. Agencies’ models identify ESG indicators that are most material to
by each individual ESG rating agency. company’s sub-industry or sector. Agencies apply the same scoring framework
to companies from the same sectors, consequently there is a standardized
questionnaire for all companies from the same sub-industry.

Lack of common methodology usually leads

to a little comparability of ESG ratings.

As a result, it is possible that companies are asked about the matters that
don’t necessarily apply to them.

© 2021. Deloitte Advisory sp. z o.o. sp. k. 8

ESG Rating Preparation Process
How can a company prepare?

01 Internal evaluation of the

company in terms of selected
ESG rating and its requirements

How it looks like in practice?

02 Internal screening and gaps
identification • Proper rating preparation requires involvement
from a number of company’s departments.
Gap
Analysis 03 Implementation of solutions • Company should have ESG policies in place
filling the gaps or plans to adopt them.
• Disclosures on environmental, social and
governance factors are the basis for most of ESG
ratings.
• Adoption of a systemic method of measuring SG
04 Adjusting company’s performance in the company may facilitate the
disclosure to the rating application and the annual refreshing of the
agency requirements rating process.
Disclosure of data
• The analysis on the potential business problems
Preparation of the
Receiving ESG Rating
related to ESG is necessary.
ESG report
• ESG aspects should be included in the company’s
strategy

© 2021. Deloitte Advisory sp. z o.o. sp. k. 9

What in practice is being checked by an ESG rating?

AGENCIES SCREENING

ESG STRATEGY DISCLOSURES INTERNAL SOLUTIONS & OPERATION

• Main strategy pillars • ESG / Sustainable development report • Sustainable value chain
screening
• Key objectives and their measurments • Ethical policy introduction in practice
• Checking dislosures on websites
• General commitments • Diversity programme
• GRI / SASB (or others) international
reporting standards

Through the internal evaluation of the three elements (ESG strategy, disclosures and internal solutions),
an ESG rating measures a company's exposure to long-term environmental, social, and governance risks

© 2021. Deloitte Advisory sp. z o.o. sp. k. 10

Question 2

What is the main challenge in the preparation for the rating process?

ESG strategy
development or improvement of ESG disclosures
internal solutions and procedures
internal resources of the organization
lack of knowledge about the assessment methodology

© 2021. Deloitte Advisory sp. z o.o. sp. k. 11

 ESG Rating process
Example of how the ESG rating process may look like*

ESG Rating Process Examples of required documents:

• Annual Report
ESG rating provider
selection • Sustainability/ESG/non-financial information Report
Internal preparation
for the assessment • Sustainability performance indicators
process (document • Financial Statements
preparation) Company screening
by ESG rating agency • Business strategy
First assessment & • ESG Strategy
feedback from the
company • Corporate governance report
First assessment &
public ESG rating • Energy and carbon/biodiversity position
• Code of Conduct
• Code of Ethics
1-2 months • Sustainability Policy
• Health and Safety Policy

After initial screening, ESG rating agencies usually initiate • Supplier Code of Conduct
After ESG rating provider selection, usually a kick-off
meeting with ESG rating agency takes place to ensure the feedback processes where assessment may be reviewed • Green Procurement Policy
clarity about the process. by the Client to ensure that the research analysts have fully
• Whistleblower Policy
understood the complexities of the company. This is the
chance to correct any missing information and • Data Privacy Policy
misunderstandings. • Human Rights Policy
*Agencies work with different indicators and with less structured evaluation criteria.
The area of analysis vary between agencies, therefore presented process is only exemplary.

© 2021. Deloitte Advisory sp. z o.o. sp. k. 12

Sustainalytics

© 2021. Deloitte Advisory sp. z o.o. sp. k. Presentation title 13

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INTRODUCTION

About Sustainalytics

Daphne van Osch – Luca Molinari

Sustainable Corporate Solutions
17th November 2021
 Sustainalytics in Numbers 19/20 1000+
Top 20 Asset Clients
Managers

780 + 17 countries
SPO delivered Global presence

20.000+ 49
Who we work with: Areas of expertise: Companies Languages
• Asset Managers • ESG integration covered spoken
• Asset Owners • Compliance, Reporting and
• Pension funds Screening 450+ 1100+
• Banks • Engagement Services Research Staff Members
• Corporates • + 25 years' experience in ESG
Source: Sustainalytics, as of July 2021
research and ratings

© 2021 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY 15

Our Strategic Positioning
A Morningstar Company

As assets and interest in sustainable investing continue

to grow, Morningstar unpacks ESG risks to meet investor
demand for in-depth qualitative and quantitative research
to curate ESG investment choices

“Integrating ESG directly into the marrow of our research

methodology helps us to widen the aperture of the
traditional financial analysis and more precisely capture ESG
risks that can exert a profound influence on long-term
competitive dynamics and the sustainability of a company’s
earnings”

Dan Rohr, Head of Equity Research for Morningstar

Source: www.sustainalytics.com/esg-investing-news/morningstar-formally-integrates-esg

© 2021 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY 16

What We Do
Sustainalytics’ services are split by the type of client we are supporting

Sustainable Corporate Solutions (SCS) for Issuers

ESG Ratings License for Issuers ESG Professional services Green, Social & Sustainable Bonds
» Commercialize ESG ratings for use in debt or equity » Socio-Economic Impact Reporting Service​ » Label your issuance as green, social, or SDG through a
instruments second-party opinion from Sustainalytics
» ESG Assessment Platform: Supply Chain Solution
» Creation of an ESG rating » Confirm to investors that projects financed post-issuance are
aligned with the bond framework
» Benchmark sustainability performance relative to peers
» Report on impact of projects financed through your issuance
» Competitive intelligence on ESG score
to investors

Research and Engagement Solutions for Financial Institutions

ESG Integration Compliance & Screening Portfolio Analysis Other services Engagement services
» ESG Risk Ratings & Research » Global Standards Screening » Portfolio Reporting » Index Services » Global Standards Engagement
» Corporate Governance » Product Involvement Research » ESG Portfolio Analytics » Industry Reports » Stewardship & Risk Engagement
Research
» Controversies Research » Carbon Portfolio Analytics » Data Services » Material Risk Engagement
» Carbon Risk Ratings
» Controversial Weapons Radar
» Country Risk Ratings &
» Human Rights Radar
Screening
» Sustainable Products Research

© 2020 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY 17

 Who we work with
Sustainalytics’ works with different type of stakeholders
Clients Partners
Banks, Asset Management, Wealth Management (research) Indices

Distribution

Platforms & Tools

Issuers (for sustainable bonds and ESG linked loans)

Note: The above representation cover only partially the list of clients and partners © 2021 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY 18
working with Sustainalytics
 How we are considered
Sustainalytics, an ESG industry leader

Research &
Organizational
Awards
<< For Stewardship and Risk 2019 recipient of the 2012-2019 voted 2015 Farsight Award for 2010 TBLI Award – 2006 Globe Award for
Engagement on Plastics and
the Circular Economy Business as a Force for among top two firms “Banks – Like a Phoenix Best ESG Research Sustainable Investment
Good Award for Best SRI Research from the Ashes” House & Banking

Sustainable
Finance & Bond
Awards

Recognized as the Largest External Reviewer In 2020 Sustainalytics achieved its 500
2017 ,2018 & 2019 voted Most Impressive
by the Climate Bonds Initiative for three Second Party Opinion marque
Second Opinion Provider
consecutive years

© 2021 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY 19

ESG Risk Rating Services

20
Introducing Sustainalytics’ ESG Risk Ratings
Measuring unmanaged ESG risks

Sustainalytics’ ESG Risk Ratings measure

companies’ exposure to and management The rating measures and adds up the unmanaged risks of a company
of material ESG issues vis-à-vis a set of ESG issues that are considered material from a
financial perspective.

Companies are exposed to different ESG issues to different degrees.

Their exposure is driven by sub-industry and company-specific factors.

An ESG issue is considered material, if the company is sufficiently

exposed to this issue. Corporate Governance is considered to be
material for all companies.

Companies are allocated across five risk rating categories (negligible,

low, medium, high, and severe risk).

© 2021 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY 21

What Do the ESG Risk Ratings Measure?
Exposure and Management of Exposure drive the rating

Exposure A Company’s Issue Management and Exposure

» Reflects the degree to which a company’s enterprise value is exposed to
Material ESG Issues (MEIs). severe risk

weak
Occupational
Management Health and Emissions,
Safety Effluents and
Waste
» Measures a company’s preparedness and track record in managing its

Issue Management
Human
Capital
exposure to material ESG issues through an assessment of policies, programs, Business
management systems and controversies; Ethics Corporate
Governance
Carbon Own
» Weights assigned to indicators are determined by company-specific exposure. Bribery and Operations
Corruption

Land Use and Resource Use

Unmanaged Risk Biodiverity

strong
Community
» Risk assessment acknowledges that not all ESG issues can be fully managed; negligible risk
Relations

» The unmanaged risks across all material ESG issues are added up to arrive at low high
the final rating. Issue Exposure

© 2021 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY 22

 How Do the ESG Risk Ratings Work?
Exposure and Management of Exposure drive the ESG Rating

A company’s sensitivity or vulnerability

Total Exposure Material ESG risk inherent from the nature of a
to ESG risks
company / its business, which cannot be
managed by a company, e.g., carbon emissions
Material ESG risk that can be influenced & of an airline in flight– this cannot be changed
managed through suitable policies, with current technology
Unmanageable
programmes & initiatives, e.g., health & Manageable Risk Risk
safety issues aimed at preventing work
place accidents
Refers to the gap between what a company has
managed & what a company could possibly manage.
Management This indicates how far the company is from best
Material ESG risk that has been managed Managed Risk Gap
practice, e.g., the bribery and corruption policy is light
by a company through suitable policies,
on content
programmes & initiatives e.g., health &
safety policy is clearly & coherently defined

Managed Risk Unmanaged Risk ESG Risk Rating evaluates the Unmanaged Risk -
the lower the score, the lower likely impact of ESG
issues on the economic value of a company

© 2021 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY 23

The Three Building Blocks of the ESG Risk Ratings
Material ESG issues (MEIs) are central to the ESG Risk Ratings

Corporate Governance
Idiosyncratic ESG Issues
» Assesses Corporate Governance & Stakeholder Governance;
» All sub-industries have the same level of exposure; companies are
differentiated based on severity of their controversies and their
Event Category 4 & 5
public listing status only;
» Regional weightings scheme for Corporate Governance pillars and indicators.

Material ESG Issues

Material ESG Issues
» Issue selection and exposure assessment at subindustry level;
» Exposure adjustment at company level via beta factors;
» Determination of overall exposure.

Idiosyncratic ESG issues

Corporate Governance
» Include issues that are not covered under the material ESG issues;
» Weight of zero until a highly significant, but inherently unpredictable event occurs.

© 2021 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY 24

 Sustainalytics ESG Risk Rating License
Sustainalytics’ research process
ESG Annual Research – 6-week process Sources
» Public corporate reporting and filings
Company » 83,000 media sources via Moreover Technologies
data
(LexisNexis)
Desktop Quality
Research and peer Company » Third-party sources (specialized providers, industry
& Analysis review feedback
Media and publications, renowned NGOs)
news data
Analysis
NGO and » Industry-teams conduct exposure and management
industry assessments
reports Publication
of Profile » Stringent Quality Management
» Company feedback
Daily News and Event Monitoring

Media and Incidents Events Quality and Company Committee Incorporation of

news data analysis assessment peer Review feedback* approval* Events assessment

*for highly significant Events assessments (category 4/5)

© 2021 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY 25

Use Cases
Sustainalytics Corporate Solutions offers three main use cases to our Licensees

The Marketing and Investor Relations is the go-to license for sharing Risk Rating details with stakeholders. It can be used for:
• Promoting the company's ESG performance and showcasing the company's ESG initiatives
Marketing and Investor
• Communicating with investors, suppliers and customers
Relations • Setting internal objectives and targets
• Using Sustainalytics Rated and Top Rated (if eligible) badges to support above activities

Companies around the globe are increasingly choosing to have their sustainability-linked loans tied to the Sustainalytics ESG Risk
Sustainability Linked
Rating, among other performance metrics. Sustainalytics conducts annual re-assessments of the ESG Risk Rating score for the
Loans entire term of the loan and provides a clear view on how the company is performing relative to its pre-determined targets.

Integrating ESG into company compensation plans is another step companies can take to achieve their sustainability goals and
Remuneration objectives. Similar to linking financial instruments to the rating, Sustainalytics provides easy score change tracking to help
measure performance outcomes.

© 2021 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY 26

Sustainability-Linked Loans
Some examples of the worked done

© 2021 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY 27

Professional Services
An overview of our professional services
ESG Assessment Platform (EAP) and Impact Reporting

ESG Assessment Socio Economic Impact

Platform Reporting Services
EAP offers the
An independent analysis of the local,
possibility to have an
regional, national, or international impact of
understanding of the
organizations’ activities/ operations and their
sustainability
value-add to economies and societies
performances of
corporates value Economic modelling based on input-output
chain throughout an multipliers to estimate impacts on GDP and
analysis which can be jobs
framed among three Measure and report on the direct, indirect,
different rating induced, and downstream positive socio-
classes economic impact of operations and supply
chain

© 2021 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY 29

Opinion Services
Opinions - services overview
Bonds and Loans Opinion
1. Second-Party Opinions on Green, Social, Sustainability Bonds and Loans & Linked Instruments

Independent Second-Party Opinion on alignment of Sustainability Loan/Bond Frameworks with market standards such as
Green Loan/Bond Principles or Sustainability-Linked Bond/Loan Principles.

2. Transition Bonds Second-Party Opinions

Evaluating the alignment and credibility of your transition bond framework , which includes assessment of both issuance-
level considerations and issuer-level considerations.

3. EU Taxonomy Assessment

As part of a Second-Party Opinion or - Update, an Assessment on the alignment of the use of proceeds to the EU
Taxonomy

4. Second-Party Opinion Update

Adding extra categories or updating existing categories of the Sustainability Bond Framework will be reflected in an
update of the existing Second-Party Opinion.

© 2020 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY 31

Reviews and verifications - services overview
Bonds and Loans Reviews and Verification

1. Pre-issuance Review

Providing assurance to investors on the alignment of selected projects with the Sustainable Loan/Bond
Framework prior to issuance.

2. Post-issuance Annual Review

Aligning with market standards and providing assurance on the alignment of selected projects and reporting
practices with the Sustainable Bond /Loan Framework after the issuance.

3. CBI verification

Align with market best practice – get Climate Bond Initiative certified. Sustainalytics provides verification for
regular loans/bonds as well as loan/bond programmes.

© 2020 SUSTAINALYTICS – CONFIDENTIAL & PROPRIETARY 32

For more information, please contact:
Daphne van Osch
Manager – EMEA Sales
[email protected]

Luca Molinari
Senior Associate – EMEA Sales
[email protected]

www.sustainalytics.com
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Copyright © 2021 Sustainalytics. All rights reserved.

The information, methodologies, data and opinions contained or reflected herein are proprietary of Sustainalytics and/or third parties,
intended for internal, non-commercial use, and may not be copied, distributed or used in any way, including via citation, unless otherwise
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for a professional advice; (5) past performance is no guarantee of future results.

These are based on information made available by third parties, subject to continuous change and therefore are not warranted as to their
merchantability, completeness, accuracy or fitness for a particular purpose. The information and data are provided “as is” and
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Insofar as applicable, researched companies referred herein may have a relationship with different Sustainalytics’ business
units. Sustainalytics has put in place adequate measures to safeguard the objectivity and independence of its opinions. For
more information, contact [email protected]

Different disclaimers may be applicable to specific products or services.

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Wrap-up

© 2021. Deloitte Advisory sp. z o.o. sp. k. Presentation title 35

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How we support our Clients?
Possible project stages

01.
Companies preparing for the ESG rating

Internal screeing & Quick wins and long-term ESG rating provider selection
Fixing the indentified gaps
gap analysis projects recomendations & Obtaining the ESG rating

02.
Companies already rated

Internal screeing & Quick wins and long-term

assesment analysis Selection and implementation
projects identifications

© 2021. Deloitte Advisory sp. z o.o. sp. k. 36

Areas for improvement: „Quick-wins”
Recommendations to improve ESG rating in short term

E X A M P L E S – W H AT C O U L D B E I M P L E M E N T E D I N 2 / 3 M O N T H S ?

DISCLOSURES (website, ESG report) POLICIES

• Introduction of GRI standards for reporting • Introduction of Environmental Policy
• Descriptions of activities taken around the • Updating Bribery or Anti-Money Laundering
topic of diversity policy
• Disclosure on training hours per employee;
number of employees per grade / sex

INTERNAL PROCESSES / PROCEDURES RESPONSIBILITY

• Value chain monitoring • Assigning Board responsibility for workforce
diversity and disclosing all information regarding
• Calculating the organisation carbon emission
diversity actions in the company
in scope 1&2
• Green Officer – dedicated role for enviromental
• Gathering data regarding energy consumption,
managment in the organisation
water usage, waste production

© 2021. Deloitte Advisory sp. z o.o. sp. k. 37

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