What do investors look for before investing in a company or asset? Well, numerous factors help an investor decide whether to invest their money or not in a particular investment avenue. Of all these factors, environmental, social and governance (ESG) factors are the most important ones in the investment industry currently. In 2022, investors are seeking sustainable businesses that do more than just make profits. Many investment banks and foundations have understood the responsibility of social goals in 2022. For this reason, companies and individual investors use ESG research reports to make investment decisions. Read on to know how ESG ratings reflect climate change risks and opportunities.

Understanding ESG ratings

How does one know the level of social responsibility taken up by an organisation? It can only happen after an organisation's ESG initiatives are cross-checked. After carrying our research, ESG reports are used to assign an ESG rating to each company. Many ESG rating organisations around the world offer individual ratings to each company. These organisations are independent and provide unbiased ESG ratings to each company. Company with higher ESG ratings take steps to ensure the betterment of society and climate.

ESG ratings normally range between 0 and 100. Investors look at the ESG ratings before lending to or investing in any company. ESG ratings are determined after thorough analysis and research. Several factors are taken into consideration to determine the ESG rating, with climate change being only one factor that influences the rating. Many other environmental scoring factors are used to determine the ESG rating. Renewable energy, soil contamination and water pollution are a few environmental scoring factors to assess the ESG rating. In short, an ESG rating can tell whether an organisation is taking steps to fight climate change or not.

Identifying climate change risks and opportunities

ESG ratings are more than just a score. Investment banks and asset managers dedicate time to ESG research to know more. With the ESG score of an organisation, several climate risks and opportunities are reflected. ESG ratings for some companies will focus primarily on climate change. This is because the return on investment of such companies can fluctuate with climate change. For such companies, the climate change risk is higher. For example, oil and gas firms are more vulnerable to climate change than some other firms. A high ESG rating for a firm implies that the firm is ready for climate-related risks and challenges.

The ESG rating of an organisation represents several climate-related factors. Based on these factors, an investor can know if the firm takes environmental responsibilities. Some climate-related factors conveyed by ESG research reports are as follows:

• Carbon emissions
• Carbon footprint
• Climate change vulnerability

Apart from the above risks, ESG ratings also represent climate opportunities for an organisation. Opportunities in clean tech, green buildings and renewable energy can be determined through the ESG report of an organisation. Each climate risk and opportunity has financial relevance. Study ESG reports before investing in 2022!