ESG scoring, is a measurement of a company's performance on Environmental (E), Social (S) and Governance (G) issues and its exposure to the relevant risks.
In recent years, in the area of sustainable investment, ESG criteria have been gaining ground in investment decision making. In other words, ESG criteria and good ESG performance are selection factors for capital investments.
ESG scoring is therefore a tool that investors use to make decisions, evaluate and compare the companies they invest in.
The value of a company (in the eyes of investors) can be strengthened or weakened depending on its rating according to ESG criteria. Scoring of ESG performance can be done by various agents (Bloomberg ESG Data Services, Dow Jones Sustainability Index, MSCI ESG Research, Sustainalytics), which are independent companies specializing in ESG scoring. The rating agencies use ESG data that companies disclose through standards/guidelines such as GRI, ATHEX and SASB non-financial disclosure standards and then convert them into metrics and scores.
Each rating agency has different methods of scoring companies and this results in variation in ESG scores and criteria used, even when it is the same company.
An example of "discrepancy" between ratings is shown in the graph below.
For example, a company may be rated very high on the ESG Environment criterion by one rating agency and very low by another. So an issue that arises with the existence of multiple rating agencies as well as the discrepancy in criteria and scoring methods is that a company that is rated may not be selected by investors and lose money due to a low score. In addition, in the long run, the credibility of ESG and its reporting by companies may be lost.
In general, investors prefer to allocate capital to companies with a good ESG score due to the fact that these companies are likely to be more resilient to current or future risks, such as addressing climate change and other environmental issues, handling equality, equality, inclusion and labour rights issues, the functioning of management (governance) structures, and so on.
An important requirement for investors is that their values are consistent with the values of the company. Even if a company scores low on an ESG criterion, this does not preclude investment in it by certain groups of investors.
Is there a need for a common evaluation/grading system containing specific and objective methodologies?
There is an argument that to address all of the above issues, it is necessary to establish a common evaluation/grading system containing specific and objective methodologies.
The way ESG data is presented plays an important role in the evaluation of a company. By presenting them in an organized and "transparent" format, the rating agency doing the assessment will have more structured data and then make a more accurate rating. At the same time, it will be more comprehensible to investors who target and give weight to a variety of categories.
E-ON INTEGRATION has developed the E-ON RIBIA ESG platform for the collection, recording and management of ESG data. With E-ON RIBIA ESG every company has the ability to, collect and handle ESG data on its own, report its results and produce reports that are accessible, structured and comprehensible to investors and rating agencies, thus providing the basis for a well rounded assessment.
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