Leon Saunders Calvert: Sustainable Finance – The challenges of scoring and ranking

The challenges and pitfalls of scoring and ranking

ESG is an amalgamation of multiple different themes which do not necessarily correlate with one another

  • Climate – the single largest thematic issue – focus on preventing it or adapting to it?
  • Diversity & Inclusion – are companies demonstrating the values of equal opportunities in their hiring and promotion practices?
  • Resource Usage, Workforce rights, etc. The list is ongoing – the point is that these are not necessarily inter-related so there is a danger in assuming that an overall ESG score can accommodate the complexities inherent it

There are multiple outcomes that ESG data can be used to solve for

  • Risk – the use of ESG data to quantify and manage risk exposures – e.g. carbon emission reduction levels and corporate exposure to transition risk
  • Alpha-generation – rather than treat ESG data as inherently about driving ethical outcomes some investors want to isolate and identify the ESG data points that can most effectively be demonstrated to be material to outperformance
  • Impact – many believe that irrespective of correlation to performance ESG is a good in and of itself and want to quantify the impact of how they allocate capital in terms of social and/or environmental benefit

Relative vs Absolute scoring

  • Finding appropriate objective benchmarks against which to score – this is easier for some data points than others (alignment to Paris Agreement is easier for example than an objectively best ratio of CEO remuneration vs average employee)
  • Values based issues are tough to arrive at objectivity
  • Lack of clarity re what macro investment needs are and how individual companies ought to align to this
  • ESG is not binary – if companies need to be perfect at everything the universe of companies in which to invest dwindles quickly to zero
  • Need to beware of undermining the value of cognitive diversity and the benefits of enabling a multitude of approaches to driving sustainable outcomes

Refinitiv ESG data model & scores

  • Created with and for the market through roundtable and advisory board engagement
  • Objective Approach:
  • ESG data points are benchmarked against the sector on a relative basis
  • Proprietary materiality “Magnitude” framework provides weightings for different data points across different sectors – data driven
  • Transparency Stimulation – Non-disclosure impacts scoring
  • Controversy score & momentum rating alongside core ESG score
  • Easy to understand – percentile rank score
  • Full transparency back to source documents – open access methodology

 

Please find the full presentation of Leon Saunders Calvert at Virtual Food for Thought (23.9.2020) here.

For further details on Refinitiv’s sustainable finance league table report visit: Refinitiv analyzess the sustainable finance market or contact Leon Saunders Calvert (Leon.saunderscalvert@Refinitiv.com) or Rene Kuehne (Rene.Kuehne@Refinitiv.com).