Managing Sustainability Risks
How are ESG risks measured?
The straightforward answer is, “very differently and very confusingly”. There is a confusion of ESG standards, principles, frameworks, ratings and scores.
Correlations of ESG scores and ratings between the world’s leading ESG database providers (such as MSCI, Refinitiv, Sustainalytics) vary from 30% to 71%. By comparison company ratings on long-term debt hardly vary at all (94-96% correlation).
As a result of the lack of consistency in ESG ratings analysts find it very difficult to compare one company to another to come to an informed ESG investment decision.
The Value & Risk Account
Our Value & Risk Account details how the ESG impacts of a company translate to financial value created, or at risk, in line with International Auditing Standards (ISAE 3000). Value & Risk Accounts are supervised and signed-off by Certified Public Accountants and are tested for relevance, double materiality, completeness, consistency, transparency and accuracy.
Decision-useful for SMEs
The Value & Risk Account provides decision-useful ESG data to help managers identify the opportunities and unlock the value of ESG that lies hidden in the business.
It gives SMEs unique insights into the value of reduced costs (e.g. by switching to a green energy supplier), improved sales revenue (e.g. by minimising customer complaints) and the increased productivity of motivated employees (e.g. by improving employee support). It also identifies the potential risks of ESG (e.g. that lie hidden in the supply chain or lack of independent advisors/directors).
Investment grade ESG data
ESGgen is the first-of-its-kind ESG accounting platform, purpose built to help investors fill data gaps (including scope-3) with audited, investment grade data from SMEs. The 29 standardised (but evolving) measures in the ESGgen Scorecard allow comparison of one company to another – aiding due diligence and portfolio management.
ESGgen data is SFDR and scope 3 ‘compliance ready’. Of the leading ESG frameworks and principles based guidelines, ESGgen has the highest alignment with the EU Taxonomy (71%) providing the best coverage of the required data points from the fewest number of measures (31) – an ‘efficiency per metric’ of 2.3%.
The remaining 29% of the EUT which we do not cover include industry or sector-specific questions relating to: (EUT#7) bio-diversity and sensitive areas, (#14) exposure to controversial weapons, (#15) greenhouse gas intensity and (#17) exposure to fossil fuel through real estate.
We have chosen to exclude these 4 indicators because they are only applicable to a very small percentage of businesses. This means that for the majority of SMEs we actually cover 100% of the EUT.