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ESG between monitoring and risk management


by Eugenio Ciamprone

Managing risks arising from environmental issues

Following the UN’s adoption of the 2030 Agenda for Sustainable Development, which establishes 17 global objectives, the European Commission, with its Action Plan, has encouraged the integration of environmental, social and corporate governance (ESG) criteria into company budgets and investments.

The European Sustainable Investment Forum (Eurosif) has defined the role of ESG in the context of responsible investment, stating that “Sustainable and Responsible Investment is a medium- to long-term investment strategy that integrates financial analysis with environmental, social and good governance analysis when assessing companies and institutions, in order to create value for the investor and for society as a whole”.

The performance of recent years has shown that ESG criteria, while not strictly speaking part of financial analysis, do influence company results. This impact is positive if companies demonstrate in a measurable way that they have reduced their exposure to environmental risk.

The European Commission has estimated that economic losses due to extreme weather conditions worldwide have almost doubled in the last fifteen years. As a result, companies are becoming more aware of the risks associated with failing to take sustainability measures and integrate ESG criteria.

To control the adoption of ESG criteria, companies need to be able to measure and monitor the performance of their sustainability choices over time.

Monitoring ESG criteria

In order to monitor the uptake of ESG criteria by organizations, the Sustainable Development Agenda (SDG) articulates the 17 Goals into 169 targets made up of 240 indicators.

Using KPIs, companies can measure their performance against the inclusion of ESG factors – environmental, social and corporate governance – and monitor it against the targets.

While initially the approach to ESG criteria was mainly to exclude sectors such as firearms, alcohol and tobacco, today the monitoring of sustainability goes beyond negative selection criteria. The orientation of organizations and investors is towards what is called Impact Investing, i.e. the achievement of financial and risk optimization objectives that go hand in hand with the achievement of social and environmental impact objectives.

The Impact Investing approach requires companies to pursue objectives that go beyond the generation of economic value. Financial and sustainable development objectives are intended to be seen as inseparable.

For these reasons, great importance is attached to how information on ESG criteria and performance is monitored, controlled and reported. In fact, we are increasingly seeing the spread of reporting tools for ESG factors integrated with traditional financial reporting.

As regards ESG ratings, specialized agencies are also collecting data and information that attest to a company’s solidity, expressing a summary judgement also on the non-financial side. This data also relates to the monitoring of ESG factors and can come from both internal and external sources such as alternative data.

ESG performance and alternative data

In order to measure corporate sustainability, organizations need to monitor both traditional information produced by company reports and external alternative data generated by suppliers and stakeholders that are part of the ecosystem where the organization operates.

Through the implementation and use of Alternative ESG, companies can comprehensively assess their sustainability score and monitor it against the targets and each of the 17 Sustainable Development Goals (SDGs) of the 2030 Agenda, but also against competitors.