What is a Sustainability Score?
Nowadays, investors are beginning to consider the companies they fund in terms of value and long-term sustainability. They are adopting an ESG frame to better understand their impact on Environmental, Social, Governance issues, completing the traditional assessment.
On the other hand, companies are starting to consider ESG as a crucial part of their strategies: to keep evolving and grow to their full potential, they need to be held accountable for their footprint.
Sustainability ratings assess a company’s environmental and social performance, measuring the gap between the values they state and their true objectives.
A sustainability score aims at highlighting all these parameters that are often overlooked during traditional financial analyses.
For example environmental issues include sustainability-related risks such as:
- Carbon emissions
- Water sourcing
- Land exploitation
- Toxic emissions
- Waste Management
- Electronic waste
A good ESG rating indicates that a specific company manages its Sustainability risks better than its peers, while a poor ESG rating means that the company has a worse ESG risk exposure, compared with others.
For example, a score of 50 means that the company is considered average in its peer group; a score of 70 or higher means that the company is rated at least 20% more above average in its peer group.
How is an ESG score calculated?
Through specific algorithms, you can convert ESG metrics like a company’s carbon emissions, board diversity into clustered environmental, social, and governance scores, which are eventually merged into a single primary rating.
Finscience exploits external Alternative Data as a measuring factor, since grounding ESG performance only on proprietary data could lead to an incomplete assessment. Data published by the company itself is often partial, referring only to the particular reporting framework chosen by the company.
“Know thyself, and you will win a hundred battles” they say: to truly understand your reputation – or the reputation of the company you would like to invest in – you must consider the gap between what you state and what your stakeholders (employees, shareholders, customers, reference area) perceive. In this sense, alternative data extracted from news, social networks, reviews, sites, sustainability reports is your best ally.