by Tommaso Motta
Most international public and privatecompanies are being evaluated and rated on their environmental, social and governance (ESG) performance by various third-party providers of reports and ratings. Institutional investors, asset managers, financial institutions and other stakeholders are increasingly relying on these reports and ratings to assess and measure company ESG performance over time and as compared to peers.
What are ESG data providers
ESG data providers play an important role in the investment process by gathering and assessing information about companies’ ESG practices and then scoring those companies accordingly. The development of these ratings systems has helped to nurture the growth of ESG investing by giving asset owners and managers an alternative to conducting such extensive diligence themselves. As of 2016, there were more than 125 ESG data providers, according to The Global Initiative for Sustainability Ratings. These include well-known providers with global coverage such as Bloomberg, FTSE, MSCI, Sustainalytics.
Bloomberg is a high tech, market moving, data driven, cross platform, information company designed to solve global problems. It provides financial tools and news, which are delivered via the web, radio, and its television broadcast program. Moreover, the company constantly develops and provides consumers with various platforms that make trading and understanding changes in the market easier.
FTSE Russell’s ESG Ratings and data model allows investors to understand a company’s exposure to, and management of, ESG issues in multiple dimensions. The ESG Ratings are comprised of an overall Rating that breaks down into underlying Pillar and Theme Exposures and Scores. The Pillars and Themes are built on over 300 individual indicator assessments that are applied to each company’s unique circumstances. FTSE Russell maintains two core data models: the ESG Ratings and data model assesses operational ESG risks and performance, while the Green Revenues data model classifies and measures revenue exposure to products that deliver environmental solutions. By splitting our data model into these two dimensions users can determine more specifically whether to target ESG issues related to (operational) risk or (product) opportunities.
MSCI is a company that is extremely active in the ESG world, offering three main types of solutions
- ESG ratings, MSCI ESG Ratings provide insights into potentially significant ESG Risks so that the investor can make better investment decisions and communicate with your clients. We use a rules-based methodology to identify industry leaders and laggards. MSCI rate companies on a ‘AAA to CCC’ scale according to their exposure to ESG risks and how well they manage those risks relative to peers. Moreover, MSCI rates 8,500 companies (14,000 issuers including subsidiaries) and more than 680,000 equity and fixed income securities globally
- ESG indexes, MSCI indexes are designed to represent the performance of the most common ESG investment approaches by including, re-weighting, or excluding companies by leveraging ESG criteria. The MSCI ESG Indexes are designed to provide institutional investors with effective and transparent tools to integrate ESG or Climate considerations in their investment process and portfolios.
- ESG analytics, a group of researches, data and indexes that are available on MSCI’s analytics system, and where analytics clients can integrate MSCI’s ESG ratings and indexes into their security selection and portfolio construction processes, stress testing and risk and performance attribution analysis.
Sustainalytics is a leading global provider of ESG research, ratings, and data, that has recently expanded its suite of high-quality ESG research, ratings, and data to support the increasing ESG needs of global investors. Sustainalytics’ ESG Data includes more than 220 ESG indicators and 450 fields,and covers over 12,000 companies, and investors can use Sustainalytics’ ESG Data product for security selection, portfolio construction, risk and scenario analysis, and to meet disclosure requirements.
Recently, a new firm was launched: the ESG Data and Country Risk Ratings offerings, which cover 170 countries and are based on more than 40 indicators. The firm’s innovative country ratings help investors to identify and assess the ESG risks facing countries and how these risks might impact their credit analysis. The ratings combine ESG and economic indicators to provide fixed-income investors with a forward-looking assessment of country risk. Leveraging Sustainalytics’ Country Risk Ratings, fixed income investors can perform more in-depth sovereign credit risk analysis, portfolio analysis and macroeconomic analysis, ultimately enabling investors to evaluate companies and countries on a broad spectrum of ESG considerations. Sustainalytics also introduced a Material Risk Engagement service, where more than 250 high-risk companies are being evaluated.
Moreover, the firm noted that more of its institutional investor clients were looking for comprehensive data to generate ESG insights and, given this demand, Sustainalytics launched an ESG Data product, enabling investors to combine ESG indicators to reflect their views on ESG issues.
Despite being significantly smaller than the previous mentioned companies, it is one with big potential. In fact, it is an extremely new reality – born in 2017 – that from the beginning has viewed in environmental, social and governance factors, a huge opportunity. Therefore, it has developed ESG scores that evaluates every company from a sustainability and sociality point of view; the process of evaluation happens combining both internal and external information of the company analyzed to give to the investor, the most amount of information possible. The process of assessing the score is composed by 5 steps:
- data collection, data are automatically collected from the different sources
- Conversion into SDG-related indicators, textual content is first analyzed via Natural Language processing tool such as text classification or sentiment analysis
- SDG Meta-Score calculation, the data sources are classified into internal or external, according to whether it is voluntarily disclosed by the company. Internal and external scores for each SDG are computed.
- Internal/External Score calculation, external and internal scores are obtained by aggregating the SDG scores, also considering the industry in which the company operates by means of materiality matrix.
- Final FinScience ESG Score, the final FinScience ESG score is obtained by averaging internal and external scores, applying a penalty coefficient for those companies where internal and external disclosure results as conflicting.