InvTech company of Datrix group
  • 19 August 2022

ESG Rating and Rankings: meaning and definition

ESG rating and ranking

ESG Rating and Rankings: meaning and definition

ESG Rating and Rankings: meaning and definition 1024 683 FinScience

What is ESG?

ESG stands for Environmental, Social, and Governance: three crucial  criteria considered by socially conscious investors to screen investments that are most likely to outperform in the future, while being consistent with their own values. 

Environmental criteria refers to a company’s focus and direction towards the environment, including Net Zero policies, for example. 

Social criteria examine how the workplace deals with ethics, diversity, inclusion with employees, suppliers, customers, and the communities where it operates. 

Governance is about a company’s leadership, Board of Directors, executive pay, audits, internal controls, and shareholder rights.

What is an ESG Rating?

An ESG rating evaluates a company’s commitment when it comes to environmental, social and governance (ESG) issues, and how proactively the company manages ESG issues that are most relevant to its business.

ESG ratings are issued by both commercial and nonprofit organizations to assess how corporate statements, performance and business models comply with sustainability goals. They are mainly provided to investment firms and private investors to assess companies in their funds or portfolios.

An ESG rating measures a company’s resilience to long-term environmental, social, and governance risks. Issues such as energy efficiency, worker safety, and board independence certainly have financial implications, but they are often underrated during traditional financial reviews. Using ESG ratings to complete the financial analysis allows investors to get a more accurate perspective on a company’s long-term potential.

What is the difference between rating and ranking in research? 

The difference is quite simple: in a rating you need to compare different items using a common scale (e.g., “Please rate each of the following items on a scale of 1-10, where 1 is ‘not at all important’ and 10 is ‘very important’”) while in a ranking you need to compare different items directly to one another (e.g., “Please rank each of the following items in order of importance, from the #1 most important item through the #10 least important item”).

In fact, a rating scale is a closed-ended scale that allows respondents to evaluate multiple variables on a single scale. On the contrary, a ranking scale is a close-ended scale that allows respondents to score multiple row items in relation to one column item or a question in a ranking survey and then rank the row items.

A rating scale question allows you to measure strength of response, while a ranking scale question allows you to see at the glance the priority of the different options. In order to get the most powerful insights, you should in fact use both. 

How Artificial Intelligence can help you with ESG

Thanks to the application of Artificial Intelligence, FinScience offers companies an integrated and modular approach to calculate the ESG scoring, combining internal and traditional data with alternative data: external data generated online, which helps to frame the company’s reputation. FinScience’s Alternative ESG Score assesses corporate sustainability according to each of the 17 Sustainable Development Goals (SDGs) of the UN 2030 Agenda.

Not only does this solution provide constant and timely updates, it also supports each company in the last yet most crucial step of the process: communicating its ESG Scoring outside the company, so that all the stakeholders can actually perceive the value and the impact of your ESG commitment.