InvTech company of Datrix group
  • 20 May 2022

ESG Scoring: what it is and how to calculate it

esg rating

ESG Scoring: what it is and how to calculate it

ESG Scoring: what it is and how to calculate it 787 443 FinScience

What is ESG Scoring and why you should do it

The acronym ESG stands for Environmental, Social and Governance: these are the three factors used to evaluate companies in terms of sustainability.

In fact, more and more investors are interested in these parameters in establishing the solidity of a company, besides the financial ones.

While “sustainable, responsible, ethical investments” are still quite vague terms, the ESG criteria are very specific in defining the actual impact in terms of environmental, social and governance footprint, since they provide a more precise score.
The ESG Score can apply to a company, a share or a fund, with a concise judgment on the three sustainability criteria.

This is not meant to replace the traditional rating, but rather to complete it, providing more transversal and global information, and consequently improving the choices of the decision makers involved.

In fact, in the medium to long term, investment decisions turn out to be more sustainable taking both into consideration.

On the other hand, in order to consolidate their position on the market, truly competitive companies are able to create shared value with all stakeholders, supporting their business choices through the positive impact they make.

This impact is not merely economic, but it also concerns these three ESG dimensions:

  • Environmental, for a business aimed at energy efficiency and the reduction of carbon footprint, committed to reduce the waste of natural resources and pollution, according to the Paris Agreement on Climate and the 2030 Agenda for Sustainable Development of the United Nations. Along with the Roadmap for Net Zero, signed by the 1000 largest listed European companies to achieve carbon neutrality by 2050, the European Union is transitioning towards more respectful growth models; 
  • Social, for the quality of the working environment in social terms, promoting the diversity and inclusion of workers, regardless of their sex, ability or age. This parameter offers a global perspective on workplace safety and corporate social responsibility, throughout the supply chain, also considering trade union relations, and in general respect for human rights.
  • Governance, for a company policy that guarantees the transparency of the BoD, including diversity criteria in its  composition and the presence of independent or non-executive directors, with plans and sustainability objectives linked to the remuneration of the Board, as well the conduct of top management in terms of ethics and compliance.

How the ESG Score is calculated 

There are basically two ways to calculate the ESG Score:

  • a quantitative approach, based on the public information issued by the company, according to international standards;
  • a qualitative approach, based on data obtained through questionnaires, including external sources, eventually evaluated through different methodologies.

By following the first path and measuring ESG performance exclusively through the information self-declared by the company itself, the main risk is getting into an incomplete assessment, due to the lack of data and the partial reporting method. On the contrary, taking into account the integration of alternative data generated by the company’s external stakeholders, can provide a truly impartial and truthful perspective on the sustainability parameters.

Thanks to the application of Artificial Intelligence, Finscience, the Datrix invtech company, offers an integrated and modular approach to calculate the ESG scoring, combining internal data – that is traditional data, spread by the company itself – 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.

esg-scoring-sdg
In addition to providing constant updates, we follow each company in the last yet most crucial step of the process: communicating its ESG Scoring outside the company, so that the actual ESG impact of the company matches its perceived value.