Introduction

ESG stands for Environmental, Social, and Governance. It refers to a set of standards that measure the sustainability and societal impact of an investment in a company or business. Investors and financial institutions use ESG criteria to evaluate the performance of a company or fund and to make investment decisions. Companies with strong ESG ratings are often perceived as being more responsible and less risky to invest in, as they are more likely to be financially stable and have a positive impact on society and the environment. Let’s delve into more details on each of the following criteria.

ESG criteria

Use of ESG scores

There are several ways in which financial companies can use ESG scores:

1. Investment: Financial companies can use ESG criteria to assess the sustainability and societal impact of potential investments. This can involve evaluating a company’s environmental practices, labour policies, and governance structures, among other things. This is viewed as an important factor in long-term company performance.
2. Portfolio construction: The ESG criteria can be used to construct portfolios that are composed of companies that are considered to be more socially and environmentally responsible.
3. Risk management: These criteria can help to identify and manage potential risks in an investment portfolio. For example, a company with poor environmental practices may be at higher risk of regulatory fines or reputational damage.
4. Reporting: Financial companies report on their use of ESG criteria in their investment decision-making processes, there is a number of different regulations that encourage the measurement of impact on their portfolio holdings. One of the most commonly used criteria would be CO2 emissions.

ESG data sources

Overall, the use of ESG criteria in finance has grown significantly in recent years, as investors increasingly seek out investments that align with their values and have a positive impact on society and the environment. The main sources for ESG scores that are available in the industry are:

• Institutional Shareholder Services (ISS) is one of the largest institutional investor advisory services in the world that helps a number of financial services companies with their voting. ISS provides a variety of scoring systems, including issue-specific scores (like its “Carbon Risk Rating” or its “Water Risk Rating”) and category-specific measures (like its “Governance Score”), as well as an overall “Corporate Rating.”
• Carbon Disclosure Project (CDP) is a non-governmental organization that publishes ESG ratings, particularly around environmental factors. Independence of CDP helps them in conducting primary research directly with issuers, which is more reliable than relying on an organization’s voluntary disclosures.
• MSCI is a leading provider of critical decision support tools and services for the global investment community and they provide various ESG rating and scores to support ESG driven investing.
• Sustainalytics provide a range of ESG scoring technics applying their methodology on more than 20,000 companies.
• S&P TruCost is the data provider measuring an environmental impact for 16,800+ companies in order to assess environmental costs, identify, and manage environmental and climate risk as well as conduct peer and portfolio analysis from a climate and environmental perspective.

Please note, none of the information on this blog represents the opinion of my employer and all information does not represent a financial advice.