ESG Ratings: the value for both companies and investors

Who benefits from the issuance of ESG ratings?    

The last few years have seen a powerful increase in the awareness of the environmental, social and governance sustainability. The pandemic, natural disasters, the growing need for transparency and for more workers’ rights, have lead both investors and entrepreneurs to stop basing their investment decisions exclusively on financial parameters, but to consider non-financial factors as well (i.e. ESG – Environmental, Social, Governance). Good news on both the financial and the sustainability side.

Contrary to popular belief, the ESG topic is not of recent date. It originated in the 90s with the Global Reporting Initiative (GRI),be that aimed at developing a reporting overview on the environmental performance of companies. For the past 10 years or so, the institutional attention towards issues concerning sustainability has grown more and more, until we reached the crucial year 2019, year of the European Green Deal. The purpose of this initiative was to implement a series of measures to make energy production and the European citizens’ lifestyle more sustainable no later than 2050. Besides EU initiatives, the United Nations have played a key role in the global effort for sustainability in all its aspects, with the 2030 Agenda and SDGs (Sustainable Development Goals).

The European Commission explains how 

a strategic approach towards the businesses’ social responsibility is ever more important for the competitiveness. It can be beneficial in terms of risk management, cost reduction, access to capital, customer relations, human resources management and innovation capacity.

At this point, however, the question naturally arises: how do we know which activities are sustainable? It is true that sustainability issues are ever more significant for investors and for lenders. But what are the tools capable of measuring enterprises’ performance in ESG terms?

The tool that evaluates an institution’s sustainability: ESG ratings

Since the investors have embraced the idea that it is both useful and profitable to allocate resources to an issuer whose activity, besides being cost-effective, ensures sustainability, the need for a universally recognized tool that evaluates an institution’s sustainability has emerged.

The ESG rating (i.e. sustainability rating) is a synthetic judgement that certifies the solidity of a broadcaster from the environmental, social and governance performance’s point of view, contrary to the “traditional” rating, which takes into account just the economic and financial variables.

Originally, with the term “sustainability” one would refer only to the environmental footprint that a given activity had on the planet, so much so that the European Union issued the EU Taxonomy, the first application metric that regulates the interpretation of sustainability for the financial world. This approach changed over time and “sustainable investment” became all the activities that created financial value while taking into account environmental, social and governance issues. “sustainable investment”. Therefore, aspects considered in the process of the rating assignment are:

  • the environmental driver: reduction of CO2 emissions, energy efficiency, efficiency in the use of natural resources, noninvolvement in the air and water pollution, conservation of natural resources;
  • the social driver: implementation of qualitative policies for the work environment, attention to gender, ability and age diversity, to safety conditions in the workplace, and to the respect of human rights;
  • the governance driver: transparency in corporate governance, independent or non-executive board members, conduct of company managers consistent with ethical and compliance rules.

In order to obtain an ESG rating, there are several solutions and companies that offer valuable assessments. Anyone can turn to a rating agency specialized in the collection and analysis of data on the sustainability of companies’ activities, which will process the final evaluation. In order for an ESG rating to be complete, processing operations are based on several information such as: public information, business documents, trade associations, trade unions, NGOs, inspections at the firm etc.

The benefits of an ESG rating for an enterprise are multiple:

  • clearer idea on the entity’s sustainability performance;
  • wider market placement and commercial, branding leverage;
  • lower reputational risk;
  • increase in the probability of financing;
  • productivity parameters measured with more efficiency

modefinance steps towards a sustainable society

Nowadays, it is ever clearer that ESG profiles will be crucial for companies in order to access financing, and therefore creditworthiness assessments cannot exclude these issues. The growing importance of sustainability will thus have a considerable impact both on financial institutions, that will have to meet the ESG reporting requirements for future loans, and on enterprises, that will be able to better manage their progress. modefinance is headed in this direction, since it has developed a proprietary ESG rating – with three different solutions that meet various needs – and an ESG scoring model, thus contributing to the progress of sustainable finance. 

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