modefinance kicks off ESG ratings
Sustainability ratings: modefinance announces proprietary model
Sunday, 18 September 2022, was International Water Monitoring and Equal Pay Day, so we take the opportunity to touch on an important topic: the concept of ESG.
Water Monitoring Day was established in 2003 to raise awareness and dedicate a day to water monitoring.
Equal Pay Day on the other hand aims to raise awareness of an issue that has plagued society for too long, namely the wage gap between men and women.
These two themes allow us to introduce two of the three ESG pillars: Environmental and Social. How do we assess these criteria at modefinance?
The proprietary ESG rating model
modefinance's modeling for issuing ESG Ratings is based on the most advanced principles of Artificial Intelligence and Machine Learning, enabling quantitative (statistical) and qualitative analysis, namely research by analysts, to assess the ESG performance of the rated entity. It is an innovative approach that primarily judges a company's awareness of the risks it is taking with its business and its policy of managing the issues these risks entail, an assessment criterion we have named 'Exposure vs. Management' in modefinance.
The rating scale comprehends 7 ESG rating classes, starting with S1 and going up to S7, defining the company as dynamic, aware, or fragile.
In the next section, we explain, in more detail, the KPIs used for rating the three pillars.
The first indicator of corporate 'transparency': Governance
Assessing the level of sustainability of governance means evaluating the set of principles, rules, and procedures that refers to the management of a company. To establish governance's KPIs, modefinance values the quantitative variables also analyzed during the creditworthiness assessment, such as the number of directors, the number of board members and the number of women on the board, the duration of membership, and the presence of an auditing firm. On the qualitative side, on the other hand, analysts are tasked with analyzing the degree of consideration of ESG components, the quantity and quality of sustainable choices by the board, and the presence of committees dealing with sustainability.
Social: the pillar for assessing the treatment of employees
It is also crucial to evaluate a company from the perspective of the treatment of its employees in terms of diversity, equal opportunities, human capital management, and safety in the workplace.
In this case, the KPIs taken into consideration based on the Social Taxonomy Report, divided into four categories, namely:
Employment: assesses working conditions, diversity, respect for rights, social dialogue, and training opportunities;
Customers: assesses the impact of work on customers, suppliers, workers, and communities, and the protection of personal data;
Supply chain: which refers to the traceability of products or services along the production chain and the selection of suppliers that maintain environmental and social standards;
Community: This refers to the impact of the company's activity on the territory.
Environmental: criteria for assessing sustainability
The EU Regulation 2020/852, which defines the guiding criteria for measuring the degree of sustainability of a company, is taken as a reference for assessing the Environmental component and is based on six objectives, namely:
Climate change mitigation;
Adaptation to climate change;
Sustainable use and protection of water and marine resources;
The transition to a circular economy;
The prevention and reduction of pollution;
The protection and restoration of biodiversity and ecosystems.
In order to make use of all this information, modefinance teams are carrying out data collection work on SMEs from Chamber of Commerce Visas, the TranspArEEnS dataset, and a questionnaire composed of specific questions that help the analysts in an accurate final assessment.
The modefinance teams are divided for each pillar and include a member of the Fintech Team and a financial analyst to collaborate and carry out the ESG criteria assessment as accurately and transparently as possible.
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