Credit rating agency Scope has developed a methodology for scoring companies’ environmental, social and governance (ESG) impacts that it claims represents an “innovative and disruptive approach”.
Dubbed ‘ESG Impact Review’, the tool – aimed at investors and issuers – bypasses corporate sustainability reports to instead draw on macro-level data, incorporates analysis of supply chains’ impact on the environment, society and governance, and assigns specific monetary values to a company’s ESG impacts.
According to Scope, the new product addresses three major challenges facing investors wanting to assess businesses’ sustainability.
“First, existing sustainability scores primarily rely on non-standardised self-disclosure by companies,” said Diane Melville, who recently joined Scope Group as head of ESG from the World Bank, in a statement.
“Second, a key part of environmental and social impact stems from supply chains, but corporate sustainability reports cannot integrate the entire supply chain.
“Third, selecting different sustainability indicators and uneven weighting makes it difficult to compare the results.”
The new assessment is based on data produced by institutions like the OECD, World Bank, and ILO.
On the topic of it incorporating analysis of supply chains, Scope said this addressed “one of the big bugbears for investors”, namely measuring all the ESG externalities resulting from a company’s economic activities.
“Integrating the supply chain into ESG analysis also helps all entities involved feel collectively responsible for the externalities they create,” added Scope.
To assign a monetary value to companies’ impacts, Scope said it uses “the latest available scientific results on environmental and social costs of economic activities, such as the calculated economic price on society for polluting one litre of clean water”.
Scope’s ESG Impact Review is not a risk measure in the sense that it does not directly analyse the risks borne by a corporate that could affect its financial performance.
However, Scope said the output of its model provided an external cost per euro of revenue that gave a good estimate of the maximum exposure of a corporate’s revenue to transition risk.
The model currently covers the 1,600 constituents of the MSCI World Index.