ESG Scores PDF

ESG scores ESG financial ecosystem Raw and refined data A (very) complex data ecosystem Data service ? Bloomberg announced on June 20th 2024 the launch of a new data offering on the Bloomberg Terminal collating the data that companies have started to report in li...

ESG scores ESG financial ecosystem Raw and refined data A (very) complex data ecosystem Data service ? Bloomberg announced on June 20th 2024 the launch of a new data offering on the Bloomberg Terminal collating the data that companies have started to report in line with the EU’s Corporate Sustainability Reporting Directive (“CSRD”). The offering is also available via Data License for scalable enterprise-wide use. Bloomberg’s CSRD offering is based on a mapping of the European Sustainability Reporting Standards (ESRS) to existing Bloomberg data fields. The offering includes historical data for a subset of fields reported by companies voluntarily or under previous regulatory requirements. Additional fields will be created to ensure that clients can access mandatory quantitative disclosures covering both financial and impact materiality.  ESG SCORES Typically, ESG scores are determined by third- party vendors specializing in ESG ratings. ▪ Since the beginning of the 2000s, new types of rating agencies have developed and are committed to evaluating the environmental, social and governance practices of States and companies. ▪ Their evaluation criteria are not standardized due to the lack of a common authoritative reference framework. ▪ Unlike traditional rating agencies, they are paid by investors and not by the issuers of securities.  WHAT ARE ESG SCORES ? Good ESG rating means a company is managing its environment, social, and governance risks well relative to its peers. A poor ESG rating is the opposite -- the company has relatively higher unmanaged exposure to ESG risks.  WHAT ARE RATING AGENCIES ? Like their big sisters who measure the credit risk of borrowers, ESG agencies were created to correct what is called “information asymmetry” in the financial markets between those who know the truth about the state of their company (the issuers), and those who know nothing about it (the investors), especially if the latter are foreigners, or even non-professionals. WHAT ARE RATING AGENCIES ? ❑ Rating agencies evaluation criteria are not standardized due to the lack of a common authoritative reference framework. ❑ There are over 140 US firms that provide ESG scores, and each has a different approach to calculating scores. While it can be helpful to have multiple perspectives, the discrepancies among vendor calculations make it difficult to assess the meaning of scores. ❑ Unlike traditional rating agencies, they are paid by investors and not by the issuers of securities. MAJOR RATING AGENCIES Source Roncalii RATING AGENCIES HISTORY CREDIT RATINGS Credit agencies estimate the probability of a company going bankrupt within a year. They use standardised financial data and there is no debate about the relevant indicators. What do scores measure ? Source Roncalli What do scores should measure ? ▪ Some defend a so-called “single-materiality” approach For them, a CSR report should answer the question: what are the specific risks and opportunities that affect the organization's ability to create value over the short, medium and long term, and how is the organization dealing with them? ▪ Others defend a “double-materiality” approach that considers essential to look both at the financial impact that ESG has on companies' accounts and at the impact that companies will have on the environment and on society (“inside-out”). What do ESG scores actually measure ? ▪ ESG ratings reflect sustainability risks, i.e "a company’s exposure to industry-specific material ESG risks and how well a company is managing those risks. ▪ That, in turn, can help inform whether a company’s environmental, social and governance policies and practices will likely positively or negatively affect its shareholders, or whether a portfolio of highly rated companies will provide superior returns to investors. ESG Scoring is about finance not impact ESG scoring does not necessarily has to do with making the world a better place. What it does is ensuring that you, as an allocator of capital, understand the risks associated with environmental, social and governance issues from the perspective of how to make the most amount of money in your investments. But simply because the ratings assess risk doesn’t mean that they aren’t also a proxy for companies making a positive impact. Source Jérome Courcier  ESG Scores Sustainalytics https://www.youtube.com/watch?v=88BvzzwA5C4 Rating process involves (in any case) 3 buckets of activity materiality: determining which indicators are relevant for a given company and sector data harvesting: gathering information about the company from various sources scoring: weighting and evaluating the commitments made by the company, the implementation of these measures (policies, action plans), and the performance (reporting) of those action plans. MATERIALITY ▪ To assess a given company requires understanding what’s material for that company, that is, what environmental, social and governance issues are deemed fundamental to a company’s financial success or that can create legal, regulatory, reputational or other risks. ▪ A matter is material if it can substantively affect the organization’s ability to create value in the short, medium and long term. ▪ Obviously, that means starting with a company’s sector; there tends to be a high level of commonality among companies doing similar things. ▪ But it also means understanding the company itself: where in the world it has facilities, what activities take place at each location, the kinds of resources it uses and where it sources them, and other issues.  Scores are based on materiality (MSCI) Finance Utilities  Scores are based on materiality (MSCI) Industrials Consummer Discretionnary How to know Which ESG issues are financially material? No standardized comprehensive list of financially material CSR/SD issues ◦ “Not possible or desirable: any such list would inevitably be incomplete and would soon be out of date” (PRI) Financial materiality issues highly depend on: professional judgement, ❑The industry (business model, competition, with no standardization. established practices) ❑The jurisdiction (headquarter, overseas operations and subsidiaries): ❑Legislation related to corporate liability, fiduciary duty… DATA HARVESTING ▪ Information can come from a wide range of sources, primarily from the company itself, with other data harvested from regulatory filings, proprietary databases, media reports and in- house research. ▪ As not all companies engage with raters for any number of reasons, or don’t share all the data that a rater might be seeking, to fill in those gaps rating agencies must engage in "imputation“: i.e., data based on assumptions provided by sophisticated models built with statistical regressionmodels, input-output calculations and other techniques. Is it possible to have standard ESG metrics for PE ?  Private Equity ESG data intiatives https://www.youtube.com/watch?v=BnAom0o2SsE&list=PLoXgMHo5g0g-qxIATsWrb9FK9O5rvU23B MSCI ESG Score Process MSCI ESG SCORES https://www.youtube.com/watch?v=dZcfmI71twQ Refinitiv ESG Score Process  Refintiv data points (extracts out of 186 fields) Resource Use Environmental Supply Chain Monitoring Boolean Workforce Policy Diversity and Opportunity Boolean Resource Use Green Buildings Boolean Workforce Salary Gap Float Resource Use Land Environmental Impact Reduction Boolean Workforce Supplier ESG training Boolean Resource Use Policy Energy Efficiency Boolean Workforce Supply Chain Health & Safety Improvements Boolean Resource Use Policy Environmental Supply Chain Boolean Workforce Targets Diversity and Opportunity Boolean Resource Use Policy Sustainable Packaging Boolean Workforce Trade Union Representation Float Resource Use Policy Water Efficiency Boolean Workforce Training and Development Policy Boolean Resource Use Renewable Energy Use Ratio Float Workforce Training Costs Per Employee Money Workforce Turnover of Employees Float Resource Use Targets Energy Efficiency Boolean Workforce Women Employees Float Resource Use Targets Water Efficiency Boolean Workforce Women Managers Float Resource Use Total Renewable Energy To Energy Use in million Float Human Rights Ethical Trading Initiative ETI Boolean Resource Use Toxic Chemicals Reduction Boolean Human Rights Fundamental Human Rights ILO UN Boolean Resource Use Water Recycled Float Human Rights Human Rights Breaches Contractor Boolean Resource Use Water Use To Revenues USD in million Float Human Rights Human Rights Contractor Boolean Emissions Accidental Spills To Revenues USD in million Float Human Rights Policy Child Labor Boolean Emissions Biodiversity Impact Reduction Boolean Human Rights Policy Forced Labor Boolean Emissions Cement CO2 Equivalents Emission Float Human Rights Policy Freedom of Association Boolean Emissions Climate Change Commercial Risks Opportunities Boolean Human Rights Policy Human Rights Boolean Emissions CO2 Equivalent Emissions Indirect, Scope 3 To Revenues USD in million Float Community Community Lending and Investments Money Emissions Water Pollutant Emissions To Revenues USD in million Float Community Corporate Responsibility Awards Boolean Emissions Emissions Trading Boolean Community Critical Country 1, 2, 3, 4 or 5 String Emissions EMS Certified Percent Float Community Diseases of the Developing World Boolean Emissions Environmental Expenditures Investments Boolean Community Extractive Industries Transparency Initiative Boolean Data evolution ? ESG data : the raw material of green and sustainable finance must evolve with the new needs of practitioners, the emergence of AI and the evolution of the regulatory framework. The current revolution in the use of ESG data signals the end of the reign of specialized agencies and is disrupting the ecosystem of data providers. In fact, it is based on three factors: the standardization of sustainability reporting which disintermediates providers; the principle of double materiality which makes their rating obsolete; and finally the emergence of alternative data which shatters the inertia and very slow frequency of ESG data. Is ESG rating regulation a solution ? The Council, the Parliament and the European Commission have reached an agreement on a proposal for a regulation on ESG Monday 5th of February 2024. ESG ratings will now have to be regulated by ESMA, which will issue an approval. As a result, there is a greater need for transparency in their methodologies and the sources they use. Separate ratings will have to be presented for each of the E, S and G factors. Regarding the environment, agencies will have to specify whether the rating awarded is in line with Paris agreement. The principle of double materiality, if taken into account in the rating process, must be clearly stated. ESG ANALYST ESG analysts in Asset Management analyze and monitor global environmental, social, and governance issues and trends. They assess whether these provide opportunities and/or present risks to existing or potential portfolio companies. This is done by scrutinizing corporate strategy, news, disclosures, and sustainability reports. Furthermore, they support engagement with representatives of investee companies ESG Analyst will typically look at a broader type of research ❑ sell-side research and analysis; ❑ academic studies; ❑ investment consultant research; ❑ third-party ESG data provider research; ❑ asset owner and asset manager white papers; ❑ investor initiative research; ❑ non-governmental organizations (NGOs) research; ❑ governmental agencies and central banks; ESG ANALYST JOB OFFER ESG ANALYST JOB OFFER  Ratings correlations If the same data goes in each agency, how can one get two different ratings out? ❑ Scope divergence – ratings are based on different issues ❑ Measurement divergence – measure same issues but use different data ❑ Weights divergence – assign attributes different levels of importance Rating agencies can display ESG strenghts and weaknesses petrobras Iberdrola THE MANY CHALLENGES TO ESG SCORES ▪ Since ESG has aroused the interest of mainstream investors, the number of companies assessed has become much higher, which has had major implications for the historical agencies and the time they spend on analysis. For information to be usable in traditional financial transactions, it must be simple and quick to use. ▪ Translating non-financial information in such a way that it has these characteristics necessarily implies a loss of nuance and could lead to missing some major aspects. Like systematic abuse in nursing homes as seen with Orpéa. ESG score does not always capture what counts for markets Renault, despite an average ESG score, experienced a very strong underperformance compared to Stellantis. Ferrari benefited fully from the premium theme. Sustainalytics’ Low Carbon Transition Ratings https://www.youtube.com/watch?v=RUeXgDgOMZI CONTROVERSIES What is a controversy ? A controversy case is defined by MSCI as an instance or ongoing situation in which company operations and/or products allegedly have a negative environmental, social, and/or governance impact. A case is typically a single event such as a spill, accident, regulatory action, or a set of closely linked events or allegations such as health and safety fines at the same facility, multiple allegations of anti-competitive behavior related to the same product line, multiple community protests at the same company location, or multiple individual lawsuits alleging the same type of discrimination What is a controversy ? ❑ To be considered, an incident must have a material financial impact on the company, i.e. the company pays fines or settlements that impact its financial performance. ❑ Incidents or accusations that criticize legitimate business activities, even if those activities are controversial in nature (i.e. investments in tar sands, palm oil, GMOs) or when the company is indiscriminately included in general criticism of an industry (where multiple companies are named and no single company’s responsibility is clear) are not considered. S&P. Media & Stakeholder Analysis - Methodology Guidebook, 2021 Avoiding controversy is important for performance Avoiding controversy is important for performance  Rating agencies provide controversies score ESG controversies are collected in real time by these ESG rating agencies, filtered through and rated based on their respective methodologies. This results in a quick turnaround ESG news making it to the various ESG ratings products within days from publication by the media. Controversies are scored by rating agencies based on their perceived severity or impact to society and also based on a company’s response. Severity is often scored on a scale from “very severe” to “minor” depending on various factors such as number of people impacted, land area impacted, the length of time over which the impact occurs, fines, and ultimately, the reputational risk to the company. Source Leaders Arena Controversies score follow different methodologies Source Leaders Arena Controversies comes mostly from the Social Pillar Source Leaders Arena The banking sector is N°1 Eight banks appear in the list of the twenty most criticized companies. From accusations of cartelization, to rogue trading, market manipulation, consumer misleading, a lack of efficiency in the fight against money laundering or corruption, to suspicions of encouraging tax evasion or financing dirty energy, the angles of attack are multiple. The banking sector is N°1 The NGOs are demanding an exhaustive carbon footprint for the bank BNP, including the emissions induced by its financing, i.e. the majority of the group's footprint, "greater than the French territory" they believe. Finally, the formal notice asks BNP Paribas to "reduce its CO2 emissions by 45% by 2030 compared to 2010 levels" and to "reduce its methane emissions by at least 30% by 2030 compared to 2020 levels". This campaign is in line with other actions based on the "duty of care The oil sector is N° 2 ▪ At a time of ecological transition, oil companies are regularly singled out, and not only by environmental protection associations, as illustrated by the recent decision of the Norwegian sovereign wealth fund to exclude certain oil producers from its investment universe. ▪ This development poses a potential risk to Total's share price. However, Total can be protected by the best in class attitude from investors.. ▪ More difficult to measure is the risk of an industrial accident for a giant that operates infrastructures in all corners of the globe. A disaster such as the one BP experienced in 2010 would be very damaging in financial and reputational terms. The Wolkswagen major controversy The U.S. environmental agency implicates the German automaker, accused of rigging Nox emissions tests for its diesel engines sold in the United States for six years. This was the beginning of Dieselgate. The sanctions fell, with an ousted management and massive losses under the effect of legal sanctions (27 billion dollars, according to Vigeoeiris calculations). Cheating hurts, … when caught Redemption is difficult For the first time, several pension funds are taking legal action in Europe against a company over its communication on climate change. It is motivated by what they call Volkswagen's double talk. The British, Swedish and Danish pension funds, which are attacking the company, believe that the carmaker is publicly advocating the fight against climate change, the green transition and the massive electrification of cars, while at the same time doing the opposite through its lobbying activities in industry associations. The responsible investors filed a lawsuit in a German court under the German Listed Companies Act after Volkswagen refused to put a shareholder resolution on climate on the agenda of its 2023 General Meeting. Nestlé Wolkswagen alike ? A serie of scandals have tarnished the food giant's reputation with the general public. First there was the scandal involving Buitoni pizzas suspected of being responsible for the deaths of two children in 2022. Then there was the illegal drilling that enabled the company to capture nearly 19 billion litres of water Then, the French National Agency for Food, Environmental and Occupational Health Safety (Anses) had submitted a memo to the Ministry of Health stating that the health quality of Nestlé group waters (Perrier, Contrex, Vittel, Hépar, etc.) was not guaranteed. The food giant was forced by prefectoral order to destroy two million bottles of its Perrier brand. Nestlé, Wolkswagen alike ? 20 years ago there was no link between obesity, type 2 diabetes and the composition of processed foods. Today that's the case, and this spring 11% of Nestlé shareholders voted in favour of a resolution calling on the company to make its products healthier! When the courts establish the responsibility of the agri- food industry for the planet's main health scourges, it will cost them as much as ClimateChange for fossil fuels! Since the beginning of 2022, Nestlé's share price has plummeted by more than 30%! Nestlé has just sacked its CEO, who has been in post for seven years! Will the agri-food industry be the automotive sector of tomorrow, which has never really recovered from the dieselgate? The signs are there! ESG risks are attacking the business model, damaging accounts and stock market value! Source Novethic August 24 2024 Heineken, who cares ? ❑ Heineken is said to have contributed to the genocide of the Tutsis in Rwanda in 1994. ‘The genocidaires were often drunk when they killed,’ explains the journalist. ‘Beer was also used as a reward after a day of massacres’. A rarity in the country, industrial beer was distributed en masse during this dark period. ❑ In Nigeria in 2006, a Heinken subsidiary allegedly used 2,500 prostitutes to persuade bar customers to change their brand of beer. ❑ In the Congo in the 2000s, Heineken put in place logistics to benefit and favour its leaders, such as providing a luxury residence for the wife of the president, Joseph Kabila. Heineken, who cares ? Heineken has a water permit in Nuevo León state where the city of Monterrey is located. This permit allows Heineken to draw about six million cubic meters of water a year, according to Samuel García, the governor. The lack of rain was at record levels in Monterrey. Therefore, the dams were draining fast and water shortages worsened in the city. However, the Heineken brewery faced no water shortage as they use groundwater supplies separate from the state. Mr. García exposed that the Heineken brewery was only using about two-thirds of the permitted water and demanded the company send the surplus to the state. Case study : how to assess ESG risks in the Pharma sector ? ▪ The pharmaceutical industry's reputation is regularly tarnished. But do health scandals have a lasting impact on their activities and stock prices? Sometimes yes, sometimes no. ▪ In the fall of 2015, Valeant Pharmaceuticals came under fire from the American political class for untimely price hikes on its drugs, which were as high as 800%! After topping $250 on the Nyse, the Canadian lab's stock plummeted to less than $30 after the affair broke. Since then, it has languished around $21 under the company's new name: Bausch Health. ▪ On Euronext Paris, Sanofi fell by 2.5% on August 10, 2016 when its Depakine (anti- epileptic) was implicated in the malformation of fetuses. Pharma Strategic Challenges ➔ Extensive capital invested in R&D, and a high risk of failure in product development ➔ The incremental value of innovation is declining over time. ➔ Increasing pressure to demonstrate the actual value of the products ➔ Potential risks of severe side-effects ➔ Important sales & marketing budgets for convincing to prescribe new drugs CSR risks associated to such industry drivers? ➔ False innovation ➔ Scientific frauds for licensing products ➔ Lobbying & corruption ➔ False claims and aggressive marketing ➔ Denial of drugs side-effects A controversial industry … The sector faces 312 controversies affecting 36% of companies. The most recurrent controversies concern: product safety information to customers anti-competitive practices corruption Vigeo Eiris: Pharmaceuticals & Biotechnology Sector 2019 Report - Key findings … with weak answers 41% of all controversies observed are related to corruption, the majority of which are of high severity, with none of the companies involved reporting on their remedial actions. Only a few companies providing formal training, dedicated controls and due diligence to prevent corruption and its associated risks. 28% of companies report on the presence of a CSR committee that is part of their Board. Only seven out of 150 companies linking executives’ variable remuneration with CSR metrics. Vigeo Eiris: Pharmaceuticals & Biotechnology Sector 2019 Report - Key findings  Inconsistent ESG ratings E S G Pharmaceutical companies display impressive margins Ledley FD & al. Profitability of Large Pharmaceutical Companies Compared With Other Large Public Companies. JAMA. 2020;323(9):834–843  Takeaways ❑ The business model of the pharmaceutical industry is increasingly exposed to financially material CSR/SD risks but is still highly profitable. ❑ The ESG agencies o have no common views on criteria to assess pharmaceutical companies o have no common assessment of the same criteria ❑ Inclusion of pharmaceutical companies in many SRI portfolios often doesn’t rely on sound records of exemplary CSR/SD strategies.