A very recently pusbished HBR article, entitled “ESG Impact Is Hard to Measure — But It’s Not Impossible“, discusses the difficulty of measuring ESG impact. In the conclusions, it’s author, Jennifer Howard-Grenville, proposes three complementary concrete actions in order to go beyond the measure—which, today, might indeed be misleading due the aggregate confusion brought by most of the ESG ratings available: “Why ESG ratings vary so widely (and what you can do about it)” ask indeed the MIT Sloan.
ESG Rating is broken…
Yes, ESG Rating is broken, and this situation is nothing new: for instance, January the 20th, 2004, i.e. 17 years ago, the relevancy of ESG ratings was already questionned in a then famous article: “The Rashomon Effect: Why Do Innovest and Oekom Rate Toyota’s Environmental Performance So Differently?“, published on socialfunds.com by William Baue.
17 years from Baue’s article publication, this so-called Rashomon Effect is still prevalent among the ESG Rating approaches available on the market.
Of course, we cannot agree more on the idea that ESG is indeed measurable—we launched IMPACTIN with the very purpose in my mind to provide a concrete solution to the 6 main issues we see today in the market approaches to ESG Rating:
- ESG Risk-based methodologies, lost in intention-checking;
- Subjectivity, due to a human-based analysis;
- Qualitative approaches;
- Rating dilution, often aggregating hundreds of indicators;
- Black-box rating methodologies, usually non-repeatable;
- Long update cycles (sometimes > 24 months), due to a limited agency’s analysts workforce vs. thousands of emitters to analyse;
How to fix it ?
At IMPACTIN, we approached the problem the other way around, and built natively our quantitative ESG impact rating methodologies on the following principles:
- ESG Impact scoring approach, based on a small set of relevant ESG impact indicators;
- Objectivity, due to a our quantitative and automated approach;
- Quantitative approach;
- Key ESG indicators (SMART Data), quantitative and selected for their relevancy, coverage, quality, etc.;
- Repeatable and deterministic method;
- Frequent and automated updates , thanks to our quantitative approach and our automated data-analysis pipeline.
Our ESG Impact rating can thus be used by AMs in their Sustainable Finance activities (thematic funds creation, portfolios and indices Impact Rating, scorecards, reporting…), and to improve the Engagement process with emitters, but also for the emitters to track their own ESG Impact performance through dedicated dashboards.
Yes, “what gets measured gets managed“, and we think there’s still plenty of room for better ESG measurements, through ESG Impact scoring. And that’s the precisely the solutions we provide to the Sustainable Finance market.