INGENIEUR
INGENIEUR
“ Executives should be able to identify the direct link between a company ’ s ESG strategy and its value creation strategy .”
Quest for clarity About 85 % of the chief investment officers we surveyed state that ESG is an important factor in their investment decisions . 60 % of respondents review their overall portfolio for ESG considerations , and about 80 % assess individual company positions in the context of how ESG affects forecasted cash flows . Strikingly , a significant majority are prepared to pay a premium for companies that show a clear link between their ESG efforts and financial performance .
Surveyed investors are also eager for clearer ESG standards . They understand that ESG scores today , unlike financial ratings , don ’ t correlate fully among ESG score providers . While financial ratings correlate at around 99 % among providers , ESG ratings can correlate at less than 60 % because of the different elements and weighting each agency assigns to various ESG metrics .
How does this strategy create value ? Executives should be able to identify the direct link between a company ’ s ESG strategy and its value creation strategy . To be credible , that connection should not be a checklist recitation of initiatives with a high-minded vision . Rather , companies should be able to walk investors through , in a reasonably granular way , why they chose the ESG initiatives they did , and how they will create value in terms that investors traditionally understand . That is , “ How will this ESG strategy enhance ( or sustain ) cash flows , return on capital , and margins , mitigate risks , affect top-line growth , and attract and retain the talent needed to produce these results ?”
The Economic and Social Rights Performance Score – World Bank
The Economic and Social Rights Performance Score is one of the new additions to the Sovereign ESG data portal . This indicator was developed by the Human Rights Measurement Initiative ( HRMI ) and spans 189 countries between 2007 and 2018 . As part of the Governance pillar , the data set measures how effectively countries use their economic resources to ensure the fulfilment of five economic and social rights — the right to education , food , health , housing and work .
Adjusted for income bias One of the most attractive features of the Economic and Social Rights Performance Score is that its methodology naturally adjusts for the ingrained income bias . Many of the widely used ESG indicators are afflicted by income bias . In the context of ESG investing , using unadjusted scores to guide investments can potentially lead to perverse outcomes , since richer countries tend to have better ESG scores , allocating investments based on ESG scores that are afflicted by this bias may inappropriately divert capital away from lowerincome countries toward higher-income countries . The Economic and Social Rights Performance Score strips out the income bias by computing the scores in relation to the so-called achievement possibilities frontier and the natural minimum threshold . The frontier traces what the bestperforming countries have shown to be achievable at each income level .
28 VOL 97 JANUARY - MARCH 2024