Refinitiv makes enhancements to ESG scoring methodology
Refinitiv ESG scores now address key industry challenges such as Materiality, Transparency Stimulation, and Size Bias.
Provider of financial markets data and infrastructure Refinitiv today announces a set of enhancements to its ESG scoring methodology.
Refinitiv ESG scores are designed to transparently and objectively measure a company’s relative ESG performance, commitment and effectiveness across 10 main themes (emissions, environmental product innovation, diversity and inclusion, human rights, shareholders, etc.) based on publicly-reported data. The enhanced ESG scores are a uniquely effective way to assess materiality across industries, while serving as an objective, impartial and trusted assessment of the importance of each ESG theme to different industries.
Refinitiv ESG scoring methodology enhancements were made in consultation with market participants (sustainable finance professionals at institutional investment firms, academics, regulators, and investment banks) through discussions about sustainable investing and what is required to encourage and accurately reflect the integration of ESG data into investment strategies. Following a series of industry roundtables, along with 4-years of market feedback, Refinitiv ESG scoring methodology enhancements were designed to ensure they are keeping up with rapid market changes and developments in the sustainable investing industry.
The key enhancements to the Refinitiv ESG scoring methodology concern:
- Materiality Matrix
The enhanced ESG scores further take into account that not all metrics have the same importance to every industry. The Refinitiv ESG magnitude matrix is developed as a proprietary model and is applied at the category level. Importantly, the magnitude values are automatically and dynamically adjusted as ESG corporate disclosure evolves and matures.
For Boolean metrics, levels of data disclosure can act as a proxy for investor driven pressure on company reporting. Levels of disclosure inform the relative ‘weight’ of data points for each industry. For measurable numeric metrics, Refinitiv uses its data to determine which sectors contribute most and the proportion of the contribution to the total is used as a proxy for the level of materiality for that sector. For example, the more a given sector contributes to carbon emissions, the more material are carbon emissions data points to companies in that sector.
Refinitiv proprietary “magnitude matrix” assesses materiality, showing the weight, from 1 to 10, of data points for each industry.
- Transparency / Investment grade scores
The previous ESG scoring methodology allocated a score of 0.5 to companies which did not report on metrics. However, given that this may disincentivize companies to report on their ESG performance, the enhanced methodology assigns a score of zero to companies that do not report on metrics relevant to the industry. This new approach is set to encourage company disclosure and transparency.
- Company size bias
When calculating controversies scores for companies Refinitiv takes into account company size. Larger market cap companies are reported on more in the news than smaller companies due to their scale of operations. Refinitiv has introduced a market cap factor which puts more weight on small companies than large companies.
