Sustainability has now become a major focal point driving business change across market sectors. Stakeholders have demanded that businesses be more sustainable, driving companies to develop best practices on impact, inclusion, and sustainability. In the report ‘Making Sense of Sustainability’, Lux Research addresses three primary questions: whether companies should bother with sustainability at all, how to set the right goals, and how to incorporate sustainability into strategy.
“Climate and sustainability have become the most important factor now for all stakeholders, including shareholders, consumers, and employees, who have shifted from wanting it to demanding it,” says Gihan Hewage, lead author of the report. “Companies have already been driven to bankruptcy in part due to not responding quickly enough to these changing consumer demands, making sustainability an important factor for businesses to consider.”
The report suggests three key ways of turning sustainability into actionable goals are to use fewer resources, reduce emissions (most notably CO2 and methane), and reduce waste.
The Lux Research report comes as Netherlands-based bank ING has revealed that it has set new targets for its own environmental programme, which is designed to make sure that its operational impact on the environment is being made responsibly.
The targets that the bank had set in 2015 for year-end 2020 are on track to be exceeded, and as a result of that ING is updating and upgrading them. The bank says this underscores its continuous commitment to climate action.
One target ING had was to reduce its total CO2e emissions by 50% by year-end 2020 compared to 2014. It managed to do this by 57% by year-end 2019. As a result, the bank has now ntroduced CO2e reduction targets split across the following two categories, in order to be more effective and transparent about its progress:
- First, the bank says it will reduce CO2e emissions from its buildings and data centres by 80% by year-end 2022 compared to 2014, and 90% by year-end 2030.
- Second, ING has committed to reducing its CO2e emissions caused by business travel using both aeroplane and car by 25% by year-end 2022 compared to 2014.
Other targets are around energy consumption, renewable electricity, global residual waste and water.
“Of course, as a bank, our biggest impact is in our financing,” said Roel Louwhoff, ING’s chief operations officer. “Still, our commitment and leadership to climate action start with our own operations.”
Going forward, ING says it will continue to work on improving the energy efficiency of its buildings and data centres; implementing more water-efficient infrastructure in buildings; reducing use of paper while increasing the use of environmentally friendly paper; reducing the use of single-use plastic; reducing the impact from business travel; and working to earn the highest sustainability rating for its head offices around the world (in addition to the bank’s new Cedar office in Amsterdam).
Scoring ESG efforts
To understand and reduce its energy use, ING says that it carries out regular monitoring, reporting and reduction strategies across its global operations. Reviewing and monitoring ESG performance is important, which is where ESG data providers fit in. These firms evaluate ESG performance and score corporates, financial institutions and more, and these ratings have a material impact on the finances of those being rated. For example, a green loan will usually be linked to a firm’s ESG performance, and when the rating reaches a certain level of positive performance, the interest payable on that loan will come down, and vice versa.
MSCI, Sustainalytics and Refinitiv are some of the leading providers of ESG data, and Refinitiv has just announced that it has enhanced its ESG scoring methodology to reflect sustainable industry developments and market changes.
Refinitiv says that its ESG scores are now more data driven than ever, accounting for industry-based materiality weighting of metrics, with minimal company size and transparency biases, allowing investors and companies to more objectively conduct industry peer-comparisons.
Refinitiv ESG scores are designed to transparently and objectively measure a company’s relative ESG performance, commitment and effectiveness across 10 main themes, including emissions, environmental product innovation, diversity and inclusion, human rights, shareholders, etc, based on publicly-reported data. The enhanced ESG scores offer a 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.
There are three main enhancements that Refinitiv says it has made to its ESG scoring methodology:
Refinitiv 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. The 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 that did not report on metrics, essentially giving them the ‘benefit of the doubt’. However, as this may disincentivise 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 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. As a result, the firm has introduced a market cap factor that puts more weight on small companies than large companies.
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