The development of an ESG rating for a business information provider

Abstract

With the effects of climate change becoming more apparent, ESG (stands for Environmental, Social, and Governance) has become a hot topic in society worldwide. In this context, Trends Business Information aims to provide an ESG rating for as many companies as possible in Belgium. The first section of this report gives the activities of Trends Business Information, which is to provide digital financial and marketing data. The subsequent section includes the problem statement. The section consists of three parts. The first part discusses the main challenge Trends faces, which is the increasing pressure from stakeholders to be more transparent on ESG. The second part provides a definition of ESG and an ESG score. This report uses an ESG score and an ESG rating interchangeably because the difference in terminology is minuscule. The third part demonstrates the relevance of an ESG score from a stakeholder perspective and a company perspective. Moreover, this part highlights the contribution of this report, which is to answer the research question of how Trends Business Information can develop an ESG rating. The third section presents our methodology. This section outlines the procedure or the research plan to formulate an answer to the research question. This research plan consists of three steps, (step1) establishing a general framework, (step2) presenting an overall ESG score, and (step3) calculating the ESG score. These steps are completed one by one based on our analysis. The fourth section is the analysis. The section is divided into four parts. The first part is an analysis of the wants and needs of Trends. The next part is an analysis of the ESG reporting standards. The two most commonly used ESG reporting frameworks are GRI and SASB. The analysis of those standards demonstrates the importance of double materiality. The third part is the analysis of the ESG rating landscape, which includes two categorizations of ESG ratings. In the last part, we examine the most prominent ESG rating providers from the categories that are of interest to Trends. In the analysis, we review the sources of data input they use, their building structure, and their scoring system. In the fifth section, our solution is explained in three parts. The first part describes the general framework for the Trends ESG rating. The framework consists of two components, the assessment of general factors and the assessment of industry key issues. The second part is about the presentation of the ESG score, for this an ESG dashboard was created in line with the needs and wants of Trends. The last part presents the calculation of the ESG score in detail. It starts by converting data points into measures, then measures are converted into measure scores, next the measure scores are converted into criteria scores, those are in turn converted into pillar scores, and finally, the pillar scores are converted into a total ESG score. Finally, the sixth and seventh sections provide a conclusion and highlight the limitations of the proposed solution. The limitations are divided into two parts. The first part is about the limitations related to data, whereas the second part is about the limitations related to our framework. In the first part, we first discuss the lack of available data. Large companies disclose a lot of information on social and governance issues, but there is still a lack of data on environmental issues. For medium and smaller-sized companies, the data gap relates to ESG issues. Next to that, data is difficult to compare as they are not always disclosed in a standardized form. Third, we use the data source ‘survey’ in our model. On the one hand, surveys are seen as a less credible source. On the other hand, they are only used as a last resort, when no or little data is available on the other data sources. The second part is related to the limitations of our framework and can be divided into two components, the assessment of general factors and the assessment of industry key issues. First, our model only consists of 150 measures of general factors, but in the future more measures need to be added. Second, the criterium controversy is manually assessed, which is time-consuming, costly, and creates room for errors. Moreover, large companies are disadvantaged because they appear more often in the news compared to smaller companies. Limitations related to industry key issues imply that it is difficult to assess industry key issues by factors outside our model. Another limitation is that our model assesses companies’ performance on an industry key issue, and not on the initiatives that a company undertakes to mitigate these issues. Despite its limitations, we expect over time that the new developments on ESG reporting standards, will help improve the constraints related to data. Moreover, we also recommend Trends to collaborate with third-party data providers who can help them provide sufficient data and gain more insights into the measures. In general, this study contributed to the development of the core fundamentals of an ESG rating system. Notwithstanding its limitations, a foundation of knowledge was achieved in the topic ‘ESG’ and the scoring system. From this, we can conclude that developing an ESG score is relevant for the sustainable future of Trends Business Information.