ESG considerations no longer escape the attention of investors, who assess the long-term viability of companies and their environmental impact. ESG scores represent a quantitative metric assigned to assess an organisation's commitment to environmental conservation, social responsibility, and ethical governance. Whatever the type of score awarded (number, letter, badge, etc.), a high ESG score indicates that a company is excelling in its sustainability efforts, while a lower rating suggests room for improvement. At ScaleX we have built a methodology inspired by the UN's SDG framework, which aims to assess the level of ESG maturity as well as the efforts made by leaders. Our aim is to help investors integrate ESG into their investment decisions and discover long-term opportunities.
Discover the importance of ESG scores in sustainable finance and learn how companies align with the United Nations' Sustainable Development Goals(SDGs).
The environmental score considers issues related to climate change, management of water and electricity consumption, pollution and waste sorting, as well as the opportunities offered by clean technologies and renewable energies. These indicators provide an overview of a company's environmental footprint and its green initiatives, in line with SDG 13: Climate Action. This encompasses reducing carbon emissions, resilience to climate change, responsible water supply, biodiversity conservation and effective waste management.
The Social score assesses the human capital and working conditions offered by a company to its employees. The ScaleX social score also provides an overview of the place of women and respect for parity in the workplace, as well as the well-being of employees and support for their career development. This key pillar responds to the UN goals of gender equality (SDG 5), decent work and economic growth (SDG8), and reducing inequality (SDG 10). By prioritising social responsibility, investors can support companies with a sustainable HR model, thereby contributing to long-term development.
The governance score examines corporate governance practices, including the composition of the board of directors, cybersecurity and business ethics. These parameters allow us to assess the ethical foundations on which a company's activity is based. Ethical governance, an essential aspect of ESG assessment, is aligned with the goal Peace, Justice and Strong Institutions (SDG 16).
Based on this analysis framework, ScaleX has worked to strengthen it with solid data and an approach using KPIs adapted to startups.
To maintain their credibility, ESG scorings must be based on solid, data-backed assessments. This is why, at ScaleX, we attach particular importance to the security of the data transmitted by entrepreneurs.
Our models take into account key indicators that illustrate the maturity of the startup and its willingness to address certain issues. For example, we give an intermediate score to a company that plans to implement a continuous training strategy for its employees, rather than penalising it for not having taken this step yet.
We know that establishing a reliable score can be challenging, especially as ESG metrics are not standardised. Data availability and quality vary across industries and regions, making it challenging to obtain accurate and comprehensive information. We also know that it is important for investors and funds to comply with the SFDR, which requires them to make the social and environmental impact of their investments transparent.
Thirdly, there is a need for better alignment between ESG scores and financial performance indicators to demonstrate the materiality of ESG factors. Addressing these challenges requires increased data transparency, and improved methodologies for measuring and scoring ESG performance. This is what we are trying to offer with the score we deliver at ScaleX, which allows analysis not only of a company through the ESG prism, but also of an entire portfolio.
Improving ESG scores is crucial for driving sustainable growth. Companies can improve their ESG performance by implementing sustainable practices, setting ambitious environmental targets, promoting diversity and inclusion, and strengthening governance structures. By continuously enhancing their ESG performance, companies can strengthen their reputation and mitigate potential risks.
Publishing ESG results also encourages companies to improve their practices, increase transparency and demonstrate their commitment to sustainable and responsible business behaviour.
That is why low ESG scores present risks for both companies and investors. Companies with low ESG scores may face reputational damage, increased scrutiny from regulators and potential legal liabilities. They may find it difficult to attract socially responsible investors, limiting their access to capital and potentially putting them at a disadvantage in the market. For investors, the risks are similar:investing in companies with poor ESG ratings can expose them to financial, legal and reputational risks. Poor ESG performance may indicate inadequate risk management, potential environmental liabilities or ethical concerns, which can have a negative impact on long-term financial performance.
The role of ESG assessment goes beyond ethical considerations; it is a strategic tool for risk mitigation and value creation. Investors who integrate ESG assessment into their strategy contribute to a more sustainable and inclusive future while protecting their investments. In short, the ESG score encourages companies to really work on their impact. ScaleX's score supports sustainable finance by enabling users to access standardised data on companies and to integrate ESG data into their investment processes.