Until now, mostly large-cap, public companies have benefited from a plethora of ESG scores provided by various large rating companies. But now, Moody’s has released a tool to also get environmental, social, and governance scores for small and medium-sized enterprises (SMEs), both public and private.
The rating agency’s ESG Solutions Group has combined Moody’s large database and its proprietary ESG scoring methodology to create a real-time ESG Score Predictor for thousands of smaller firms.
It is notoriously hard to get standardized quality ESG data from SME’s due to limited disclosure and company coverage. Moody’s tool provides 56 ESG scores and sub-scores using regions, sectors, and company size, resulting in about 140 million company ESG scores that can be accessed on its platform.
“SMEs are the backbone of every economy; they drive innovation and power global supply chains,” said Andrea Blackman, global head of Moody’s ESG Solutions in the press release. “Alongside portfolio analysis and analyst-driven SME assessments, the ESG Score Predictor adds a unique, integral component to our comprehensive suite of cutting-edge solutions to help investors and companies leave no stone unturned when identifying and analyzing ESG risks and opportunities.”
This tool is especially valuable for banks and money managers who use ESG ratings when creating and managing investment portfolios for their clients. As individual investors become more and more demanding regarding sustainability, climate and value investing, ESG rating providers are expanding coverage to smaller firms and even emerging markets.
Moody’s ESG Score Predictor provides metrics that include granular ESG scores, an energy transition score, a physical risk management score, and carbon emission footprints (Scope 1 and 2) for any size company. The rating company’s historical data covers 100,000 firms, metrics for over 600 industries, and 12,000 sub-national locations in 220 countries and territories.
For companies that do not have a score, machine learning and ESG models produce predicted metrics in terms of size, location, and industry.
“We create heatmaps to highlight sector and location risk,” noted Moody’s authors in an ESG Score Predictor white paper. “Using this approach, organizations can assess portfolio exposure and the appropriateness of mitigating strategies implemented by firms within the portfolio. For firms associated with higher risk, a more detailed, full assessment should be performed, which may include using available disclosures, data from alternative sources, as well as direct engagement with management to enrich assessment based on these predicted metrics.”
Scores range between zero and 100 and provide a forward-looking view of a firm’s trajectory. This includes how well a company is managing ESG risks and opportunities, tackling the transition to a low-carbon economy, as well as anticipating, preventing, and managing climate risk, explained the white paper.
Moody’s obtains the necessary data from various sources. It gathers firm-level corporate disclosures and uses its proprietary databases to obtain country-level climate and physical risk metrics. It also evaluates a company’s participation in the United Nations Global Compact and gathers country and region-specific macroeconomic, sustainability, development, and freedom measures from many private data aggregators.
“As the backbone of every economy, small and medium-sized enterprises are at the forefront of sustainability impact,” said Moody’s. “With data and tools to screen and examine supply chain risk and bank portfolio concentrations, Moody’s ESG Solutions enables customers to overcome the ESG disclosure gap that can create a barrier to SME engagement today.”