A smart ESG score is a sustainability ranking given to a company by RobecoSAM using environmental, social and governance factors, but with biases removed from the data collection process.
It was developed as a more specific tool to drill down on the true sustainability credentials of companies on a more like-for-like basis. The primary data source for Smart ESG scores is the Corporate Sustainability Assessment (now owned by S&P Global), an annual survey of more than 4,700 companies based on ESG criteria that are both industry-specific and financially material.Traditional ESG scores often show very strong biases toward existing factors such size, country, region or sector. For example, a large company may have a bigger budget for addressing sustainability issues – including supplying data to the collectors of it – than a smaller one. Subsequently, the larger company may get a higher ESG rating than the smaller one simply because there is more data on which to judge it, even if the smaller one was more sustainable. Similarly, ESG disclosures are more developed in Europe than Asia, which means a traditional scoring methodology would naturally give a higher score to a company from Germany than from India. A portfolio that relied exclusively on these scores would be therefore be unnaturally tilted towards larger-cap European companies when there may be better opportunities undiscovered elsewhere.
The scores are extensively used in Robeco’s quantitative strategies, which require a higher level of data crunching that fundamental analysis. They are also used to create ‘best-in-class’ categories for Robeco’s Sustainability Focused range of strategies which have a higher level of ESG integration, typically by excluding those companies with the lowest Smart ESG scores. This enables the resulting portfolio to have an ESG score that is superior to the benchmark that it follows.
See also: ESG integration