Smart ESG score

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 Smart ESG score irons that out. They are calculated in a two-fold way. Firstly, biases are removed based on market cap, industry and region. Companies are only compared only to those with similar characteristics from the same region or sector. Biases induced by the heterogeneous and diverse nature of sustainability data are effectively removed. Secondly, a weighting system is used to assigns heavier weights to those ESG criteria which have a greater ability to predict likely future returns according to the company. Only financially material information is used: different ESG indicators will be more financially relevant for different industries, sharpening the focus on financial materiality. Once all the information has been received, an unbiased and financially material ESG score – or Smart ESG score – can be assigned to the company.

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