The case for proprietary ESG scoring
At BNP Paribas Asset Management, we believe that it is essential to use our own scoring framework since there are limitations to relying on third-party models:
- Some ESG scores by external providers are the sum of sometimes more than 100 metrics, turning the score into a ‘black box’. This can blur the picture.
- The metrics selected by third-party providers often reflect subjective opinions and biases, which may not be material or insightful.
- Some third-party ESG scores are skewed towards rewarding issuers for disclosure instead of performance. ESG disclosure is welcome, but it does not necessarily improve the way an issuer deals with the issues.
- Accordingly, we assess the metrics we source from third parties to focus on those that have the required coverage and quality. We also infuse data with our first-hand knowledge and insights.
Such issues may cause an issuer to receive different ESG scores from different providers, obscuring their actual ESG performance. This is what we aim to address with our proprietary framework.
The BNPP AM approach
This is based on two critical beliefs:
- Sustainability is imperfectly understood, under-researched and mispriced in the markets.
- Not all ESG issues matter equally: companies that do well on material topics outperform the market, even if they score poorly on immaterial issues.
To arrive at ESG scores that provide useful investment insights, we select metrics using these criteria:
- They should concern ESG issues that are material to the issuer’s business
- They are selected based on the expertise of our Sustainability Centre among other things
- We prefer insightful performance metrics
- We favour data that is of reasonable quality and readily available, so that we can compare issuers fairly.
A discerning focus on ESG performance
Our scoring framework takes into account that ESG risks and opportunities can differ across sectors and regions.
We have divided issuers into 20 sectors and four geographical areas, creating 80 groups of geographical and sector peers. Beyond sector-specific metrics and weight, we use two measures for all issuers:
- Carbon emissions – This creates a positive bias towards issuers and sectors with lower carbon emissions
- Controversies – Sectors that are more prone to ESG controversies, and risk, have slightly lower scores.
On top of refining and combining third-party data, we integrate insights from our Sustainability Centre’s research on material issues such as climate change, and our investment teams’ knowledge and interaction with issuers.
These qualitative insights are used:
- To correct the score for provider data that was not available, factually incorrect or outdated, or which we disagree with (e.g. the assigned severity of an ESG controversy)
- To capture insights about how ESG scores may evolve as well as issues not captured by our selected metrics.
The combined qualitative and quantitative ESG score ranges from 0 to 99, with issuers ranked in deciles against peers. Issuers that are excluded from investment (through our Responsible Business Conduct policy) are assigned a score of 0. ESG scores are updated monthly.
The result? A powerful tool
Our investment teams use ESG scores and research in a number of ways. They facilitate:
- ESG integration - Identifying the ESG strengths and weaknesses of issuers informs our investment decisions.
- Investment stewardship – The scores help with activities such as engaging with companies, or using our influence as an investor to drive positive change on identified areas of concern.
- Reporting and transparency – e.g. reporting on portfolio ESG and carbon scores against a benchmark
- Responsible Business Conduct – Implementing investment policies
- New product development – To ensure it is aligned with ESG themes, or investors’ requirements.
BNPP AM’s proprietary ESG scoring framework covers more than 12 000 issuers; uses a limited number of material, insightful metrics for each sector; is statistically rigorous, dynamic and forward-looking.
Thanks to such features, we believe our scores are a powerful tool to help investment teams generate long-term sustainable investment returns for investors.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.