Where do ESG ratings come from: sustainable finance prospects

Products 15 July 2022

Besides the “traditional” risk assessment, obtaining an ESG (Environmental, Social, Governance) rating that can confirm the solidity of an institution from the point of view of environmental, social and governance performance is becoming more and more essential for the financial market. Considering the fact that SMEs account for 99% of all European enterprises in terms of numbers, the institutional commitment towards a sustainable transformation of the society in general and of the economic-financial system in particular is addressed especially to this type of companies.

Why should we all be interested in ESG ratings? After years of natural disasters, a pandemic, and an increasing interest for workers’ rights, as well as for an efficient business management, an investment cannot be considered reliable if not employed in a sustainable activity.

As a result, the development of a set of universal standards and conditions that allow the establishment of a company’s degree of sustainability was the ambitious goal of numerous governmental and non-governmental projects, most notably GRI Standards (launched already at the end of the ‘90s, EU Taxonomy and United Nations’ SDGs. All these years of work have been engaged in the research of quantitative and qualitative methods that could define a standardized outline of enterprises’ ESG data gathering in order to deliver an ESG rating that valorizes sustainability factors in the final economic and financial evaluation. The purpose of this tool is the reduction of uncertainty on the market in order to increase financial stability, the introduction of new and profitable investment opportunities for SMEs and the reduction of the risk of greenwashing.

The two modefinance souls united for the creation of a proprietary ESG rating

modefinance fits perfectly in this context, since it created an assessment model that measures the level of sustainability of an enterprise’s activity, thus being capable of delivering a proprietary ESG rating.

Before developing an ESG evaluation model, modefinance had been part of numerous initiatives aimed at increasing the sustainability of SMEs’ activities, first and foremost the TranspArEEnS project (Mainstream Transparent Assessment of Energy Efficiency In Environmental Social Governance Ratings), led by Ca’ Foscari University in Venice, in partnership with the EMF-ECBC, the Leibniz Institute for Financial Research SAFE of Frankfurt and CRIF, and the RIBES project (Return of Investments for Building Energy Efficiency Solutions). It is with the help of these projects and the EU Taxonomy that modefinance was able to develop a quantitative and qualitative framework for standardized data collection and, consequently, to define the main KPIs (Key Performance Indicators) that will help analysts with the elaboration of the final evaluation. 

Like all the initiatives branded modefinance, the analysis of ESG factors proves to be a dynamic and fluid model, able to always evolve in order to meet the needs of the SMEs’ economic and financial market. In addition to this, what makes our ESG rating unique in the wide range of choices available is modefinance’s dual soul. The ESG evaluations project consists of two elements – the economic one, of pure financial analysis, and the modeling one, represented by Fintech experts. Every pillar of the ESG factors is supported by a team composed of rating analysts and Fintech experts, a solid union of experience, knowledge and competence, able to deliver a 360° ESG assessment, extremely important in the decision-making process as far as future investments are concerned.

Thus, our sustainability rating offers a complete view of the risk exposure of a given enterprise, thereby facilitating access to capital for our clients, increasing stakeholders’ value and contributing to the improvement of SMEs’ sustainability performance, that in this way prove to be ethically valid and, consequently, more reliable.

Eventually, besides ESG rating emissions, modefinance is part of another significant project that contributes to a more sustainable society and finance – the issuing of minibonds. As evidenced by the 8th Italian Report on Minibonds issued by the Politecnico di Milano, modefinance is number one Italian agency by minibond emissions and, as such, it supports numerous initiatives, among which we find Basket Bond Mezzogiorno, Garanzia Campania Bond and Basket Bond Italia. The latter stands out within our topic, given that it requires the integration of an ESG rating in addition to the traditional one for all SMEs that need liquidity for their future projects.

By integrating the ESG rating with the traditional one – merely economic and financial – and by adopting a no-longer deferrable change, modefinance is able to offer its clients an all-round risk assessment experience, thus facilitating their investment choices.