Sustainability analysis: too complex? Here’s how to simplify it

In recent years, sustainability has become a central element in evaluating corporate performance in the financial sector. Despite the lack of standardized and universally accepted parameters – although we are clearly moving in that direction – many organizations have taken advantage of this regulatory gap to meet the growing demand for sustainability assessments, often without real expertise.

Navigating the market maze is complicated, and the offerings often result in long and cumbersome evaluation systems based on declarations collected through endless questionnaires.

However, there is now an alternative that automates the data collection process and the assessment of corporate sustainability.

Adopting a rating-based approach, modefinance provides ESG Automated, an automated and modular ESG scoring model designed to meet the needs of the financial and corporate sectors. ESG Automated uses information automatically retrieved from internal and third-party databases, eliminating the need to complete long and complex questionnaires. Integrated into the patented Tigran platform, the model is also accessible via API and can be seamlessly integrated into the client’s existing information systems.

The final assessment is divided into the three pillars of sustainability: E (environmental), S (social), and G (governance), each evaluated on a scale from S1 to S7. This modular approach allows for verticalized models on individual pillars or combinations thereof, offering tailored solutions based on the specific needs of the client.

For the analysis of the environmental pillar (pillar E), modefinance uses an automated method that evaluates two sub-pillars:

1. Exposure to Physical Risk: measures the exposure of the company’s local units (such as production and storage sites) to 9 types of physical risk events (storm surges, eruptions, fires, etc.). To delve deeper into the topic of physical risk, read this article

2. Climate change mitigation: it examines the adoption of the following certifications:

• ISO 14001: An international standard for an environmental management system, focused on improving environmental performance and ensuring regulatory compliance; 
• ISO 50001: An international standard for an energy management system aimed at improving energy efficiency and reducing energy consumption.

The presence or absence of such certifications, like all other KPIs, is not simply evaluated with a binary score (Yes/No) but through a reference benchmark that considers the relevance of the standard to the sector in question. For example, the absence of ISO 50001 in a technology sector company is evaluated differently than in an energy-intensive company.

The final environmental score associated with the company is the result of an average between exposure to physical risk, stemming from unpredictable natural phenomena over which companies have limited control and responsibility, and climate change mitigation actions, measured through the adoption of specific international standards.

When talking about the S pillar, we are referring to the company’s adoption of social policies aimed at improving the well-being of the workforce. The assessment is based on two thematic areas, each with its own KPIs:

1. Employees:

• Average spending per employee: It represents the average expenditure by the company on each employee in terms of salary, training, and benefits. This data is evaluated using statistical benchmarks based on the analysis of public data from Italian companies over the past ten years
• Employee turnover: Measures the number of employees who have left the company in the past year. This data is compared between the current year and the previous year, based on the historical records available in the company report
• Adoption of ISO 45001 management system: An international standard for occupational health and safety management systems (OH&S). It provides a framework for improving worker safety, reducing workplace risks, and creating safer and healthier working conditions
• Gender equality certification (PDR 125/2022): Certifies the company’s adherence to Italian guidelines for implementing gender equality policies within organizations, promoting equality and inclusion.

2. Supply Chain:

• Supply chain responsibility index: An index developed internally by modefinance that assesses cash flow management within the supply chain by measuring the difference between the average collection period (DSO) and the average payment period (DPO)
• Adoption of ISO 28000 management system: An international standard for supply chain security and the operational environment of organizations.

All KPIs are evaluated using specific benchmarks, considering factors such as geographic region, sector (EFRAG), NACE code, and company size.

Governance is traditionally the pillar most aligned with the world of financial rating, which is why, within the ESG model, it is the one with the most KPIs and relies heavily on publicly available information through records.

The Governance model is structured into 3 evaluation areas:

Governance Structure

Evaluates the company’s structure based on the following points:

1. Presence of an external audit body
2. Presence of a supervisory body
3. Number of members on the Board of Directors
4. Number of directors with shares/stakes
5. Presence of auxiliary roles
6. Percentage of women on the Board of Directors
7. Average age of Board of Directors members.

Governance responsibility

Evaluates the company’s adoption of responsible policies by verifying the presence of the following certifications:

1. Legal compliance rating: Awarded by the Italian Competition Authority (AGCM) to companies that adhere to high standards of legality and transparency

2. ISO 9001 certification: Pertains to quality management systems. It ensures that a company follows international standards to guarantee the quality of its products and services, thereby improving customer satisfaction. This ISO provides a holistic view of various thematic areas and business strategies.

Materiality analysis, stakeholder engagement, and CSR strategy

Evaluates the company’s social and environmental responsibility by verifying the presence of the following certifications:

1. ISO 37000: Specific to anti-corruption management systems. Indicates that the company has implemented a management system to help prevent, detect, and address corruption

2. ISO 27000: Pertains to information security management systems. Ensures that the company manages information security to guarantee the confidentiality, integrity, and availability of data.

Responses are weighted based on the legal form, NACE code, and revenue class. This approach ensures that evaluations are always accurate and relevant to each specific context.

The ESG Automated model provides a final result by averaging the scores of the E, S, and G pillars. It is also possible to view the evaluation for each thematic area related to the individual E, S, and G pillars in order to have a complete picture of the company's sustainability, highlighting strengths and weaknesses.

In summary, the ESG Automated model offers an automated, real-time evaluation of the three ESG pillars based on a vast amount of data managed by modefinance as a Fintech. In the sustainability analysis, each company is placed within a benchmark with standard comparison criteria to assess its ESG performance relative to the industry average or other specific criteria. This approach distinguishes modefinance from other entities by not merely providing a simple score but by placing the assessment within a broader, technologically advanced context. The ESG assessment is automated and relies on public sources, eliminating the need for human intervention. As a result, the complete automation of the analysis process adds significant value, allowing for the avoidance of traditional ESG questionnaires and providing an accurate and immediate preliminary evaluation.

The model can be applied separately to each pillar, offering flexibility to companies. Banks, which have to – and will increasingly need to – integrate ESG strategies into their investment and financing decisions, can use this model to assess the sustainability of their portfolios and offer better credit conditions based on ESG criteria. In addition to banks, companies with numerous suppliers can also benefit from the Automated model, gaining a detailed view of their suppliers’ sustainability metrics. Therefore, modefinance’s ESG Automated model is an essential tool for anyone looking to integrate ESG criteria into their business strategies, making sustainability analysis a straightforward and immediate process.