ESG Risk

ESG risk assessment aims to measure the environmental, social, and governance (ESG) material factors that will drive long-term financial value in a particular business. Research has proven that the consideration of ESG factors has a positive impact on companies’ market return and on investors’ outcomes.

Clarity AI has developed a methodology designed to assess how ESG issues potentially affect companies and governments’ future financial performance, represented by scores.

Although the measurement of financial risks linked to sustainability is becoming widely known and used in sustainable investing, it faces several challenges:

• ESG data availability is limited and incomplete, with few organizations including non-financial topics in their reports.
• ESG data quality can be poor and its measurement heterogeneous, requiring robust data quality and consistency checks.
• There are multiple perspectives on the financial materiality of ESG Risk issues, resulting in poor correlation among different ESG scores.

Given the complexity of ESG metrics, which are the most granular level of information related to sustainability, the market has proposed different ways of summarizing and aggregating all this information.

The most important and frequent ones are ESG Scores and ESG Ratings. Essentially, these two measures do something very similar. They aggregate all this complexity into a simple final letter or number in an attempt to make certain dimensions of sustainability comparable across companies. ESG Ratings usually are built by analysts and they include personal opinions whereas ESG Scores, on the other hand, are more systematic but fundamentally, they provide the same level of visibility.