Navigating the ESG Landscape: Constructing a Robust and Reliable Scoring Engine

25 Pages Posted: 18 Jun 2023

See all articles by Yiting Liu

Yiting Liu

University of Twente; Bern University of Applied Sciences

Joerg Osterrieder

University of Twente; Bern Business School

Branka Hadji Misheva

Zurich University of Applied Sciences

Lennart John Baals

University of Twente; Bern University of Applied Sciences (BFH)

Date Written: June 11, 2023

Abstract

This white paper explores the construction of a reliable Environmental, Social, and Governance (ESG) scoring engine, with a focus on the importance of data sources and quality, selection of ESG indicators, weighting and aggregation methodologies, and the necessary validation and benchmarking procedures. The current challenges in ESG scoring and the importance of a robust ESG scoring system are addressed, citing its increasing relevance to stakeholders. Furthermore, different data types, namely self-reported data, third-party data, and alternative data, are critically evaluated for their respective merits and limitations. The paper further elucidates the complexities and implications involved in the choice of ESG indicators, illustrating the trade-offs between standardized and customized approaches. Various weighting methodologies including equal weighting, factor weighting, and multi-criteria decision analysis are dissected. The paper culminates in outlining processes for validating the ESG scoring engine, emphasizing the correlation with financial performance, and conducting robustness and sensitivity analyses. Practical examples through case studies exemplify the implementation of the discussed techniques. The white paper aims to provide insights and guidelines for practitioners, academics, and policy makers in designing and implementing robust ESG scoring systems.

Keywords: Environmental, Social, and Governance (ESG); ESG Scoring Engine; ESG Indicator Selection; Weighting Methodologies; Validation

JEL Classification: A00

Suggested Citation

Liu, Yiting and Osterrieder, Joerg and Hadji Misheva, Branka and Baals, Lennart John, Navigating the ESG Landscape: Constructing a Robust and Reliable Scoring Engine (June 11, 2023). Available at SSRN: https://ssrn.com/abstract=4475651 or http://dx.doi.org/10.2139/ssrn.4475651

Yiting Liu (Contact Author)

University of Twente ( email )

Postbus 217
Twente
Netherlands
(+41)798122239 (Phone)

Bern University of Applied Sciences ( email )

Quellgasse 21
CP 1180
Biel/Bienne, BE 2501
Switzerland
(+41)798122239 (Phone)

Joerg Osterrieder

University of Twente ( email )

Drienerlolaan 5
Departement of High-Tech Business and Entrepreneur
Enschede, 7522 NB
Netherlands

Bern Business School ( email )

Brückengasse
Institute of Applied Data Sciences and Finance
Bern, BE 3005
Switzerland

Branka Hadji Misheva

Zurich University of Applied Sciences ( email )

IDP
Technikumstrasse 9
Winterthur, CH 8401
Switzerland

Lennart John Baals

University of Twente ( email )

Postbus 217
Twente
Netherlands

Bern University of Applied Sciences (BFH) ( email )

Quellgasse 21
CP 1180
Biel/Bienne, BE 2501
Switzerland

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