How is sustainability measured? ESG ratings

Understanding whether an activity or financial instrument is sustainable is not always straightforward. Some products, such as green bond, carry a label and are easily identifiable on the market. For example, we know that if we invest in green bonds issued according to the criteria established by the European Union (EU Green Bond), we are financing projects that comply with the European taxonomy. Others, such as shares, are more difficult to recognise.

One tool that can help us assess the sustainability of an investment is the so-called 'ESG rating', which can be expressed either numerically (for example, from 0 to 10) or by letters, as is the case with credit ratings (for example, from CCC to AAA). These raings are attributed by specialized agencies, which analyse information published by the company (non-financial disclosure) or obtained through other sources (questionnaires, databases, news). Such information refers to the sustainability criteria that the company adopts in its management and investment projects. As well as ESG ratings, which provide a combined assessment of a firm's sustainability, the agencies can provide data on single aspects (e.g. on carbon emissions, water consumption, exclusively social considerations etc.).

ESG ratings are the result of information, assumptions, updates, and calculation methodologies that can vary between different agencies, leading to varying degrees of reliability and comparability, especially at an international level.

To try to overcome these limitations, and considering the strategic role of ESG ratings in determining the degree of sustainability, the European Union published a new regulation in November 2024. This regulation aims to introduce common rules for Member States to improve the transparency, accountability, reliability, independence, and, where possible, comparability of sustainability assessments.

ESG scores are widely used in finance to select financial instruments, build investment portfolios, and create market indexes that are deemed 'sustainable' or 'ESG-compliant', based on aspects of the investment instrument or strategy considered at any given time.