ESG Risk Evaluation
MACS understands ESG scoring as a central metric that can and should be used by investors, fund managers and financial institutions to establish and monitor environmental and social sustainability of individual investments and investment portfolios. Nevertheless, MACS believes that the current manual practice is highly exposed to the subjectivity of FI staff as ESMS systems of FI's in the GGF target regions tent to be weak, or do not exist for smaller loan tickets of standard eSave measures.
Therefore, MACS suggests an automated ESG loan scoring system that is capable to provide IFC E&S - compliant ESG scores for standard and non-standard measures is a useful and cost-efficient approach to strengthen the ESMS of partner FIs.
Automatic ESG scoring is free from subjective judgements of loan officers and thus allows inter-institutional and inter-regional analysis and aggregation on at fund level. In the assessment process, MACS uses IFC performance indicators as risk/impact indicators and UNStats Industrial Classification as sector definitions, both slightly adjusted to better correlate with data already collected in eSave.
Location relevance is established on the basis of internationally accepted locational databases (World Bank Sovereign ESG Database, World Database of Protected Areas, TI Corruption Perception Index, WHO air quality etc.). The parameters are arranged in sector-risk and location-risk matrices, allowing the scoring algorithm to decide whether a performance indicator is relevant for a sector or a location and calculating ESG score components based on the fraction of relevant indicators. The relative weights of individual parameters form a risk profile that can be set by fund managers reflecting the risk appetite of the fund, and is one of the parameters that can be adjusted to closely align the scoring methodology with the goals of the fund. The final ESG score used by portfolio analysis has been calculated using equal weights for all four parameters. The scoring output is aligned with the following IFC Environmental and Social Categorization framework:
Category A
Business activities with potential significant adverse environmental or social risks and/or impacts that are diverse, irreversible, or unprecedented.
Category B
Business activities with potential limited adverse environmental or social risks and/or impacts that are few in number, generally site-specific, largely reversible, and readily addressed through mitigation measures.
Category C
Business activities with minimal or no adverse environmental or social risks and/or impacts.