Scoring environment pillar in environmental, social, and governance (ESG) assessment

ABSTRACT With technological advancements, many interconnected environmental issues have been worsening, including soil, water, and air pollution, climate change, loss of biodiversity, and over-exploitation of natural resources. With the inception of the term “sustainable development”, many market participants, including institutional and private investors, want to consider environmental sustainability in their investment decisions. However, until the upsurge of Environmental, Social, and Governance (ESG) investing, which is closely associated with sustainability, achieving sustainable development is challenging. ESG, the three critical areas identified by analysts, can significantly impact the financial aspect of a company. As a result, Renewable Energy 100%, the carbon neutrality approach, and the circular economy concept are widely used nowadays as environmental management tools. However, the limited comparability, the biased scoring metrics, the aggregated nature of diverse environmental factors, different methodologies implemented by rating providers, and the lack of robust datasets have resulted in limited usefulness of E (Environmental) scoring as a tool for greening the financial sector. Hence, to improve the relevance of the E pillar, the E in ESG must compose of a set of metrics to address different environmental aspects, thus avoiding unforeseen environmental disasters at a later stage. The inconsistency in the metrics’ scope and its evaluation criteria are the main drawbacks, which must be addressed for the E pillar to become an effective tool for allowing sustainable finance and development.