World's first Pure Play Dynamics approach to ESG ratings – a new sensor for better sustainability control.
The Swiss approach sets new standards in ESG ratings by focusing on dynamic quantifiability. By measuring 17 core factors and their change year-over-year, it’s possible to transparently track a company’s ESG performance. The dynamics are reflected in the consolidated GGX ESG rating. This approach offers great advantages for portfolio management and investment consulting.
Based on feedback from financial market participants (sell side) and investors (buy side), conventional ESG ratings have some shortcomings. These ratings are only partially meaningful, sometimes confusing, very costly for subscribers and often non-transparent. In addition to these criticisms, misinterpreted or inexplicable ESG ratings are also causing legal and regulatory risks.
To solve this problem, the ESG Ratings & Indices division of the Global Green Xchange the past two years has scrutinized how to better apply ESG ratings in a way that’s more effective and easy-to-interpret for investors. In addition, GGX has analyzed and evaluated leading academic research on ESG ratings — including New York University’s Stern School of Business (2019), Harvard Business School (2019), Friedrich Alexander University Erlangen-Nuremberg (2021), and MIT Sloan/University of Zurich (2022) — for practical applications in its search for solutions.
„Until now, no ESG rating has been available on the market that singularly targets the dynamic change in the respective company's behavior and makes this dynamic quantifiable.“
Based on this work, it’s evident that clearly defensible, focused metrics in E, S, and G should be given much more weight. Furthermore, transparency and traceability are essential for decisive future rating factors. Most importantly, a new generation ESG rating should primarily react to ESG figures of the respective company instead of considering announcements, interpretations and regulations or policies in the rating grade. Until now, no ESG rating has been available on the market that singularly targets the dynamic change in a respective company's behavior and makes this dynamic quantifiable.
Taking all of these factors into account, GGX has created an unprecedented, practical solution: the GGX Pure Play Dynamics approach to ESG ratings. The new generation rating model takes all of the criticisms of conventional ESG ratings into account and eliminates weaknesses. The rating score represents the latest development (improvement, unchanged or deterioration) in a company’s 17 core factors compared to its previous reporting period. It works like a “quantified delta” in the ESG performance of the specific company.
In addition, the new rating model is compatible with existing internal and external rating concepts and models.
The Pure Play approach utilizes as few factors as necessary. Unlike conventional ESG ratings, the Pure Play approach used in the GGX ESG ratings methodology lets investors make investment decisions based on the dynamics of 17 core factors—rather than on additional elements that can distort the overall ESG rating. It also helps investment advisors clearly explain to their clients why a company received which GGX ESG rating score. The performances in the respective E, S, and G pillars are disclosed.
The GGX Pure Play Dynamics approach to ESG ratings - benefits for portfolio managers, investment advisors and end investors:
A Dynamic Sensor: The ESG rating is dynamic from reporting year to reporting year. It represents the change in the 17 core factors. As soon as there are new sustainability data (“sustainability report”) available on the rated company, an updated rating calculation occurs.
Focus on 17 essential core factors: Relevant core areas that best reflect the performance in environmental, social and governance factors from the respective company.
Transparent weightings: The percentage impact of the 17 core factors on the overall ESG rating is disclosed to rating users.
No artificial additions: There are no further interpretations in the GGX Pure Play Dynamics approach, because too much data would dilute the informative value, and ultimately the final ESG rating wouldn’t be completely clear.
Professional investors and intentional investors can now use the ESG ratings based on the GGX Pure Play Dynamics approach for their internal and external use. All other specifications are outlined in this publication.
Please contact us directly here: GGX ESG-Ratings & Indices, phone +41 44 500 9203 or email@example.com.
About the author
Martin Raab is a long-time investment professional, book author, and member of the Board of Directors of Global Green Xchange. He manages the ESG Ratings & ESG Data division. As one of the authors of the newsletter "Green Money" and of ESG Insights, he regularly analyzes and reports on various topics related to sustainability and capital markets.