A Quantum Leap Forward in Data-Driven ESG Scoring

A successful pilot managed by Surecomp has shown that ESG scoring can now be applied at the individual trade finance transaction level, opening up a world of possibilities for corporate treasurers to support sustainable global trade.

The 2022 edition of the United Nations Climate Change Conference, known as COP27, opened on 6 November in the Egyptian city of Sharm El-Sheikh. Picking up from the event’s previous instalment in Glasgow last year, leaders from around 200 countries are meeting to discuss sustainability strategies and how best to tackle the global climate crisis.

Many of the issues under discussion will strike a chord with corporate treasurers because they are often in a position to support or even influence ESG goals within their organisations. This is usually through the use of ESG-linked financial instruments. For example, research from law firm Linklaters[1] found that a total of 835 green bonds have been issued globally since the start of 2022, raising $245bn, following a record year in 2021 when green bonds raised $572bn. Beyond bonds, treasurers can also use a growing variety of green deposits and sustainability-linked loans, while a number of MMFs claim ESG compliance.

It can be more challenging for the treasurer to exert their influence on ESG with the organisation’s external partners, specifically the supply chain. The practices of suppliers and the sheer logistical challenge of shipping goods and materials worldwide might seem too complex to grapple with for a treasurer focused on managing cash flow and financial risk. However, a recent successful pilot project illustrated how treasurers could use data to support organisational ESG goals and green the supply chain.

Proof of concept for automated ESG scoring

In October , global trade finance solution provider Surecomp announced it had successfully completed a pilot of automated ESG scoring and tracking using its RIVO[2] trade finance platform. The pilot demonstrated that ESG scoring could be applied in real-time on an individual transaction basis. This would enable treasurers to embed ESG at the heart of their trade transactions.

Enno-Burghard Weitzel, Senior Vice President Strategy and Digitisation, Surecomp, reflects: “Corporate treasurers are finding that an increasing number of financiers are providing preferential rates to sustainable finance. External stakeholders are also requesting greater transparency over sustainable portfolios and working practices. Access to real-time ESG data enables corporates to be compliance-ready and to optimise their overall business beyond the scope of trade finance.”

The drive behind the Surecomp pilot came from the sustainable trade working group within the Banking Commission at the International Chamber of Commerce (ICC). With the clear need for action on ESG from all sections of society, the ICC posed the question to itself regarding its own role in facilitating action, given the organisation’s reach. The answer was to create a framework that can deliver ESG scoring on a per transaction level.

“This is the right thing to do for an organisation such as the ICC,” Weitzel says. “Being part of the working group, we quickly saw that it fits naturally into what we do with our RIVO collaborative trade finance platform, which is all about connecting the dots in the trade finance ecosystem. We were extremely active in that working group in providing suggestions of how the ICC could develop the framework.”

‘Wave one’ of the ICC Sustainable Trade Framework[3] will use a simple matrix to determine whether the various elements of a transaction are sustainable, drawing on readily available data and – to ensure the integrity of assessments – globally recognised sustainability standards. This initial framework will focus purely on the textile industry. The businesses piloting the framework will be announced at COP27 and the full wave one framework will be published.

Partnering for success

For the Surecomp pilot to succeed, the involvement of ratings agencies with an ESG focus was critical. Sivan Bender, Digital Innovation Director, Surecomp, explains how these agencies brought their experience to bear.

“We started talking to partners involved in ESG ratings, such as Coriolis, MSCI, and Scope Group, plus KYG Trade, all of whom provide ESG screening for corporates, goods and vessels,” Bender says. “We explained that they would be doing the actual scoring of the elements and would have to translate their methodology to the ICC framework. That’s the domain of these partners. It’s their expertise, so at the end they would be giving us data that is aligned with the ICC framework, and then we would be able to show the parties involved: the buyer, the seller, and the banks.”

That the ICC drove the pilot was crucial to obtaining buy-in from the agencies to harmonise their various ratings in line with the framework.

“With the ICC proposing the framework, the message to the agencies was clear: it was a commercial partnership with Surecomp but aligned with the ICC framework,” notes Weitzel. “Naturally, they all have a commercial interest and want to sell their rating, one agency scores A, B, C, and D, another uses 1, 2, 3, and 4, and so on. There’s no way of our harmonising that, but the ICC can achieve it, given its global reach.”

Getting to work

With the partners on board for the Surecomp pilot, the team got to work collecting the data for use. This involved extracting elements of data from real transactions – although not the entire transaction, for privacy reasons – and preparing this as a sample data set.

“The data that we used came from documents such as letters of credit [LCs],” recalls Bender. “We didn’t enhance the data because we wanted to know the actual situation, to understand what data we can use, and to know if we were ready. We discovered that, while goods can be rated, the actual data within trade transactions is insufficient. We need the 10-digit HS [Harmonised System] codes – some of the descriptions for goods are ‘security system’ or ‘cranes’ – we cannot rate something at that high a level, we need to go down into the actual parts.”

For corporates, Surecomp required the ability to identify the company beyond simply the company name.

“We need to have the exact LEI [Legal Entity Identifier] of the company, its address and details like that which can be clearly identified within the data,” adds Bender. “So, for companies, we had 35% successfully identified for rating and for goods it was about 10%, and that’s how we built the score.”

Once the sample data was ready, Surecomp shared it with the different scoring agencies. They did their research and sent the scores back, at which point Surecomp took all of the different elements and computed the overall score according to the ICC framework.

While the ICC has started its framework development with a focus on the textile industry, the Surecomp pilot took a broader approach. The pilot worked on more than 1,000 transactions from at least 700 companies in around 120 locations. The pilot also included a sample of approximately 100 vessels. These are perhaps the most accurate for data, as Scope Ratings already works on vessel tracking, following the guidelines in the United Nations Sustainable Development Goals. Almost every single vessel that carries goods is rated so that data was freely available for the pilot.

“We deliberately took this broad approach to the pilot because we wanted to show that what we can do is not limited to one country or one industry vertical,” affirms Weitzel. “The findings from the pilot are broadly applicable to most industries and geographies. And, having achieved, that we could go back to the working group and assure the members that this absolutely can be done from a technical standpoint. That’s the key outcome.”

A catalyst for change

With the resounding success of the automated ESG scoring pilot, the critical question for corporates, banks, and other trade finance stakeholders is to establish what they want to get out of the data.

“During discussions in our design partner group, corporates were questioning whether they should share this data with the outside world,” recalls Weitzel. “Corporates already share the LC application with their bank; that’s why we used the LC data because it is an existing dataset already being shared. Corporates don’t need to share extra data. However, the fact that we had that feedback suggests that a change in mindset is necessary to take advantage of this opportunity because we’re not sharing any more than corporates feel comfortable sharing today.”

By sharing that data and receiving an ESG score per individual transaction, treasurers can better manage their ESG impact by gaining greater transparency on existing processes and being proactive in trade relationships.

“If you look at the life cycle of an LC, at the beginning a treasurer won’t know on which ship the goods will be transported,” explains Weitzel. “However, they can reach out to the exporter and ask them to ensure they use a ship with the minimum rating of B, for example, if they know their overall transactional rating should be B at the minimum. All of a sudden, this data is enabling corporates to take action, not only in hindsight to consume the transparency, but to proactively manage their impact. This gives them a new option of managing their overall ESG impact.”

Indeed, the ability to automatically generate ESG scores on a transactional basis in real-time could be used by corporates as an essential management tool, enabling the visualisation of the ESG impact of their entire portfolio.

“If a corporate sees that half of their portfolio isn’t rated, they can then take steps to start correcting that,” notes Bender. “Maybe one-third of their portfolio is below the level they’ve set for themselves. Identifying this means they can start understanding why that’s the case and then take action to improve. Just think, around 15 years ago, we began rating vehicles, which eventually increased the desire for electric cars because people started thinking how much better they are for the planet in general.”

There is also a risk management angle to this development. As corporates start achieving good ratings for socioeconomic or environmental actions, there is an inherent reputational risk of falling behind and not achieving a decent rating.

“Doing good business, having a pleasant and efficient workspace for employees, and not destroying forests and water supplies – all that is not just about the environment and keeping things clean for future generations,” says Bender. “For corporates, it is also about managing the immediate financial risks they face.”

Going global

The collaboration necessary for the success of this pilot is quite a timely lesson for the various parties gathering in Egypt at COP27.

“It’s a powerful lesson to be open-minded, use the power of partnerships and be ready to adopt solutions that you may not have initially been thinking about,” affirms Weitzel. “One of our pieces of feedback to the ICC is to get the work on the sustainable framework out of the Banking Commission. Think about it, the ICC has 45 million corporates and a few thousand banks. If someone is going to make this happen, it’s the corporates.”

As the ICC pilots wave one of its trade sustainability framework in the textiles industry, it will be some time before the automated ESG scoring tool Surecomp has pioneered is available for general use by treasurers.

“The ICC needs to collect the feedback from the corporates in its pilot and must then develop wave one of the Sustainable Trade Framework into version one,” says Weitzel. “Once that’s announced, we can go into production and it will be global – that’s the value of it.”

Choose, prepare, engage

Until the complete ICC framework is developed, Surecomp is working on enhancing the offering based on lessons learnt during the pilot.

“We will work on improving the data quality for the corporates and the description of the goods during the time until the framework is matured,” Weitzel adds. “We will build up coverage so that by the time we launch, we have coverage of approximately 80% of the corporates, 80% of the goods, and 100% of the ships, adding even more value to the service.”

Corporate treasurers can also use the time ahead of the finalised framework to prepare for engagement and ensure they are in the best possible position to hit the ground running.

“Every organisation will have its own steps to take to get ready to engage,” concludes Weitzel. “Treasurers can lead the internal discussion over whether the organisation is comfortable with sharing the relevant data. Of course, they will realise that they are doing so already, but it is all about shifting the mindset.

“Treasurers might also engage with an ESG rating company to have a more detailed rating on their own organisation or discuss with their corporate counterparts, suppliers and vendors to explore whether they can engage in this process together. Choose a platform, prepare, and engage – use this time wisely.”