ESG ratings play a critical role in sustainable finance and investment. To learn about the role of sustainability ratings in the Islamic sustainable finance and investment space, ISFI spoke to Magdy Eissa, the vice-president of IdealRatings, a data screening and ratings provider with a focus on sustainability and Islamic finance solutions.
Sustainability is a very broad topic and ESG is perhaps the most talked-about at the moment. Sustainability ratings and screening entail looking at various underlying inclusion activities and considerations with different rating approaches and philosophies ranging from a binary rating methodology to a more subjective approach, according to Magdy.
When assessing the ESG rating of a company, each aspect, the E, S and the G, are looked at individually and measured against key performance indicators (KPIs). The KPIs would vary across the industry of the firm and the weightage of the importance of sustainability metrics will differ. Further, under each KPI, there should be a list of indicators.
“For example, under the E side, we have to define certain KPIs like air emissions, like how the company is treating the water resources, how they are handling the waste, what are the activities relating to habitat protection and so on,” Magdy detailed.
The pillars are the same for all vendors, Magdy added, while the KPIs, weighting system and the materialities considered differ from vendor to vendor.
While rating methodologies vary across vendors, the ratings of large capitalization firms in developed markets are generally consistent. This is due to the regulatory landscape and robust disclosure requirements. As such, developing markets present a challenge for rating providers as well as investors. The relevant data required to form the basis of rating assessments is often not disclosed. Once you get to emerging markets, to small- and mid-capitalization firms in frontier markets, it gets very challenging, Magdy explained.
While the developed markets are forging ahead with enhanced sustainability regulation and disclosure requirements, Magdy thinks that greenwashing is not going to be an antiquated concern in the near term.
“Greenwashing is something that will unfortunately exist for quite some time. It will phase away, of course, with increasing transparency and disclosure. It will phase away from the tightened compliance and regulatory requirements, but we cannot say that we can eliminate greenwashing entirely,” Magdy shared.
This is an excerpt from an interview with Magdy Eissa, the vice-president of IdealRatings. Listen to the full discussion on the role of sustainability ratings in the Islamic sustainable finance space on IFN OnAir.