Université Manouba

Ecole Supérieure de Commerce

Chapitre1:
ESG Specialization Introduction

Lecture: ESG Analytics with AI Tools

Année universitaire: 2023/2024

M2Pro Data Science
 Outline-Goals

1) History and framework behind ESG

2) ESG pillars (components)
3) ESG Score, calculation and issues
4) ESG projects: ESG Portfolios, ESG and corporate performance, ESG
Chatbot (to be done on datasets)
5) Pros and cons of ESG

B.Jlifi
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 1) History and framework behind ESG
1.1 Definition of CSR/ RSE

• Les bases de la Responsabilité Sociétale des Entreprises (RSE) ou

Corporate Social Responsability (CSR) (Howard R. Bowen (1953):
l’école des relations humaines (Robert Owen, Hugo Münsterberg, Mary
Parker Follet)

• En 1987, le développement durable. Le rapport « Brundtland »: «

développement qui répond aux besoins du présent sans compromettre la
capacité des générations futures à répondre aux leurs ». Rapport est issu de
la « Commission mondiale sur l’Environnement et le Développement » de
l’Organisation des Nations-Unies
• La première apparition d’un concept théorique de base de la Responsabilité
Sociétale des Entreprises (RSE) ou CSR et les Investissements
Socialement Responsables (ISR) en 1994 avec les travaux de John
Elkington, dans son livre : « Cannibals with Forks: The Triple Bottom Line
»
• « Triple Bottom Line » = prémices des critères ESG (critères
Environnementaux, Sociaux et de Gouvernance).
• « Bottom Line » comptable = réunir, au sein d’un même concept, les
B.Jlifi résultats financiers ainsi que les résultats sociaux et environnementaux
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 1) History and framework behind ESG
1.1 Definition of CSR/RSE

Definition
L’entreprise doit incorporer des pratiques sociales dans son fonctionnement
et son management. Le « Livre Vert » de l’Union Européenne, outil pour «
promouvoir un cadre européen pour la responsabilité des entreprises »,
définit la RSE (CSR) comme des pratiques qui « satisfont pleinement
aux obligations juridiques mais qui vont aussi au-delà et investissent
"davantage" dans le capital humain, l'environnement et les relations
avec les parties prenantes ».

Norme ISO: ISO 26000 qui balise la RSE pour les entreprises.
 1) History and framework behind ESG
1.2 Definition of ESG
• Le terme ESG (Environnementaux, Sociaux et Gouvernance) est apparu
pour la première fois dans le rapport « Who Cares Win » du Global
Compact des Nations-Unies, en 2004, lancé par Kofi Annan (réunissant de
nombreux acteurs gouvernementaux et de la finance).
• Cette notion a été, reprise dans « Principles for Responsible Investment »
(UNPRI) (2005). Ces critères seront considérés comme constituant les
principaux axiomes du Développement durable.
• Ils se retrouvent également dans les principes directeurs de l’Organisation
de Coopération et de Développement Economique (OCDE) (2011) dont,
par exemple le premier principe énonce : « [les entreprises] devraient
contribuer aux progrès économiques, environnementaux et sociaux en vue
de parvenir à un développement durable ».
• En 2015, adoption des « 17 objectifs pour l’humanité et la planète », aussi
appelés « objectifs de développement durables » Sustainable
Development Goals (SDG). Ces objectifs se trouvent au coeur des
concepts d’Investissements Socialement Responsables (ISR) et de
responsabilité des entreprises (CSR). Ils ont été créés dans le cadre d’un «
B.Jlifi plan d’action pour l’humanité, la planète et la prospérité » sur 15 ans.
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 1) History and framework behind ESG
1.2 Definition of ESG

Cette notion est dérivée de

la « bottom line »
comptable et a pour objectif
de réunir, au sein
d’un même concept, les
résultats financiers ainsi
que les résultats sociaux,
de gouvernance et
environnementaux.
Permet de théoriser, pour
les entreprises, les idées du
développement durable
 1) History and framework behind ESG
1.2 Definition of ESG

Environmental, social and governance (ESG) is a framework used to

assess an organization's business practices and performance on various
sustainability and ethical issues.

ESG Data = Extra financial Data

 1) History and framework behind ESG
1.4 ESG Raters

The six prominent ESG rating agencies:

1. Kinder, Lydenberg, and Domini (KLD),
2. Sustainalytics,
3. Moody’s ESG (Vigeo-Eiris),
4. S&P Global (RobecoSAM),
5. Refinitiv (Asset4), and
6. MSCI
 1) History and framework behind ESG
1.5 ESG and DPEF

• Déclaration de Performance Extra-Financière (DPEF)

• Origine: une directive européenne d’octobre 2014 qui concerne « la publication
d'informations non financières et d'informations relatives à la diversité par
certaines grandes entreprises et certains groupes »
• Transposée dans la loi française en juillet 2017. Elle s’applique à tous les
rapports de gestion relatifs aux exercices ouverts, et cela depuis le 1er
septembre 2017.
• La DPEF répond à une demande forte de résultats de la part des entreprises sur
les aspects environnementaux et sociétaux. Elle complète, en France, la loi
Sapin 2 ou le devoir de vigilance. Émanant d’une directive européenne, la
DPEF permet d'harmoniser les pratiques et les mesures entre les différents
pays.
• Au niveau mondial, elle répond aux recommandations d’un autre acronyme, la
TCFD, pour Task Force on Climate Disclosure, un groupe mis en place par le
G20 pour « établir un cadre commun de transparence financière en matière de
climat »
 1) History and framework behind ESG
1.5 ESG and DPEF, Bilan Carbone

Les entreprises concernées par la DPEF

• Entreprises cotées avec plus de 500 salariés ou un chiffre d’affaires
supérieur à 40 millions d'euros. Pour les sociétés non cotées, ce sont celles
ayant plus de 500 salariés avec un chiffre d’affaires supérieur à 100
millions d'euros.
• La recommandation Carbo: comme pour un Bilan Carbone: en réduisant
les déchets, en finançant des projets de compensation carbone…
 2) ESG Pillars
Exemple-Refinitiv 2019

https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-
scores-methodology.pdf
 2) ESG Pillars
Exemple-Refinitiv 2022

https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-
scores-methodology.pdf
2) ESG Pillars
 2) ESG Pillars (A retenir)

Les 3 types de critères ESG

🌱 ENVIRONNEMENTAL : gestion des déchets, réduction des émissions de
gaz à effet de serre et de la consommation énergétique, prévention durable des
risques liés à des catastrophes industrielles (marées noires, contamination des
sols…). En bref, tout ce qui peut caractériser une société éco-responsable.
✊ SOCIAL : respect du droit des employés et du dialogue social dans la
politique de management, de la parité et du nombre de personnes en situation de
handicap, prévention des accidents du travail, formation du personnel + relation
avec les parties prenantes (stackeholders): employees, suppliers, customers,
community members
⚖ GOUVERNANCE : lutte contre la corruption, respect de la transparence de
la rémunération des dirigeants, relation entre les actionnaires, la direction et le
conseil d’administration: Relation entre management, shareholders et CSR
 2) ESG Pillars
2. 1 Environmental Pillar/the category/the variables
Environmental Pillar (Refinitiv):
• Resource use: this is a category that contains 22 variables to calculate the category score
• Emissions
• Innovation
Environmental Pillar (S&P Global):
• Greenhouse gas emissions
• Water use
• Waste & pollution
• Land use & biodiversity
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Influence of climate change through their emissions of greenhouse gases (GhG)
● Carbon
● Methane
● Nitrous oxide
● Ozone
● Chlorofluorocarbons

Transition Risk
 2) ESG Pillars
2. 1 Environmental Pillar (another segmenation)

Energy consumption and efficiency.

Carbon footprint, including greenhouse gas emissions.
Waste management.
Air and water pollution.
Biodiversity loss.
Deforestation.
Natural resource depletion.
 2) ESG Pillars
2. 2 Social Pillar
Social factors address how a company treats different groups of people --
employees, suppliers, customers, community members and more
(stackeholders).
• Fair pay for employees, including a living wage.
• Diversity, equity and inclusion (DEI) programs.
• Employee experience and engagement.
• Workplace health and safety.
• Data protection and privacy policies.
• Fair treatment of customers and suppliers.
• Customer satisfaction levels.
• Community relations, including the organization's connection to and impact on the
local communities in which it operates.
• Funding of projects or institutions that help poor and underserved communities.
• Support for human rights and labor standards.
 2) ESG Pillars
2. 2 Social Pillar: Employees
● The amount they are paid

● The conditions they work under and the composition of the workforce

● Inequality in pay across and within jobs classes can also breed resentment and
demotivate less well-paid workers to an extent that offsets the incentive benefits
achieved by their higher paid counterparts

2) ESG Pillars
2. 2 Social Pillar: Physical Conditions
● Rate of accidents and negative health effects of employment
● Extending to the use of child labor or other coerced labor
● Regulatory inquiries and lawsuits can add additional costs to the health bills and costs
involved in attracting and retaining workers
● Trade agreements and social activism are increasing the transparency to such
violations and the cost of having firms engaged in these practices within the supply
chain
 2) ESG Pillars
2. 2 Social Pillar: Composition of The Workforce

● Gender, racial, ethnic, religious or other easily observable criteria can create
tangible benefits and costs

● Diversity, equity, inclusion and a shared sense of purpose can make members
of these groups feel more connected to and engaged with their employer,
stimulating productivity

● Send signals to customers from the same group or suppliers who have
characteristics with similar benefits
● Customer willingness to pay
● Supplier demands on price
 2) ESG Pillars
2. 2 Social Pillar: Customers
● Customers directly harmed by faulty, tampered or inadequately tested product
or service
● Trigger regulatory oversight and the denial of the formal license to operate
● Some products may not be faulty but still cause harm
● Physical harm
● Mental suffering

● Social cost of big tobacco

● Facebook whistleblower highlighted internal studies within Facebook
detailing the impact of Instagram on depression and suicide rate in
adolescence
 2) ESG Pillars
2. 2 Social Pillar: Community
Sense of inclusion and belonging by company’s workforce
● Extends to the customer and community sentiment towards the company
● The sentiment of stakeholders from one group towards those in other groups
at the societal level
Firms with better community relations have
● More satisfied employees
● Easier subsequent negotiations for permits, expansions and the management
of inevitable conflicts with the community
● Such choices are particularly sensitive where group boundaries defined by
● Ethnicity, Religion, Culture, Race, Political ideology, Class, Gender, Age,
Geography
 2) ESG Pillars
2. 3 Governance Pillar
Governance factors examine how a company polices itself, focusing on
internal controls and practices to maintain compliance with regulations,
industry best practices and corporate :

• Company leadership and management.

• Board composition, including its diversity and structure.
• Executive compensation policies.
• Financial transparency and business integrity.
• Regulatory compliance and risk management initiatives.
• Ethical business practices.
• Rules on corruption, bribery, conflicts of interest, and political donations
and lobbying.
• Whistleblower programs.
 2) ESG Pillars
2. 3 Governance Pillar (culturel)
Governance of the tension between shareholders financial interest and managerial self-
interest has been an important focus of research in accounting and management .
Pay equity
● Rise of CEO pay in USA
● 1970: 25 times of that of average worker
● 1990: 50 times of that of average worker
● Present: between 200- 400 times from peak of 1970 stock market to the
present
Inequality in pay and focus by the executives on short-term stock price performance
which has driven gains in their compensation, can lead to Self-interested behavior by
senior executives
Focusing on share buybacks
Matching or exceeding short-term guidance
Other short-term goals that are not in the company’s long-term financial interest

Such behaviors can directly undermine long-term performance through

underinvestment and other long-term investments and indirectly through further
demotivation of the broader workforce
 2) ESG Pillars
2. 3 Governance Pillar: The Board of a Company

Important source of advice to senior management and oversight of management on behalf

of shareholders
● How competent is the board?
● How much information are they given and how much voice do they have in
practice?
● Are committee on compensation, risk, nomination staffed by board members with
relevant capabilities and do they work independently of management?
● How many board members are independent of management and what role do they
play on committee?
● How interconnected are board members through outside commitments and how
focused are they on this company as opposed to others?
How many board members are independent of management and what role do they play on
committee?

Are they compensated in a way that incents them appropriately without generating
conflicts of interest?
 2) ESG Pillars
2. 3 Governance Pillar: The Board of a Company

● Need to examine the enterprise risk management practices of a company

beyond the risk committee of the Board
● Does the company have a risk register with data on the potential
magnitude and likelihood of a range of material risks?
● Is the process of generating that risk cross-functional and participatory
● Does it rely on internal and external data in its assessment of
probabilities and potential harm?
● What is the process to identify and assess the efficacy of various
mitigation mechanism for those risks?
● Who is responsible for risks and their mitigation and on what basis are
their requests for resources assessed?
 3) ESG Score
Methods

ESG Score = Controversie Score + E score + S Score + G score

Each Score is calculated based on agrégation multiplied by weights

Still calculated by agrégation

Machine Learning and Deep Learning techniques are not yet used
 3) ESG Score
Divergence

Scope, Measurement, Weight

Scope is the set of attributes An that describe a company’s ESG performance.

Measurement determines the indicators Ik;1. . . Ik;n, which produce numerical values
for each attribute and are specific to rating agency k. Weights determine how
indicators are aggregated into a single ESG rating Rk. Scope divergence results from
two raters considering a different set of attributes.
Measurement divergence results from two raters using different indicators to
measure the same attribute.
Weight divergence results from two raters aggregating the same indicators using
different weights.
 3) ESG Score
Divergence (Nestlé use case-child labor and ESG score
variation)
Importance of Social Network Analysis for calculating the good S-Score and G-
Score
 3) ESG Score
Divergence (Nestlé use case-child labor and ESG score
variation)
 5) Pros and cons of ESG
5. 1 Pros (avantages)

The pros of ESG practices for investors and companies:

• Investment returns and sustainability can mix. Sustainability funds can
achieve similar or better returns compared to traditional funds, according to
2022 performance data from Morningstar, an investment research,
management and technology company.
• ESG can attract new customers for additional growth. Consumers and
business customers who factor ESG considerations into their buying
decisions are likely to seek out products or services provided by companies
that are focused on ESG.
• ESG investing pushes companies to make other positive investment
decisions. Organizations with ESG initiatives tend to focus on a wide range
of environmental issues and ethical practices. For example, ESG aligns
with the triple bottom line, a sustainability-focused accounting framework
that companies can use to measure the overall economic value they create
and their social and environmental impact.
 5) Pros and cons of ESG
5. 1 Pros
The pros of ESG practices for investors and companies:
• ESG helps companies attract and retain high-quality employees. It can
boost employee motivation and increase overall productivity by giving
workers a sense of purpose.
• ESG can cut costs (long term effect). When ESG practices are incorporated
into the fabric of an organization, operating expenses, energy bills and
other costs can be reduced over time
 5) Pros and cons of ESG
5. 2 Cons (inconvénients)

ESG doesn't follow a one-size-fits-all approach. The approach to ESG that

works for one company might not work for another, which complicates both
management of ESG initiatives and ESG investing. The need to weave ESG
efforts into both day-to-day business practices and long-term strategies adds
more complications.
ESG strategies that aren't authentic can backfire. Organizations that focus on
ESG inconsistently, use it as a brand image ploy or disconnect it from their
business strategy likely won't be successful. For example, a company that
engages in greenwashing -- a term for making false or misleading claims about
environmental actions -- could face a customer backlash that affects revenue
and the value of its stock.
The good and appropriate use of ESG is important
 5) Pros and cons of ESG
5. 2 Cons

▪ Strong stock market performance isn't guaranteed. While there are success
stories, focusing on ESG doesn't guarantee strong performance by a
company's stock. In addition to other internal factors, changes in market
conditions, business trends and the overall economy can negatively affect
the performance of companies and ESG funds alike.
▪ Creating a diverse investment portfolio can be difficult. For investors
focused on an ESG-led investment strategy, it might be harder to create a
balanced portfolio that aligns with long-term goals.
▪ Detailed performance reporting across different ESG criteria can be
challenging. Most ESG factors aren't tied directly to financial data,
resulting in additional effort to provide tangible performance results.
Further, knowledge gaps reside between ESG information and supply chain
as reporting standards and frameworks are not consistently applied.
 Goals
• How corporations bring ESG investing into their portfolios
• To look at portfolio optimization and the utilization of ESG factors to
maximize returns in addition to examining different funds, their fee
structures, and how investors can blend ESG into their investment
portfolio.
• ESG is a part of good investment
• How to assess risk, create better risk management policy, and build a map
to identify valuable areas of opportunity and create better decision-making
approaches
• Il n’existe pas de méthode optimale pour attribuer des scores ESG aux
entreprises et fonds d’investissements
• Explain Environmental, Social, Governance Factors

After this course:

• The best practices for creating a solid risk management plan and
how to create a culture that is sensitive to ESG,
• Screening funds
• Choosing ESG variables by feature importance tools
• Rating corporates
• Measure how ESG factors impact revenues, costs, or productivity : True or
B.Jlifi
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