METHODOLOGY
Sona Sustainability Credit Score System (SSCSS)
24/04/2024
The methodology used to develop the Sona Sustainability Credit Score System (SSCSS) is comprehensive and systematic, focusing on incorporating various dimensions of sustainability into a standardized rating framework.
The following is an overview of this methodology:
1. Introduction
The Sona Sustainability Credit Score System (SSCSS) is a comprehensive framework designed to evaluate and quantify companies’ environmental, social, and governance (ESG) performance. Evolving from the established Sustainability Credit Score System (SCSS), the SSCSS integrates advanced methodologies, including country impact assessment, industry-specific models, forward default probability estimation, and an expanded range of rating options. This detailed methodology elucidates the intricate processes involved in developing, implementing, and refining the SSCSS, providing a comprehensive understanding of its architecture and evaluation mechanisms.
2. Framework Development
The SSCSS is built upon a robust analytical hierarchy process (AHP) framework, which systematically evaluates sustainability dimensions across diverse industries and geographies. Enhancing the foundation laid by the SCSS, the SSCSS incorporates sophisticated modelling techniques, refined weighting schemes, and comprehensive indicator sets tailored to address modern sustainability challenges comprehensively.
3. Data Collection and Preparation
The journey towards a holistic sustainability assessment begins with meticulous data collection and preparation. Drawing from diverse sources, including company disclosures, governmental reports, academic publications, and NGO databases, this phase involves identifying, aggregating, and validating relevant sustainability indicators. Rigorous quality assurance protocols ensure data integrity and accuracy, laying the groundwork for robust analysis and informed decision-making.
4. Country Impact Assessment
The SSCSS integrates country-specific factors into the sustainability rating process, leveraging insights from the United Nations Country Sustainability Report and other reputable sources. This assessment evaluates the overall sustainability performance of the country in which a rated company operates, accounting for regional disparities in environmental regulations, social norms, and economic conditions.
5. Industry-Specific Models
Recognizing the heterogeneous nature of industries and their distinct sustainability challenges, the SSCSS adopts industry-specific models to tailor assessments to each sector’s unique characteristics. Through sectoral analysis and stakeholder consultations, these models delineate sector-specific weightings for the six sustainability dimensions, reflecting varying degrees of exposure and impact.
6. Expanded Rating Options
In response to evolving sustainability risk management practices, the SSCSS introduces an expanded range of rating options to provide stakeholders with greater granularity and flexibility in assessing companies’ sustainability performance. Alongside traditional ratings like business as usual (BAU) and future sustainable business (FSB), the SSCSS incorporates categories such as sustainability default (SD) and not applicable (N/A), offering a comprehensive spectrum of ratings to accommodate diverse business contexts and sustainability profiles.
7. Sustainability Forward Default Probability
A hallmark feature of the SSCSS is its forward-looking assessment of sustainability risk, encapsulated in the sustainability forward default probability metric. By analyzing historical sustainability performance data, market trends, and macroeconomic indicators, the SSCSS predicts the likelihood of sustainability-related defaults occurring over a specified time horizon, enabling stakeholders to anticipate and mitigate sustainability risks proactively.
8. Credit Rating Score Comparisons
The SSCSS translates sustainability scores into credit ratings, facilitating standardized measurement and comparison of companies’ sustainability performance. Leveraging methodologies from credit rating agencies, the SSCSS assigns ratings ranging from AAA to D, with corresponding credit grade equivalents and investment grade classifications, ensuring consistency and comparability across industry sectors and geographic regions.
9. Iterative Refinement and Quality Assurance
The SSCSS methodology undergoes continuous refinement and quality assurance to uphold the highest standards of accuracy, reliability, and transparency. Through stakeholder engagement, peer review processes, and ongoing monitoring of emerging trends, the SSCSS evolves in tandem with the dynamic sustainability landscape, overseen by a dedicated Sustainability Credit Risk Committee.
10. Documentation and Transparency
Transparency and documentation are cornerstones of the SSCSS methodology, fostering trust, credibility, and accountability within the sustainability community. Detailed documentation of data sources, methodologies, and assumptions empowers stakeholders to critically evaluate the SSCSS results and contribute to ongoing improvements, promoting openness and collaboration to enhance collective understanding of sustainability challenges.
11. Conclusion
In conclusion, the SSCSS methodology represents a paradigm shift in sustainability assessment, combining advanced analytics, stakeholder engagement, and rigorous quality assurance to deliver actionable insights into companies’ ESG performance. By embracing complexity, uncertainty, and diversity, the SSCSS navigates the multifaceted terrain of sustainability, guiding stakeholders towards informed decision-making and sustainable business practices, poised to adapt, innovate, and lead towards a more sustainable and resilient future.
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