Advancing the
systematic
integration
of ESG risk factors

The transition to Net Zero is a  fundamental goal in today’s business activities. SigmaQ’s emission-adjusted corporate default probability can help you succeeding in creating measurable results in implementing a sustainable finance agenda.

The COP26 agreement once again has raised the pressure to cut green-house gas (GHG) emissions to prevent a “climate catastrophe”. The ever-increasing impact of climate change, with its increasingly extreme weather conditions, leaves no room for not following up this pressure with action and implementing the transition to Net Zero. Regulators from all over the world are taking corresponding measures.

Integrating ESG risk factors

Systematically integrating ESG risk factors into a sustainable finance agenda is a difficult but vitally important task. Only when financial markets start to price ESG signals properly will capital allocation effectively and sustainably change. With a proper ESG metric in place investors can direct capital towards more sustainable businesses.

Data driven approach

But for this to happen, the industry needs a mature, data-driven approach and better data analysis. Overly complex ESG ratings, conflicting standards and a sometimes debatable spectrum of social and governance metrics have hampered transparency and comparability. The inability to attach unambiguous metrics to the S and G dimension in the ESG universe creates question marks around the entire approach. This leads to a situation in which the perfectly well quantifiable E(mission) dimension could receive unjustified skepticism, which needs to be avoided in light of the transition to Net Zero.

SigmaQ’s approach

We at SimgaQ have made it part of our own agenda to find solutions to systematically integrate ESG risk factors into business and risk management considerations via a purely data-driven approach. As one of the first companies world-wide we’re able to translate GHG emissions into a financial risk by means of our novel credit risk technology, which is able to reflect new risk factors in the modelling of default probabilities (https://sigmaqanalytics.com/data-service/). Our approach overcomes the problems of intransparent ESG ratings, which raises so much skepticism and hampers the transition to Net Zero.

Emission-adjusted corporate default probability

Our emission-adjusted PDs are special in that they rely on reported figures (scope 1-3 GHG emissions) only, i.e. they do not make use of any qualitative information or external ESG ratings. Our model is fully calibrated and integrated with our credit risk technology for corporate default probabilities.

With all the uncertainties around ESG standards and the way companies understand and integrate ESG factors, we think this is a transparent way forward.