SE-09: Comprehensive ESG Evaluation

ICO Std 2002 — Extension SE-09

This extension module specifies the methodology requirements for comprehensive Environmental, Social, and Governance (ESG) evaluation of corporate entities. While SE-08 addresses sustainability and environmental performance with a planetary-boundaries orientation, this module focuses on enterprise-level ESG assessment as practiced by institutional investors, rating agencies, and financial regulators. The two modules are complementary: SE-08 evaluates what the planet and society require; SE-09 evaluates how well enterprises manage ESG risks and opportunities within their business context. This module extends the core layer (Chapters 4–10) with the E, S, and G pillar structure, ESG integration strategies, and cross-framework disclosure mapping.

SE-9.1 Scope and Applicable Objects

SE-9.1.1 Scope

This module shall apply to the design, execution, and governance of ranking systems that evaluate:

a) listed and unlisted corporations on comprehensive ESG performance;

b) investment funds and portfolios on ESG criteria integration;

c) sovereign and quasi-sovereign issuers on ESG risk;

d) financial instruments (bonds, structured products) on ESG-labeled credentials.

SE-9.1.2 Normative References

The following references shall inform the design of ESG ranking methodologies:

SE-9.1.3 Relationship to Core Layer and SE-08

a) This module shall conform to the core layer (Chapters 4–10) as specified in the standard.

b) This module is complementary to SE-08 (Sustainability). Where overlap exists (e.g., environmental indicators), the ranking entity shall document the differentiation: 1) SE-08 evaluates absolute sustainability performance relative to planetary boundaries; 2) SE-09 evaluates ESG risk management and opportunity capture relative to industry peers and financial materiality.

c) The ranking entity may reference SE-08 indicators for environmental data but shall apply ESG-specific weighting and interpretation.

SE-9.2 ESG Pillar Structure

SE-9.2.1 Three-Pillar Framework

The ESG evaluation shall be organized into three pillars, each comprising multiple themes:

Pillar Code Weight Range  
Environmental SE-9.2.1.1 25 %–40 %  
Social SE-9.2.1.2 25 %–40 %  
Governance SE-9.2.1.3 20 %–35 %  

a) Pillar weights shall be determined by the ranking entity based on stated methodology and shall be disclosed with rationale.

b) The ranking entity should implement industry-specific pillar weighting to reflect sector materiality, provided that the weighting methodology is documented and applied consistently within each sector.

SE-9.3 Environmental Pillar (E)

SE-9.3.1 Climate Change

a) Climate change indicators shall cover both risk and opportunity dimensions:

Risk indicators

1) Carbon emissions exposure — Scope 1, 2, 3 emissions intensity relative to sector median; 2) Transition risk — Fossil fuel dependency, carbon-intensive asset exposure, stranded asset risk; 3) Physical risk — Exposure to climate hazards (acute: storms, floods; chronic: sea level rise, heat stress) based on geographic footprint and asset location.

Opportunity indicators

4) Clean technology revenue share — Revenue from low-carbon products and services as a proportion of total revenue; 5) Green capital expenditure — Investment in decarbonization and climate adaptation as a proportion of total CapEx; 6) Climate resilience — Adaptation measures implemented, climate scenario planning quality.

b) Climate indicators shall be assessed with reference to TCFD recommendations and sector-specific transition pathways.

SE-9.3.2 Natural Resources

a) Natural resource indicators shall include:

1) Water stress exposure — Withdrawal from water-stressed regions, water efficiency, water recycling rates; 2) Land use and biodiversity — Land footprint, deforestation exposure, biodiversity impact assessment; 3) Raw material sustainability — Critical mineral dependency, recycled content, circular economy practices.

SE-9.3.3 Pollution and Waste

a) Pollution and waste indicators shall include:

1) Toxic emissions and waste — Release of regulated substances, hazardous waste generation and management; 2) Packaging and product lifecycle — Packaging sustainability, product recyclability, extended producer responsibility compliance; 3) Environmental incidents — Number and severity of spills, releases, and regulatory violations.

SE-9.3.4 Environmental Opportunities

a) Environmental opportunity indicators shall capture proactive value creation:

1) Renewable energy — Renewable energy consumption share, renewable energy generation capacity, power purchase agreements; 2) Green innovation — Green R&D expenditure, green patent filing rate, clean technology portfolio; 3) Sustainable market positioning — ESG-labeled product revenue, green certification portfolio, market share in sustainable segments.

SE-9.4 Social Pillar (S)

SE-9.4.1 Human Capital

a) Human capital indicators shall include:

1) Workforce diversity and inclusion — Gender, ethnic, and age diversity metrics at all organizational levels, pay equity ratios; 2) Employee development — Training investment per employee, internal promotion rates, career development program coverage; 3) Employee health and safety — Lost-time injury rate (LTIR), total recordable incident rate (TRIR), near-miss reporting rates; 4) Employee engagement and retention — Turnover rates, engagement survey scores, long-term employee retention.

b) Human capital indicators shall be normalized by industry context (e.g., higher inherent safety risk in construction vs. financial services).

SE-9.4.2 Product Responsibility

a) Product responsibility indicators shall include:

1) Product quality and safety — Recall rates, safety incident rates, quality management system certification (ISO 9001); 2) Responsible marketing — Marketing standards compliance, vulnerable population protection, advertising truthfulness; 3) Data privacy and security — Data breach incidents, privacy compliance (GDPR, CCPA, etc.), cybersecurity maturity rating; 4) Access and affordability — Pricing practices for essential products/services, access programs for underserved populations.

SE-9.4.3 Community Relations

a) Community relations indicators shall include:

1) Community investment — Philanthropic spending, in-kind contributions, employee volunteering programs; 2) Local economic impact — Local procurement, local hiring, SME supplier development; 3) Stakeholder engagement — Quality and frequency of community consultation, grievance mechanisms, impact assessment processes.

SE-9.4.4 Supply Chain Labor Standards

a) Supply chain labor indicators shall include:

1) Supplier labor audit coverage — Percentage of suppliers audited for labor standards; 2) Critical labor findings — Number and severity of child labor, forced labor, and unsafe working condition findings; 3) Responsible sourcing programs — Conflict mineral due diligence, living wage commitments, freedom of association in supply chain.

SE-9.5 Governance Pillar (G)

SE-9.5.1 Board Structure and Effectiveness

a) Board structure indicators shall include:

1) Board independence — Proportion of independent directors, separation of Chair and CEO roles; 2) Board diversity — Gender, ethnic, skill-set, and tenure diversity of board members; 3) Board expertise — ESG/sustainability expertise on the board, industry-specific knowledge, risk management experience; 4) Board oversight effectiveness — Frequency and quality of ESG/sustainability committee meetings, board engagement with ESG issues.

b) Board indicators shall be assessed in the context of the entity’s ownership structure (e.g., family-controlled, state-controlled, widely-held), as governance best practices vary by context.

SE-9.5.2 Business Ethics

a) Business ethics indicators shall include:

1) Anti-corruption program — Policies, training coverage, incident reporting and investigation procedures, whistle-blower protection; 2) Political activity — Political contribution disclosure, lobbying expenditure transparency, trade association memberships disclosed; 3) Competitive practices — Anti-trust compliance, fair competition policies, market manipulation prevention; 4) Intellectual property — IP protection practices, respect for third-party IP, open innovation policies.

SE-9.5.3 Tax Transparency

a) Tax transparency indicators shall include:

1) Country-by-country reporting — Disclosure of revenue, profit, tax paid, and employees by jurisdiction; 2) Effective tax rate — Comparison of effective tax rate to statutory rate, with explanation of material differences; 3) Tax governance — Board oversight of tax strategy, published tax strategy statement, relationship with tax authorities.

b) The ranking entity shall not penalize legitimate tax planning but shall flag aggressive tax avoidance structures (e.g., use of tax havens without substantive economic activity).

SE-9.5.4 Risk Management

a) Risk management indicators shall include:

1) Enterprise risk management (ERM) maturity — Framework comprehensiveness, integration with strategy, risk culture assessment; 2) ESG risk integration — Explicit identification and management of ESG risks within ERM framework, ESG risk appetite statements; 3) Crisis preparedness — Business continuity plans, crisis communication procedures, historical crisis response quality.

SE-9.6 ESG Integration Strategies

SE-9.6.1 Strategy Taxonomy

The ranking entity shall document which ESG integration strategy (or combination of strategies) it employs. Recognized strategies include:

SE-9.6.1.1 Negative/exclusionary screening

a) Entities that fail to meet minimum ESG thresholds or engage in excluded activities (e.g., controversial weapons, thermal coal above threshold) shall be excluded from the ranking universe.

b) Exclusion criteria shall be clearly defined, documented, and disclosed. The ranking entity shall specify: 1) the activities or sectors excluded; 2) the revenue threshold for exclusion (e.g., > 5 % revenue from excluded activity); 3) the basis for exclusion (norms-based, values-based, or risk-based).

SE-9.6.1.2 Positive/best-in-class screening

a) Entities that demonstrate leading ESG performance relative to their sector peers shall be identified and may receive preferential ranking treatment.

b) Best-in-class assessment shall be conducted within sectors to avoid penalizing sectors with inherently higher ESG risk profiles.

SE-9.6.1.3 Thematic investment

a) The ranking entity may apply enhanced weighting to entities contributing to specific sustainability themes (e.g., clean energy, water access, health equity). Thematic focus shall be disclosed.

SE-9.6.1.4 Impact investment

a) Where the ranking methodology incorporates impact measurement, the ranking entity shall require: 1) intentionality — a stated intention to generate positive environmental or social impact; 2) additionality — impact that would not have occurred without the entity’s intervention; 3) measurability — quantifiable impact metrics with defined targets and timeframes; 4) contribution — evidence that the entity’s activities contributed to the measured impact.

SE-9.6.2 Strategy Consistency

a) The ranking entity shall apply its stated ESG integration strategy consistently across all entities in the ranking universe. Ad hoc exceptions shall be documented with rationale.

b) The ranking entity shall disclose the proportion of entities excluded, promoted, or re-weighted under each strategy.

SE-9.7 ESG Disclosure Standards Cross-Mapping

SE-9.7.1 Framework Interoperability

a) The ranking entity shall provide a cross-mapping table that maps its indicators to the following disclosure frameworks:

1) GRI Universal Standards (2021) and applicable GRI Topic Standards; 2) SASB Industry Standards (for each sector in scope); 3) TCFD Recommendations (four pillars: Governance, Strategy, Risk Management, Metrics & Targets); 4) CDP Questionnaire (Climate, Water, Forests); 5) EU Taxonomy Regulation (Article 8 disclosure requirements).

b) The cross-mapping shall indicate for each indicator: 1) which framework(s) it maps to; 2) the mapping quality — direct (1:1), approximate (requires adjustment), or partial (covers only some aspects); 3) any gaps where the indicator is not covered by any standard framework.

SE-9.7.2 Disclosure Quality Assessment

a) The ranking entity shall assess the quality of entity ESG disclosures, not merely their quantity. Quality dimensions shall include:

1) Completeness — Coverage of material ESG issues identified by SASB or equivalent industry materiality assessment;

2) Accuracy — Consistency with verified data, absence of material errors;

3) Timeliness — Data vintage within acceptable timeframes (per SE-8.6);

4) Comparability — Consistent reporting boundaries and methodologies across reporting periods;

5) Verifiability — Extent of third-party assurance, availability of underlying evidence.

b) A disclosure quality score shall be computed and may be used as a data quality modifier in the scoring model (SE-9.8).

SE-9.7.3 Convergence and Future Standards

a) The ranking entity should monitor and incorporate emerging disclosure standards, including: 1) ISSB Standards (IFRS S1, IFRS S2) — International Sustainability Standards Board global baseline; 2) ESRS (European Sustainability Reporting Standards) under CSRD; 3) SEC Climate Disclosure Rule (as adopted).

b) Where the ranking entity adopts emerging standards, it shall document the transition approach and provide comparability with prior methodology versions.

SE-9.8 Scoring and Rating Methodology

SE-9.8.1 Scoring Approach

a) ESG scores shall be computed at three levels:

1) Issue level — Individual ESG issues (e.g., carbon emissions, labor safety) scored on a 0–100 scale; 2) Pillar level — Pillar scores (E, S, G) as weighted averages of issue scores within each pillar; 3) Overall level — Overall ESG score as a weighted average of pillar scores.

b) Issue weights shall reflect industry-specific materiality. The ranking entity shall document the materiality assessment methodology, which may be based on SASB, MSCI Key Issue Identification, or an independent assessment.

SE-9.8.2 Risk-Based vs. Impact-Based Approaches

a) The ranking entity shall declare whether its methodology is primarily:

1) Risk-based — Assessing ESG factors as financial risk drivers (consistent with investor fiduciary duty interpretation). Scores represent unmanaged risk exposure.

2) Impact-based — Assessing ESG factors as measures of real-world environmental and social impact. Scores represent positive or negative impact magnitude.

3) Hybrid — Combining risk and impact dimensions, with documented weighting between the two.

b) The choice of approach shall be disclosed and shall be consistent with the stated purpose of the ranking.

SE-9.8.3 Key Issue Methodology (MSCI-Informed)

a) Where the ranking entity adopts a key issue approach, it shall: 1) identify a set of key ESG issues for each industry, based on materiality assessment; 2) weight key issues more heavily than non-key issues in pillar and overall scores; 3) update key issue identification at least annually to reflect evolving ESG risks.

b) The ranking entity shall disclose the key issues identified for each industry and the weighting applied.

SE-9.8.4 Controvers Assessment

a) The ranking entity shall implement a systematic controversy assessment mechanism:

1) Controversial events and allegations shall be identified through media monitoring, NGO reports, regulatory actions, and litigation databases; 2) Each controversy shall be assessed for severity (minor, moderate, major, severe) and the entity’s response (adequate, partially adequate, inadequate); 3) Active controversies shall result in a controversy modifier applied to the relevant issue score; 4) The ranking entity shall verify controversy allegations through multiple sources before applying modifiers.

b) The controversy assessment methodology shall be documented, including source monitoring scope, severity classification criteria, and modifier calculation.

SE-9.9 Benchmarking Against Established ESG Ratings

SE-9.9.1 MSCI ESG Ratings

a) The ranking entity shall document its relationship to the MSCI ESG Ratings methodology, including: 1) MSCI’s Key Issues and Weighted Average Score approach; 2) MSCI’s industry-specific materiality framework; 3) MSCI’s Governance Score treatment (industry-neutral vs. industry-specific).

b) The ranking entity shall note that MSCI ratings range from AAA to CCC (7-point scale) and shall document its own scale and any mapping to the MSCI scale.

SE-9.9.2 Sustainalytics ESG Risk Ratings

a) The ranking entity shall document its relationship to the Sustainalytics Unmanaged Risk framework, including: 1) the concept of Unmanaged Risk = Unmanageable Risk + Managed Risk Gap; 2) Sustainalytics’ risk classification (negligible, low, medium, high, severe); 3) Sustainalytics’ industry-specific risk exposure assessment.

b) Where the ranking entity adopts a risk-based approach, it should consider the Unmanaged Risk framework as a methodological reference for quantifying ESG risk exposure.

SE-9.10 Data Collection and Quality Assurance

SE-9.10.1 Data Sources

a) ESG data shall be collected from the following source hierarchy:

1) Entity disclosures — Annual/sustainability reports, regulatory filings, CDP responses; 2) Alternative data — Government databases, satellite data, sensor data, patent databases, media monitoring; 3) Third-party ESG data providers — With documented methodology and coverage; 4) Estimates and models — Only with documented methodology and quality indicators.

b) The ranking entity shall disclose the proportion of data from each source type and the data coverage rate for each indicator.

SE-9.10.2 Data Quality Assurance

a) The ranking entity shall implement data quality assurance procedures, including: 1) automated consistency checks (internal data logic validation); 2) cross-source verification for material indicators; 3) outlier detection and investigation; 4) time-series consistency validation.

b) Data quality shall be quantified as a data quality score that feeds into the scoring model as specified in SE-9.8.

SE-9.11 Publication and Transparency

SE-9.11.1 Methodology Disclosure

a) The ranking entity shall publish a complete methodology document, including: 1) all indicators with definitions, data sources, and calculation methods; 2) pillar and issue weights with rationale (including industry-specific materiality assessment); 3) scoring and normalization procedures; 4) ESG integration strategy (SE-9.6); 5) controversy assessment methodology (SE-9.8.4); 6) cross-framework mapping (SE-9.7); 7) data quality assurance methodology (SE-9.10).

b) The methodology document shall comply with the IOSCO ESG Ratings and Data Products Providers Statement (2021) recommendations for transparency.

SE-9.11.2 Results Presentation

a) Published results shall include, for each ranked entity: 1) overall ESG score and rating; 2) pillar scores (E, S, G) and key issue scores; 3) industry classification and peer group; 4) data quality assessment and coverage indicators; 5) active controversy flags; 6) ESG integration strategy effects (exclusions, re-weighting).

b) The ranking entity should provide historical score trajectories to enable trend analysis.

Note: This extension module is part of ICO Std 2002 (Tianji Ranking Methodology Standard). It is complementary to SE-08 (Sustainability): SE-08 evaluates absolute sustainability performance relative to planetary boundaries, while SE-09 evaluates enterprise-level ESG risk management and opportunity capture. ESG ratings carry significant financial and reputational consequences. The requirements in this module are designed to ensure methodological rigor, cross-framework interoperability, and transparency in accordance with IOSCO guidance. Implementation of this module shall be validated by the SE-09 Working Group with participation from ESG analysts, financial materiality specialists, and disclosure framework experts.