An integrative framework for supply chain rating: from financial-based to ESG-based rating models

Abstract

Credit risk rating systems are frequently criticized because of their short-term focus and their narrow view of the firm as an entity isolated from its network of relationships. This paper aims at overcoming these limitations of traditional rating systems by proposing an integrated model of supply chain rating, based on both financial and non-financial variables and including environmental, social and governance (ESG) indicators to embrace a long-term orientation of value creation. Enlarging the scope of evaluation from the single company to its supply chain, we realize an integrated ESG – financial model which evaluates both financial and sustainability aspects of organizations, based on the supply chain they belong to. This model is especially useful for evaluating the potential growth of small and medium enterprises which, differently from large corporations, are usually more opaque to financial markets, and present lower disclosure intensity. Therefore, this measurement system can be adopted by both financial institutions, to evaluate potential borrowers, and individual companies, to make internal assessments or to evaluate the performance of their downstream and upstream partners.

Keywords:

• supply chain management
• supply chain quality management
• supply chain finance
• sustainable supply chain management
• supply chain performance measurement
• supply chain rating
• ESG indicators

Acknowledgements

The authors would like to thank Federico Cinque for having contributed to the quantitative aspects of the supply chain rating model.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The model described in the chapter belongs to Fineteca S.r.l. Fineteca is a fintech start-up that has developed the algorithm by using the data made available by the observatory on the industrial supply chains of the Research Center CASMEF Luiss Guido Carli.

2 Thomson Reuters is one of the few rating agencies to partially disclose – on request – the methodology underlying its ESG rating system. The score provided by Thomson Reuters captures and calculates over 500 company-level ESG measures. However, only a subset of these measures is available publicly, upon request. These indicators are organized into a hierarchical structure, since they are grouped into 10 categories, which, in turn, are clustered in the three pillars scores – environmental, social and corporate governance.