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.