New Tool Supplements ISS' Governance QualityScore and Is Designed to Enable Institutional Investors to More Fully Evaluate ESG Risk

Institutional Shareholder Services, Inc. (ISS) recently launched an Environmental & Social (E&S) QualityScore Disclosure and Transparency Signal scoring tool that provides a new metric for institutional investors to use, together with ISS' Governance QualityScore, to more fully evaluate the environmental, social and governance (ESG) risk of their portfolio companies. ISS believes that institutional investors are increasingly factoring ESG considerations into their investment and voting decisions and engagement activities. ISS is an entity that provides proxy voting recommendation and other services to its institutional investor clients. E&S QualityScore measures the depth and extent of corporate disclosure on environmental and social issues, including sustainability governance, and identifies key disclosure omissions. According to ISS, "[i]nvestors report that company disclosure is a meaningful signal in its own right..." E&S QualityScore Key Issues Technical Document (Technical Document) at 2. ISS assigns each company a numeric, decile-based score indicating a company's level of E&S governance disclosure risk relative to peers in its industry group. Scores range from "1" to "10," with "1" indicating relatively higher quality disclosure and transparency practices and relatively fewer disclosure omissions. ISS assigns a score for each of the four topical categories within each of the Environment and Social pillars (as reflected in the tables below) and an overall score for each pillar. ISS published the Technical Document, which provides an overview of the key issues ISS analyzes for each subcategory in the Environment and Social pillars. ISS analyzes more than 380 E&S factors in total under the E&S QualityScore methodology, but ISS will evaluate and score each company using only the factors relevant to the company's Global Industry Classification Standard (GICS) industry group. At least 240 factors apply for each industry group. The Technical Document does not discuss with specificity the 380 E&S factors, factors that are relevant to particular industries or how ISS will determine a company's peers for E&S QualityScore purposes.

 

The E&S QualityScore methodology focuses on quantitative and qualitative aspects of disclosure practices, including global disclosure standards and key industry initiatives. ISS used the authoritative standards and recommendations from groups such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD) to select the factors incorporated into the methodology. In addition, the factors that are relevant to these frameworks are more heavily weighted than other factors. ISS will review the methodology annually to ensure that it remains in line with evolving disclosure standards and stakeholder expectations. The initial launch of E&S QualityScore in January 2018 covered 1,500 companies across 30 regions in the six industries listed in the table below, which ISS views as being most exposed to E&S risks. In the second quarter of 2018 (i.e., after proxy statements are filed for most U.S. companies), ISS has stated that it plans to expand coverage to an additional 3,500 companies spanning 18 more industries as set forth below.

 

 

Later this month E&S QualityScores will appear in ISS proxy research reports along with the company's Governance QualityScore. As with Governance QualityScore, the E&S QualityScores will have no impact on ISS' proxy voting recommendations. E&S QualityScores are not currently presented on external websites (e.g., Yahoo! Finance) but ISS expects to distribute the scores through the same channels as Governance QualityScores once it has assigned scores to the broader group of 5,000 companies.

For its analysis, ISS uses data from a company's publicly available filings, policies and website disclosures, Sustainability and CSR reports and Integrated Reports. ISS also confirms whether a company participates in, or formally endorses, authoritative multi-stakeholder initiatives from website disclosures or member lists made available by the relevant initiatives. ISS relies on information companies have already disclosed and does not ask them to generate new information for the E&S QualityScore.

Companies may verify their data against the E&S QualityScore methodology through a complementary data verification tool accessed through ISS Corporate Solutions' Governance Analytics platform, available here. If a company already has a login for the Governance Analytics platform, that login will provide access to the E&S QualityScore Data Verification tool. Companies that do not already have a login for the Governance Analytics platform may request login information by sending an email to contactus@isscorporatesolutions.com. When verifying data and providing corrections, companies should reference public disclosures where appropriate. ISS has stated in FAQs that companies can verify their data for E&S QualityScore purposes throughout the year, including the period between the annual meeting proxy statement filing and the annual meeting (during which period companies cannot verify data for Governance QualityScore purposes), although ISS expects one-week blackout periods will occur in line with the launch of additional industry groups and annual methodology changes. In light of the launch of E&S QualityScore, companies should review and consider expanding their disclosures on environmental and social issues and compare them to disclosures made by their peer companies.