Founded in 1985, Institutional Shareholder Services group of companies (ISS) empowers investors and companies to build for long-term and sustainable growth.
QualityScore methodology enhancements expected in Q3
IN A statement released on June 8, ISS ESG, the sustainable investment arm of Institutional Shareholder Services (ISS), announced planned methodology enhancements to its Environmental & Social Disclosure QualityScore solution for global institutional investors.
The Environmental & Social Disclosure QualityScore measures and identifies risk in environmental and social areas of concern through thorough analysis of company disclosures.
Scores can also indicate best-in class disclosure practices and save time in performing peer comparisons.Similar to ISS' Governance QualityScore, the Environmental & Social Disclosure QualityScore uses a numeric, decile-based score that indicates a company’s risk.
Overall environmental and social scores indicate a company’s risk relative to their peers in their industry.
The planned enhancements, expected to take effect in the third quarter, will at a high-level provide an improved measure of corporate disclosure practices and augment coverage of material issues. The changes come against the backdrop of advances in industry disclosure standards.
More than 150 factors underlying the scoring will be revised for greater relevance, close to 50 factors retired and more than 60 new factors will be added.
These additions are driven by the expansion in coverage of corporate disclosures and the inclusion of new, material topics.
As a result of this methodology update, the Environmental & Social Disclosure QualityScore will be supported by 360 comprehensive and refined factors.
The update will also include a review of the model’s materiality assessment, comprising an adjustment of category and factor-specific weights to better capture the depth and the extent of corporate disclosures.
Topics and enhancements in scope include the following:
> Expansion of included topics to allow for more in-depth assessments of labor relations and occupational health disclosures.
> Improved tracking of disclosures in the areas of workforce diversity and equality, with the addition of gender pay gap factors.
> Enhanced assessment of disclosures concerning human rights for companies and their suppliers.
> Introduction of new participation factors in social and environmental initiatives and frameworks including Women’s Empowerment Principles, RE100, ILO 169, among others.
> Update to existing assessments of companies’ natural resources profiles.
> Increase in granularity of reviewing carbon- and climate-related disclosures.A data verification period will run from July 10 to July 21, allowing companies to verify and submit changes to their data on all factors, including those added for this release, before scores are calculated and made available under the updated methodology. Access to the data verification portal is provided free-of-charge and available year-round.
In a separate FAQ on the Environmental & Social Disclosure QualityScore, ISS notes that while companies are duly credited for their policies and associated environmental and social disclosure, participation in relevant and reputable ESG-focused initiatives is also prized.
This is because such initiatives have a "threshold of conduct for participation, give access to shared learning on best practice from industry peers, and confirm and reaffirm the company’s commitment to expected standards".
In addition to standard industry initiatives, multi-stakeholder initiatives provide a risk-management framework supported by stakeholders.
Furthermore, international initiatives enable a standardized and comparable disclosure structure across markets.
The selection process of initiatives is stringent and only a few are considered both reputable and relevant.In the same FAQ, ISS emphasises the importance of voluntary disclosure too.
"When backed by the growing, and developing body of normative frameworks evaluation of disclosure practices is clearly informative. If disclosure is so robust, why are there so many initiatives focused on it? Why do so many investors continue to seek better disclosure?"
The reality is the market sees benefits in ratings that are more disclosure focused, and ratings that are more 'materiality' based. Environmental & Social Disclosure QualityScore’s focus on depth of disclosure on metrics most material to the company’s specific industriesand peers resonates with investors," it said.
As ESG disclosures become more popular as an investment strategy, being able to evaluate a company's long-term financials by identifying potential hazards is a crucial stage in stock screening and portfolio construction.
Businesses that integrate ESG disclosures effectively into strategy planning are better poised and prepared to build on enhanced shareholder value and create resilience in consumer-conscious and investor-conscious backdrop.
Although financial analysis and evaluation are always a component of the investment process, ESG has proven to be a valuable predictor of long-term, sustainable financial success.
Investors are increasingly gravitating towards ESG investment and analysing ESG ratings and disclosures to have a better understanding of a company's long-term prospects and projects in the pipeline.
