Institutional Shareholder Services (ISS) recently announced plans to change its methodology for its Environmental & Social Disclosure QualityScore (ISS QualityScore). The revised ISS QualityScore is expected to take effect during the third quarter. ISS ESG, the sustainable investment arm of ISS, says that it aims to improve its measures of corporate disclosure practices and update its materiality assessment. ISS plans to revise more than 150 factors, retire nearly 50 factors and add more than 60 new factors. The revised ISS QualityScore would include the following updates:
- 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.
- Revised 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 and ILO 169.
- Changes to existing assessments of companies’ natural resources profiles.
- Increase in granularity of reviewing carbon- and climate-related disclosures.
Companies are not required to update their data. However, from July 10 to July 21, 2023, companies will be permitted to submit changes to their data on all factors, including the newly added factors. After this period, scores will be recalculated and made available under the updated methodology. ISS encourages companies to routinely review and verify their data to ensure the methodology evolves with disclosure standards. Generally, ISS gathers data from company publications, including Securities and Exchange Commission (SEC) filings, sustainability and corporate social responsibility reports, integrated reports, publicly available company policies, and information on company websites.
Per ISS ESG, the guiding frameworks behind the methodology are the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the UN Sustainable Development Goals (UN SDGs), the UN Principles for Responsible Investment (UN PRI), and the Task Force on Climate-Related Financial Disclosures (TCFD). There are approximately 410 factors, which vary by industry group. Some environmental and social factors are management of environmental risks and opportunities, carbon and climate, human rights, labor, health, and product safety.
ISS gives scores of 1 through 10 to companies, based on raw score calculations of peer companies within a specific industry group. A score of 1 indicates what ISS views as relatively better-quality environmental and social practices and disclosures and relatively lower environmental and social risks. On the other hand, a score of 10 indicates what ISS views as relatively higher environmental and social risks, poorer mitigation strategies, and fewer disclosures. ISS provides additional information in its FAQs and brochure.
ISS intends that the ISS QualityScore will help institutional investors compare environmental and social risks through company disclosures of specified data and information. The scores indicate a snapshot of what ISS believes are key environmental and social risks and identifies “red flags” that may warrant further analysis.
Takeaways
Companies should be aware of the upcoming changes, which may impact companies’ disclosure decisions, and consider taking advantage of the opportunity to verify and correct the ISS data.
The ISS QualityScore updates reflect the demand by certain investors for more transparent disclosures of material climate risks, similar to the SEC’s Proposed Climate Disclosure Rules, summarized
here. Proactive environmental and social strategy can help companies adapt to the evolving disclosure frameworks and anticipated regulatory requirements.
