ISS ESG is bringing in changes to its scoring system that will impact company ESG scores and decile rankings with immediate effect when implemented from December 1, 2023.
The sustainable investing arm of ISS says 14 factors are being expanded across new regions. Six of these cover board composition, including questions on tenure, independence and board diversity. A further seven are related to compensation, including a question on whether an issuer’s most recent say-on-pay proposal received ‘significant’ shareholder opposition.
The final factor being expanded into new regions is a question on audit and risk oversight. As part of its Governance QualityScore system, ISS ESG asks whether a regulator has initiated an enforcement action against a director or executive in the past two years, a question that is being extended to firms in Latin America. The question is already asked of companies across the US, Canada, Asia-Pacific (ex-South Korea), India and South Korea.
The firm is also seeking additional information across 11 other areas covering board structure, compensation and shareholder rights. ISS ESG says more than 10 other factors originally introduced in 2022 will now be incorporated into scoring, though specific details for each of these changes have not been shared.
IR Magazine understands that more detailed information, including on the enhancements and scoring changes, is available to issuers via the data verification portal free of change to subscribing investor clients.
ISS ESG is running a data verification period from November 6 to November 17. During this period, companies can verify and submit changes to their data across all factors before scores are made available under the updated methodology.
Guillaume Tassin, head of data solutions at ISS ESG, says the update is the culmination of a two-year process. ‘Institutional investors benefit from industry-leading comparability of governance best practices across international markets, drawing on a comprehensive set of datapoints,’ he comments in a statement.
‘These now range from well-established governance factors such as the level of shareholder support on say-on-pay proposals to more recent areas of investor focus such as information security and diversity.’
ESG on the buy side
ESG questionnaires have been a point of increasing demand on IR time in recent years. At the same time, however investors have also been developing their own, internal scoring systems too.
Research from SquareWell Partners in 2021 found that the world’s biggest asset managers were ‘increasingly looking to develop their own proprietary ESG ratings and tools to lessen their dependence on ratings firms’.
Of the 50 largest asset management firms covered in the research, more than half have already developed internal ratings, while 40 percent continue to use at least four external ESG research and ratings providers.