Upcoming Changes to ISS Environmental Social Disclosure QualityScore
In a recent update, Institutional Shareholder Services (ISS) has declared its intention to modify the way it calculates its Environmental & Social Disclosure QualityScore (ISS QualityScore). This revised version is set to be implemented in the next few months. ISS ESG, the sustainable investment division of ISS, aims to enhance its evaluation of companies' disclosure practices and refine its assessment of materiality. To achieve this, ISS plans to reassess over 150 factors, discontinue around 50 factors, and introduce over 60 new factors. The updated ISS QualityScore will encompass these changes:
Businesses are not obligated to refresh their information. Nevertheless, from July 10 to July 21, 2023, businesses will be allowed to present modifications to their information on every aspect, including the recently added ones. Once this timeframe concludes, the scores will be recalculated and disclosed based on the updated procedure. ISS advises companies to regularly examine and corroborate their information in order to ensure the procedure adapts to the standards for disclosure. Primarily, ISS acquires data from company documents such as Securities and Exchange Commission (SEC) submissions, reports on sustainability and corporate social responsibility, comprehensive reports, publicly accessible company policies, and data available on company websites.
According to ISS ESG, the principles that shape the approach 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). Each industry group has around 410 distinct factors. Examples of environmental and social factors include managing environmental risks and opportunities, carbon emissions and climate impact, human rights, labor practices, health, and product safety.
ISS assigns ratings ranging from 1 to 10 to companies, evaluating them in comparison to other companies in the same industry. A rating of 1 suggests superior environmental and social practices and transparency, as well as lower risks in these areas. Conversely, a rating of 10 suggests higher environmental and social risks, inadequate strategies for mitigation, and limited disclosures. ISS offers more details in its frequently asked questions and informational booklet.
ISS hopes that the ISS QualityScore will assist institutional investors in evaluating environmental and social risks by examining the data and information provided by companies. These scores provide a quick overview of the significant environmental and social risks according to ISS, and they highlight any potential concerns that may require deeper investigation.
Businesses need to stay informed about the imminent modifications that could directly affect their choices regarding disclosure. It is advisable for them to seize this opportunity to examine and rectify any inaccuracies in the ISS data.
The recent revisions made to ISS QualityScore show that some investors are requesting greater transparency in revealing important climate risks. This is in line with the Climate Disclosure Rules proposed by the SEC, as explained here. It is beneficial for companies to have an environmental and social strategy in place as it enables them to adjust to changing disclosure guidelines and future regulatory demands. At WilmerHale, our experts keep a close eye on these trends and offer guidance to companies on how to navigate these changes. To gain more information, please reach out to our WilmerHale ESG team.
