& Securities

ISS is further sharpening the 2018 proxy season’s focus on corporate sustainability with the introduction of its new Environmental & Social (“E&S”) QualityScore Disclosure and Transparency Signal. According to ISS, the new QualityScore will measure the quality of corporate disclosures on E&S issues relative to a company’s peers. ISS views disclosure in this area as a “meaningful signal to investors” – the proverbial canary in the coal mine – because “limited disclosure is often indicative that further investigation is needed to rule out the presence of poor practice.”

E&S QualityScore will score each of “E” and “S” separately, from 1 (“good”) to 10 (“poor”). As with ISS’ Governance QualityScore, it will have no impact on ISS’ proxy voting recommendations – but it will be displayed in ISS’ voting report for shareholders to see.

E&S QualityScore now covers 1,500 companies from the US, Canada, EMEA and Australia in time for the 2018 US proxy season. Covered companies are in the six industry groups ISS considers most exposed to E&S risks: Energy, Materials, Capital Goods, Transportation, Automobiles & Components, and Consumer Durables & Apparel. ISS said it plans to add 3,500 companies in 18 other industry groups in the second quarter of 2018.1

Notably, ISS will not recognize a company’s sustainability initiatives unless such efforts are made public. The E&S QualityScore will collect data from company publications including filings, sustainability and CSR reports, integrated reports, publicly available company policies, and information available on company websites.

In developing its analytical framework, ISS said it gave weight to the standards and recommendations developed by the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD). As discussed in the E&S QualityScore FAQs, available here, each of the Environmental and Social “pillars” will address four categories (each of which is divided into subcategories):

• Environmental
  • Management of environmental risks and opportunities
  • Carbon & climate
  • Natural resources
  • Waste & toxicity
• Social
  • Human rights
  • Labor, health & safety
  • Product safety, quality & brand
  • Stakeholder & society

ISS has published further details on its data metrics, available here, but has not published a detailed technical document similar to its Governance QualityScore.

What to Do Now

• Review and consider whether your company’s public disclosures on E&S policies and initiatives are up-to-date, comprehensive and available for ISS to view. It is important to note if your company is a signatory to any multi-stakeholder initiatives, such as the UN Global Compact.
• Consider improvements in E&S policies and initiatives to increase the ISS E&S QualityScore, which can be updated in real time.
• If your company is one of the 1,500 that is now under ISS’ E&S QualityScore lens, verify and provide feedback of your company’s E&S profile through ISS’ Data Verification site, available here.
• For more information on how to develop and disclose your company’s sustainability efforts, and for more information regarding trends in sustainability generally, see our Alert, available here.