Annual Report on Corporate Responsibility Shows Improved ESG Ratings Alongside Rise in Controversies
MUNICH (May 15, 2019) — ISS ESG, the responsible investment arm of Institutional Shareholder Services Inc. (ISS), today announced the release of ESG Review 2019, an annual analysis of the state of adherence by companies across the globe to environmental, social, and governance (ESG) criteria. This year’s report finds the share of companies covered by ISS’ Corporate Rating and assessed as “good” or “excellent” (both assessments lead to Prime status) now stands at 20.4 percent, up from just over 17 percent in the previous year.
This year’s report also shows that the group rated with medium or excellent performance (on a four-category scale of poor, medium, good or excellent) now includes more than 67.5 percent of covered companies in developed markets. This represents an all-time high over the 11-year history of the report. Similar patterns can be observed among companies in emerging markets, the report finds, albeit at a considerably lower level. Broken down by sector, Household & Personal Products has the highest share of Prime-rated (i.e., good to excellent performance) companies, followed by Semiconductors and Electronic Devices & Appliances. Sectors with the lowest share of Prime-rated companies are Food & Beverages, Oil, Gas & Consumable Fuels, and Retail.
The report also finds that 41 percent of the assessed companies contribute “positively” to the United Nations Sustainable Development Goals (SDG) through their products and services, of which 8 percent contribute to a “significant” extent. Conversely, the products of 27 percent of assessed companies are viewed as obstructing the achievement of the SDGs.
The 609 corporates that received a Prime rating are also seen as leaders in terms of climate strategy. More than 70 percent of these firms have set either an absolute or an intensity-based target to reduce their greenhouse gas emissions. A scenario analysis of a portfolio consisting of all 609 of these Prime-rated companies which focuses on future alignment with a 2 degree Celsius average global warming reveals that the Prime portfolio remains 2-degree compliant until 2050.
Meanwhile, Norm-Based Research, which identifies significant allegations against companies linked to the breach of established standards for responsible business conduct, saw a more than 40 percent rise in the number of reported controversies across all ESG topics. This exemplifies a growing misalignment of corporate practices with stakeholder expectations that are grounded in UN Global Compact and the OECD Guidelines for Multinational Enterprises.
“The positive developments highlighted in this report notwithstanding, there is still a long way to go as reflected in the increase number of controversies,” notes Robert Hassler, Managing Director with ISS ESG. “In many respects, however, this is not surprising and stems from both corporate failures to prevent and mitigate harm and growing public awareness and scrutiny of corporate activities and escalating standards around responsible business conduct.”
At the close of 2018, failures to respect human rights and labour rights together accounted for the majority (56 percent) of significant controversies assessed under ISS ESG’s Norm-Based Research. Industries that are most exposed to controversies in the environmental area are Materials, Energy, and Utilities. On social matters, Materials is also leading, similarly followed by Energy and Capital Goods. The governance area sees most controversies within Banks, Capital Goods, and Pharmaceuticals & Biotechnology.
More information about the ISS ESG Review 2019, including a summary of key findings, can be found here.