The landscape of ESG risks, impacts and opportunities, and sustainable investment strategies, as well as framing conditions, including regulation, voluntary standards, scientific, and technical developments are highly dynamic and require an agile forward-looking ‘first mover’ approach to data collection, methodology, and product development. This is in order to best serve investors with highly innovative and versatile data and solutions to successfully realize their individual sustainable investment strategies and objectives, and to assist with compliance with regulatory mandates.

Within ISS ESG, a dedicated ESG Methodology team with the mission and mandate to stay abreast of trends, developments, and existing and emerging client and prospect needs, exists. ESG Methodology works closely with product and research teams, a team that focuses on public affairs, and additional stakeholders to initiate, develop, and agree upon proposed and required methodology developments and enhancements.

To ensure a robust and consistent methodology development process and structure, an internal Methodology Review Board (MRB), consisting of experienced methodology and research leaders, has been established by ISS ESG. The MRB guide, steer, and vet the methodology development strategy and process, setting and agreeing upon overall objectives and strategic targets, clarifying, reviewing, and reassessing priorities, as well as initiating and confirming specific new methodology developments or adjustments.

Finally, the Methodology team coordinates a quarterly Methodology Updates communication to ISS ESG clients to inform them of upcoming enhancements to the research methodology underlying ISS ESG’s solutions and data. The updates include detailed change log files, where relevant. These quarterly communications are also complemented by communications to clients when significant methodological, product, and/or data platform developments occur.

How ISS ESG’s methodology aligns with globally accepted frameworks

A wealth of ESG frameworks have been developed through comprehensive multi-stakeholder consultations over the past two decades. These frameworks reflect widely shared expectations and serve as an indication of the direction and scope of prospective regulatory measures. They therefore provide valuable guidance for sustainability reporting that ensures comparability and is decision-useful for institutional investors.

ISS ESG data and research is comprehensively and systematically mapped to recognized disclosure and performance standards. It is used by institutional investors to align investment and stewardship decisions with established frameworks and report against such frameworks. Of particular note in this context are the complementary materiality approaches developed by Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI), and the recommendations for financial risk disclosures by the Task Force on Climate-related Financial Disclosures (TCFD).

ISS ESG has developed a specific suite of solutions based on business-relevant targets under the United Nations Sustainable Development Goals (SDGs), the most widely recognized and comprehensive framework for assessing the real-world impact of business activities, or environmental and social materiality.

Lastly, ISS ESG has tailored a set of solutions enabling investors to comply with the EU Sustainable Finance Regulation, including but not limited to EU Taxonomy Alignment, Sustainable Finance Disclosure Directive (SFDR) and Principle Adverse Impacts (PAI), SFDR Article 8 and 9, and ESMA fund naming rules.

ISS ESG strives to provide its clients with high quality and reliable ESG research. To this end, the ISS ESG research team works towards continuously improving research processes and has put in place safeguards designed to achieve accuracy and reliability. These efforts are led by a dedicated Quality Management & Assurance team.

ISS ESG’s ESG analysts undergo extensive training at the time of onboarding on ISS ESG’s methodologies, as well as its research processes and techniques. In addition, many analysts draw on knowledge gained through higher education as well as prior work and/or industry experiences. Additionally, ISS ESG continuously provides its employees with various forms of market education and training to help ensure that research and analyses are in line with market requirements, investor expectations, and ISS ESG’s own methodologies and processes.

The research and assessments conducted by ISS ESG analysts are used to form a broad suite of products and solutions intended to meet the varying needs of the investor community and are continuously enhanced and broadened as new needs and uses occur.

The quality program of ISS ESG research is governed by the principles of:

Independence

It is essential that ISS ESG is independent in order to satisfy the market need for reliable and impartial ESG assessments and data. As a unit within ISS, ISS ESG, like all services offered for the institutional investor community by ISS, is separated by a “firewall” from ISS-Corporate, ISS’ wholly owned subsidiary which offers services to corporate issuers. The firewall serves to mitigate potential conflicts of interest between these distinct businesses. An ISS-wide compliance department monitors the separation between ISS and ISS-Corporate, and implements policies and procedures designed to mitigate or manage potential conflicts of interests within ISS. Moreover, the provisions of ISS’ Code of Ethics provide that an analyst shall not evaluate a company or a matter in which they have a personal interest (or that such an interest must be disclosed). Comprehensive information on ISS’ approach can be found on ISS’ Due Diligence website.

Comparability

ISS ESG research products enable investors to compare issuers across a variety of signals, including, depending on the particular product offering, performance against ESG criteria, transparency, corporate malpractice, and revenue generation. Comparability is secured by assessing all issuers based on clearly defined evaluation rules to ensure that comparable cases are assessed alike. The evaluation rules are monitored and developed by dedicated analysts with thematic responsibility as well as the Global ESG Methodology team, and by extension ISS ESG’s Methodology Review Board, which serves to reduce subjectivity in data collection and assessment.

Application of these rules is achieved through quality assurance processes. All assessments are based on data that is procured through rigorous and clearly documented data collection processes, and are generally reviewed by peers. Certain high-level assessment signals and scores also require a multi-layer sign-off process where key information is verified by senior members of the research team. Furthermore, dedicated analysts in ESG research continuously work on identifying and eliminating potential error sources and conduct targeted analyses to monitor data quality.

Completeness

Investors need complete information for decision-making purposes. ISS ESG research strives to consider all material ESG aspects and information when assessing an issuer to deliver complete data to users. ISS ESG data and analysis are primarily sourced from publicly available information, including a company’s own disclosure and reporting as well as subscription databases such as the CDP. As noted above, while ISS ESG may accept certain non-public information (such as from official company documents), ISS ESG does not accept material nonpublic information (meaning information that a reasonable investor would consider important in making an investment decision or information that is likely to have a substantial effect on the price of a company’s securities). Data from alternative sources (reputable media sources, NGOs, government and inter-government agencies) triggers and feeds into in-depth analysis under ISS ESG’s Norm-Based Research which in turn feeds into ISS ESG’s Corporate Rating. Additionally, for many data sets, the research team conducts fact-finding dialogue with companies to provide supplementary detail, data validation, and confirmation. The feedback process with companies takes place on a cyclical basis, as well as in particular cases during event-driven updates. Information shared by companies is reviewed, discussed with the subject company if necessary, and assessed according to ISS ESG’s evaluation guidelines. ISS ESG also consults from time to time with experts and field specialists to cross-check information and deepen the understanding of benchmark corporate practices.

Timeliness

To ensure that ISS ESG research incorporates complete information, material new information needs to be integrated in a timely manner. To this end, ISS ESG applies a staged refresh procedure: scheduled annual updates are complemented by ad hoc updates triggered by significant events, including but not limited to, corporate actions (e.g., mergers, major spinoffs, and acquisitions) as well as new or evolving ESG controversies. Thus, ISS ESG aims to ensure that information which materially affects ISS ESG scores and signals is integrated into the assessments ahead of scheduled updates.

Transparency

ISS ESG clearly and transparently communicates with both the users of the research products as well as with the assessed entities. Clients receive detailed information on the underlying methodologies used for particular ISS ESG offerings and can view granular data that underlie the scores and signals. Clients also have access to analysts to inquire about assessments or evaluation approaches in detail. For certain solutions which incorporate corporate issuer engagement, issuers are informed that ISS ESG conducts research on them. Furthermore, for particular types of research, issuers are provided with draft reports prior to the publication of research results and the opportunity to review for factual accuracy and provide feedback. ISS ESG makes available to covered companies a final version of their respective ESG Corporate Rating, free of charge.

Corporate issuers can also actively engage with ISS ESG analysts during company outreaches within the boundaries of our independence rules.

ISS ESG aims to continue to increase transparency towards the general public and interested parties regarding the work that it does. The information made public on this website is part of this initiative.

Public corporate disclosure accounts for a significant share of processed ESG data. The following corporate disclosures are systematically reviewed by ISS ESG:

In addition to corporate disclosures, ISS ESG collects information from a range of alternative ESG data sources, including the following: media sources (international, local), social media, NGOs, government agencies, inter-governmental agencies. Alternative data provides counterbalance to corporate disclosure, enabling an additional overlay for corporate analysis. Stakeholder-driven alternative data is widely considered an important early warning signal.

ISS ESG is committed to providing fact-based, objective, and well-researched ratings and assessments to investor clients through the use of such sources. Accordingly, the ISS ESG research team prioritizes the appropriate identification, evaluation, and application of sources, regardless of origination. According to internal source management guidelines, source information is comprehensively documented and for certain datasets, is also shared with clients. In particular, alternative ESG data sources are evaluated against a range of criteria, including accuracy, credibility, objectivity, and source triangulation, to support the production of high-quality research.

Verification by companies is a central step in our data collection process. ISS ESG provides access to key ESG research reports in the Governance Analytics platform of ISS’ wholly-owned subsidiary ISS Corporate Solutions, Inc. (“ISS-Corporate”). Separately, ISS ESG Research submits, on a voluntary basis, certain full draft reports for the ESG Corporate Rating, Norm-Based Research, and Controversial Weapons Research for issuer review.

ISS ESG generally relies on publicly available information for its research offerings. ISS ESG does not accept, use or incorporate in its research offerings any material non-public information (meaning, generally, information that a reasonable investor would consider important in making an investment decision or information that is likely to have a substantial effect on the price of a company’s securities). To the extent that any research offerings as described on this website may involve dialogue with the subject companies, those companies are instructed not to provide to ISS ESG, and are made aware that ISS ESG will not consider, any material non-public information. However, to enhance the quality, credibility, completeness and usefulness of the ESG assessments for our investor clients, ISS ESG accepts and uses certain supplementary non-public information which is considered non-material, based on the above definition, but is relevant for ESG performance assessments. For further information, please refer to the Non-Public Information Framework.

ISS ESG applies a staged refresh procedure to ensure that its data, assessments, scores and ratings are up to date. Scheduled annual updates are complemented by ad hoc updates triggered by significant events, including but not limited to, corporate actions (e.g. mergers, major spin-offs, acquisitions) and new or evolving ESG controversies.

ISS ESG provides investors with comprehensive data and assessments on covered entities’ performance relating to a broad range of environmental, social, and governance matters. Building on over 30 years of experience in the field of sustainability research, ISS ESG has developed robust methodologies that form the foundation of ISS ESG’s solutions and scores. ISS ESG’s methodologies and data may be subject to certain limitations. The below outlines such limitations as well as the actions taken by ISS ESG to address these.

Limited availability of data

In assessing the ESG performance of covered entities, ISS ESG relies on a broad range of data, a significant degree of which is sourced directly from covered entities. Overall, covered entities’ reporting on sustainability matters is increasing in terms of the amount, thematic scope, and consistency of reported data. Nonetheless, in some cases, availability of reported data is limited, and even where reported data is available, it is not always consistent and reliable. To mitigate these limitations, ISS ESG leverages a variety of alternative data including media sources, recognized international or local non-governmental organizations, government agencies, and intergovernmental agencies, among others. ISS ESG products may also build on estimated and/or modelled data in the absence of reliable reported data (and for more detail we refer you to the stand-alone methodology descriptions for each product). Moreover, ISS ESG research leverages contextual information, including whether the entity operates in countries with high legal and factual standards related to the topic in question, and various ISS ESG research products apply the concept of proportionality, whereby the assessment requirements are adjusted depending on company size and risk exposure. Finally, thorough checks of the reliability, accuracy, and robustness of reported information are built into ISS ESG’s research processes, designed to ensure the validity of assessments based on such data.

Time lag in data and assessment results

ISS ESG’s research relies, to a significant degree, on self-reported information from covered entities. Typically, covered entities report annually for the previous fiscal year, meaning the information provided has a significant time lag. An additional time lag may arise from the point in time when information is published by the covered entity to the point in time when such data has been collected and processed by ISS ESG. To provide investors with the most up-to-date data, ISS ESG strives to align its updates with corporate reporting cycles as much as possible. Moreover, ISS ESG also relies on alternative data, such as media reports, which are closer to real-time and are integrated on an ad-hoc basis. In addition, many of ISS ESG’s research solutions take a forward-looking approach reflecting the momentum of ESG performance and qualitatively assessing strategies, targets, and action plans for future-oriented assessments.

Uncertainty about future performance (Execution Risk)

ISS ESG’s research aims to not only assess past performance but provides forward-looking assessments to the extent possible. Future-oriented assessments inherently bear a degree of uncertainty, in part because stated commitments or strategies may not materialize as anticipated. ISS ESG applies robust methodologies in an effort to evaluate the credibility of commitments on future performance by covered entities, factoring in relevant information on the comprehensiveness of action plans, existing progress towards commitments, external verification of such commitments, as well as any evidence or track record of controversial action.

Limited coverage

ISS ESG research covers a broad and global, but not unlimited, universe of entities based on market demand. Individual users of ISS ESG data may thus experience certain coverage gaps which can, to some extent, influence their ability to leverage ISS ESG research and data in their investment activities. To allow investors to gain a more comprehensive picture, ISS ESG regularly expands its research coverage in line with market demands.

Moreover, ISS ESG provides research results not only for covered entities but often also assigns such outcomes to associated issuers (such as subsidiaries and other affiliates). In assigning research outcomes to associated issuers, ISS ESG follows stringent assignment rules to ensure that results are meaningful for all issuers to which they are assigned.