There is a plethora of ESG ratings systems and providers used by investors to ensure they do not fall foul of “greenwashing” standards. Among the most cited providers is ISS with its QualityScore product. Hence, while some listed companies and their boards may deplore the potential for conflicts of interest arising from selling services to improve governance ratings and being a governance rater, the fact is ISS is an influence on the extent that funds with a “green” mandate regard a company as a safe ESG bet.

This article summarises recent changes to its scoring. ISS ESG released its Governance QualityScore update on 31 October.  The 2023 update is extensive, introducing 23 new factors and improving global comparability of governance best practice by extending 52 existing factors to new jurisdictions.

New factors cover seven areas:

1. Information security

• Including third party risks and breaches, support for shareholder proposals and disclosure of performance measures in executive compensation.

2. Director skills

• Board level skills relating to climate, diversity, equity and inclusion, as well as selected others.

3. Director and executive pledging

• Assesses existing policy with actuals in aggregate and as a percentage of outstanding shares.

4. Emerging risk oversight

• Focuses on the independence of committees responsible for climate, human capital management, health and safety, and succession.

5. Diversity, equity and inclusion

• Expands assessment to include whether there are LGBTQ+ and ethnically diverse directors on the board.

6. ISS pay-for-performance concerns

• Displaying the initial and overall quantitative concern for pay-for-performance.

7. Holding Foreign Companies Accountable Act

• Assesses whether companies are conclusively identified under the Act.

The expanded coverage into new jurisdictions includes:

Board structure

• Six questions, focusing on board member independence and diversity.

Compensation

• Seven questions, covering loans to directors, holding periods for restricted stock, change in control or severance payments, minimum vesting periods for equity, and recent significant shareholder opposition to Say-on-Pay proposals.

Audit and risk oversight

• One question relating to a regulator initiating enforcement action against a director or executive in the past two years.

Company scoring and decile ranking will be impacted from 1 December.

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