Adding to the seemingly never-ending series of ratings and scores purporting to measure companies’ ESG performance, ISS has developed a new contender, “ESGF” – representing ESG + financials (F). The new rating blends two existing ISS products - its ESG Corporate Rating and its (not very successful) EVA tool. ISS touts that “marrying the financial “F” pillar with ESG performance can help create a “more holistic approach to investing” providing better insights into a company’s long-term sustainability. The new quality score uses a 2:1 weighted distribution between ESG and F factors so that strong financial performance alone cannot mask a company’s weak ESG profile.
The ESG Corporate rating considers about 100 indicators to evaluate a company’s ESG practices according to industry and throughout the supply chain. The rating assesses material risks, opportunities and impact from products and services to generate a letter grade on a twelve-point scale (ranging from A+ to D-) which then corresponds with a numeric score. This methodology results in almost no companies (5%) attaining an A or B grade.
The Financial rating is calculated using data from ISS’s Economic Value-Added framework (EVA), which the proxy advisor has been attempting to monetize for some time, but which doesn’t seem to have gained much traction or influence in ISS’s company analyses. About 39% of companies make the A or B grade on the EVA side.
The new ESGF rating will be available on ISS’s corporate rating reports in 2023 and is one of many enhancements that ISS intends to make to its corporate ratings solutions, according to their press release.