ISS Scores Decrease & Sustainable Fund Flows Hit a New Record (Newsletter 2/12)

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Ratings & Frameworks

In Case You Missed It – Your ISS Score Decreased Overnight

Did your ISS score go down in the last week? In late January, ISS added subcategories of current data points, included 17 new data points, and made 4 existing factors now applicable to U.S. companies. The biggest updates are two new subcategories that fall under the audit category: Information Security Risk Management and Information Security Risk Oversight, which account for 11 of the 17 new factors. Some additions include – the number of directors with information security experience and how often the Board is briefed on security issues, and whether the company has experienced any information security breaches in the last three years.

ISS is now assessing ethnic and racial diversity on the board within its Diversity and Inclusion subcategory. It will also examine the scope of disclosures on diversity and inclusion and performance measure links to incentive plans.

In Compensation, ISS will now be collecting the presence and proportion of special grants awarded to executives – particularly in light of the number of companies changing up comp to make up for salaries given up in the height of COVID-19. Since investors may use this score as a tool to screen portfolio companies or for engagement purposes, a change in score could be a big concern for companies.

Investor Updates

Flows into Sustainable Funds Skyrocket

Once again, flows into U.S. sustainable funds hit a record. According to Morningstar, $51.1 billion went into U.S. sustainable open-end and exchange-traded funds in 2020. This is almost a $30 billion increase over 2019 flows, and nearly 10x the flows seen 2018. What does this mean? Investors flocked to ESG-integrated investments in 2020, underscoring the significance of ESG for companies.  

The Inconsistencies in ESG Reporting

S&P Global’s #1 ESG trend for 2021 is improvement in ESG data. While ESG disclosures have become widely adopted by companies, there are inconsistencies in the quantity, type, and location of ESG information published. Although about 90% of S&P 500 companies release sustainability reports, only 16% reference ESG factors in their SEC filings (S&P Global). CFOs are now discussing ESG metrics more than ever before, which is at least partially driven by investor requests. Globally, demand is increasing for more structure around required ESG disclosures. The UK responded by announcing mandatory TCFD reporting by 2025 for publicly listed companies. Meanwhile, the Big Four accounting firms are collaborating to provide an ESG framework in 2021.

Activists to Look out for in 2021

Insightia’s Activist Investing Annual Review 2021 predicted that the largest investors – BlackRock, StateStreet, and Fidelity – will increase support for ESG resolutions this year in order to attract investments from institutional and retail clients. Additionally, the review highlighted a few activist investors to watch in 2021 –

  • Inclusive Capital Partners – founded by ValueAct Capital Partners founder Jeff Ubben, is a socially responsible investment firm that seeks out companies that sustainable funds typically avoid
  • Impactive Capital – received an anchor investment of $250 million for a 6-year term from CalSTRS
  • Clearway Capital – focused on ESG laggards in Europe

Company Spotlight

CDP to TCFD Aligned

Since 2019, almost 2,000 U.S. companies have submitted responses to the CDP Climate Change Survey. Because completing the CDP questionnaire is a large step towards aligning with TCFD, investors may increasingly search for companies’ responses. For example, Hanes Brands’ TCFD webpage contains a link to the company’s CDP Climate Change Response. If your company is ready for CDP, but not yet prepared for a full TCFD alignment, providing a direct link to the CDP response on the sustainability portion of the company’s website is a great way to start. This week, SM Energy published its full CDP Climate Change Questionnaire on the Sustainability section of its website.

Almost Full Transparency

Amazon has added significant E and S disclosures in its earnings release including some pretty hefty commitments to paying employees more, committing millions to equitable housing, and signing the Climate Pledge. This might be a signal on the priorities of the new incoming CEO, however those companies still trying to get emissions data from AWS will wonder why a commitment to this disclosure is not included in the discussion.

News Bites