Why Your ISS Governance Scores Went Down Overnight

What is the ISS ESG Governance QualityScore?

The ISS ESG Governance QualityScore (GQS) is data driven scoring methodology that incorporates hundreds of data points to enable its subscribers to screen companies and make informed decisions on their portfolio companies. The general classifications of the data points are Board Structure, Compensation, Shareholder Rights, and Audit & Risk Oversight.

Why did ISS scores abruptly change?

In late January, many companies saw their ISS ESG Governance QualityScore change overnight, without any changes to their actual ESG governance practices. Based on the updates released in ISS’ Governance QualityScore methodology, some pretty significant changes went into effect. ISS added new subcategories of data points to existing categories, 17 new data points to the GQS methodology, and 4 existing factors that were not applied to the analysis of U.S. companies will now be applied.

Which topics are bringing down ISS scores?

The most substantial updates were made to 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. A few 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.

Also, ISS is now assessing ethnic and racial diversity on the board, within its Diversity and Inclusion subcategory and would like to see evidence of employee diversity goals tied to executive compensation KPI’s. ISS promises to scrutinize any special grants to executives in light of Covid-19. Finally, they are closely monitoring executive directors, and specifically Board chairs serving on an excessive number of outside Boards.

How often does ISS issue updates?

ISS updates the methodology behind this score periodically, normally once or twice a year. The content of these updates can vary. Some updates may be as simple as updating the wording of a data point or announcing that a data point will now be applied to companies in a certain market. Other updates can be more substantial, like the updates ISS announced this January.

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Source: ISS Governance QualityScore Methodology Guide (January 29th, 2021).