Sustainability research is an outgrowth of traditional socially responsible investing, but “it’s a shift from exclusionary screening to add positive screening, best-in-class companies” to include in investment portfolios, Mr. Deosaran said. Sustainability “investors don’t want to eliminate the opportunity to invest in companies that are managing risks,” and some of those firms might not make it through an SRI screen, he noted.
The new sustainability research and database will cover 1,685 companies in North America and Europe, including all of the companies in the Standard & Poor’s 500 stock index, as well as 283 in the S&P/TSX Composite index and 776 European companies in the MSCI Europe Australasia Far East index. So far, ISS has produced sustainability risk reports and rankings on 995 of the companies, and it expects to complete research on the rest by mid-June, he said. ISS hopes to cover 2,500 companies by year’s end and 5,000 by the end of 2008. ISS has no plans to add emerging markets to its sustainability risk reporting.
ISS scores companies on 200 environmental and social factors to produce the sustainability risk report. Of the companies ranked so far, Royal Dutch Shell PLC, The Hague, Netherlands, leads the rankings with a sustainability score of 90.62 on a scale of 100. It is followed by Credit Suisse Group, Zurich, with 84.8, and BP PLC, London, with 84.58.
The sustainability research reports build on ISS’ corporate governance quotient, introduced in 2002. The CGQ measures the overall quality of a company’s corporate governance practices and its board of directors. ISS produces a CGQ for more than 8,000 companies in 31 countries. By the end of the year, ISS plans raise the number of factors it uses to determine a company’s CGQ rating to 100 from 68, he added.
But a company’s ISS sustainability score won’t necessarily coincide with its CGQ, because the sustainability score takes different factors into account — climate change, resource use, waste production and disposal, labor issue and product safety, among others. Some factors are more relevant than others in evaluating a company, depending on the industry. “There is no harmful impact (to scoring) where issues aren’t relevant to a company,” he said.
Royal Dutch has a CGQ of 97.8; Credit Suisse, 97.3, and BP, 84.5.
The other companies with the highest sustainability scores are Johnson & Johnson, at 82.04, and with a CGQ of 58; Alcoa Inc., 81.92 and 37; Enbridge Inc., 81.19 and 48.6; 3M Co., 80.42 and 67.1; BG Group PLC, 79.42 and 99.1; Total SA, 79.28 and 50.2; and Akzo Nobel NV, 78.61 and 89.6.
‘Mainstreaming effect’
“Europeans (both investors and companies) are probably just a bit ahead of the U.S. and Asia in investors incorporating ESG data in investment models,” Mr. Deosaran said. But in the U.S., “there is a mainstreaming effect. We heard from a lot of firms that are looking for more extra-financial data,” such as ESG, he said. “It’s becoming a natural extension of the investment process.”
ISS obtains the data for its sustainability reports from publicly available information such as regulatory filings and corporate websites.
“We don’t distribute questionnaires to companies, because of a (potentially) low response rate or a company’s skipping issues (on the questionnaire) that might put it in a bad light,” Mr. Deosaran said.
“Any company we analyze has free access to all data we capture on them,” he said. “We invite them to understand the process and make changes. If a company makes changes we will ask them to point to (supporting) documentation … An analyst will research the changes, and then ISS will decide whether to accept the change or reject it or request more data.”
Finding a correlation between sustainability risk reports and corporate performance would be “the holy grail,” he said, adding that academic studies show some evidence of a correlation of corporate governance quality and corporate performance.
