An integrated ESG picture for institutional investors
ISS ESG’s head of index strategy, Hernando Cortina, tells Environmental Finance how the index business is evolving its thematic ESG solutions to help provide a complete picture for its clients.
For more information see: www.iss-esg.com
Environmental Finance: How is the ISS ESG index business responding to evolving investor needs?
Hernando Cortina: We are constantly augmenting and evolving our ESG index offering with innovation. One recent example is biodiversity. We think biodiversity in ESG investing has the potential to be as significant as climate has been over the past decade.
We recently launched our ISS STOXX Biodiversity Index: a cutting-edge family of regional and global indices that highlights both biodiversity leaders and biodiversity-aware companies around the world.
The core of it is our Biodiversity Impact Assessment Tool (BIAT) which tracks key business activities and supply chain metrics, including lifecycle assessments for land, air, water, disappeared species, species abundance, and an impact category. There is a lot of complexity in biodiversity data, so we condense it into a simple assessment scale from ‘very high’ to ‘very low’ impact.
Market standards are not as established in biodiversity as they are in climate, so we aim to provide several impact metrics for our clients. We’re able to give investors a high-level overview of the corporate impacts on biodiversity and drill into specific geographies. The indices rely on our BIAT data in combination with traditional screening data such as palm oil or pesticides screening, among others.
Biodiversity data can be difficult for our clients to analyse but it is increasingly important for them to do so considering the evolving regulatory landscape, as well as the Taskforce on Nature-related Financial Disclosures (TNFD) and the development of the Global Biodiversity Framework in the aftermath of COP15 in December 2022. We spend significant time developing datasets that can help our clients understand the biodiversity impact of their investment strategies.
EF: What market trends are driving innovation at ISS ESG?
HC: We see some shift in focus from broad ESG considerations to thematic ESG areas – to a single ESG issue that might be of importance to an institutional investor. For example, we recently launched the ISS ESG Freshwater indices. These indices are driven by how well companies are managing water risk and how much freshwater scarcity risk they are exposed to. That’s been a theme of increasing investor interest over the past several years.
Other innovations include our ISS ESG US CyberRisk index and the ISS ESG EVA Index family. EVA, which stands for ‘economic value added,’ is not a traditional ESG dataset, but at ISS ESG we have combined datasets on company profitability and ESG ratings. It dispels the myth that ESG investing involves a sacrifice in returns or financial materiality.
Another important aspect of innovation is ESG reporting. With a focus on an ESG area, an institutional investor can report on the key metrics in an ESG index of a given issue, such as climate alignment, diversity, or the UN Sustainable Development Goals (SDGs), and illustrate the difference versus a traditional index. Reporting and analytics are now a big part of what the market expects, and investors want to highlight the value in a thematic ESG index relative to the baseline.
EF: Beyond supporting indices, how does ISS ESG’s integrated data offering help serve investors?
HC: We offer a wide array of tools that, for example, cover national labels and regulations, SDGs, climate, and temperature impacts of portfolios, and are undergirded by the more than 12,000 data points ISS ESG now provides. We also offer a Thematic Engagement Solution leveraging our data. By converting data into something a typical investor can understand and act upon, as well as clearly explaining why a security is included in an index or not, ESG investing is further streamlined. We continue to invest in technology and evolve our analytics and insights to make ESG data more easily accessible, digestible, and reportable for our clients.
Our integrated offering builds upon three decades of experience, including working alongside sustainability investing pioneers. Our strong relationships with institutional clients allow us to continually improve our integrated ESG offering. When a client needs to make a change, we’re able to respond quickly.
EF: What are you working on next?
HC: We’re going to continue to listen to our clients and understand what they need in terms of investment solutions. We will deliver innovation, much as we did with the biodiversity series, and continue to enhance our climate and other core offerings while expanding delivery options to cloud-based solutions and application programming interfaces (APIs). Customisation is crucial. In short, we’re very excited for what’s ahead and we believe our clients will be, too, as we continue to focus on delivering cutting-edge solutions.
