Environmental Finance: How is ISS ESG developing its offering in light of new approaches to delivering ESG services in the market?
Maximilian Horster: ISS ESG’s team is now nearly 600 strong, with analysts representing the largest single role. They analyse companies from the bottom up and put this information in the hands of investors, whether as raw data or in all types of ratings. Due to our unique structure, we also provide collaborative engagement solutions to clients, and our clients can make their voice heard through our voting service. We can help our clients with measuring, with acting and with delivering real-world impact.
In our research, we increasingly make use of AI and machine learning: not to replace analysts with algorithms, but to augment their work. AI helps with locating ESG-relevant data, and it can help with extracting that data; but it cannot provide the bottom-up assessment of a company to understand, for example, whether its climate strategy is robust enough.
With all this, we are moving from a world where there was too little ESG data to one where there is too much. We now have around 10,000 ESG data points for any given company. Our challenge is to make sure that investors can turn that data into knowledge that is specific to their business. For this, our global Client Success team, with hubs in all major markets, supports each client on their specific use case.
EF: What are the main regulatory developments investors are responding to over the next twelve months? How are ISS ESG’s solutions evolving in light of these?
MH: Regulation is one of the key challenges for our clients, not only in Europe, where it’s most visible, but around the world. In the US, the Securities and Exchange Commission [SEC] is discussing regulation for funds similar to the EU’s Sustainable Financial Disclosure Regulation, which was a key catalyst for ESG data and solutions in Europe.
Another area where you have EU regulation rhyming with regulation elsewhere is in its Taxonomy – which is now only one of over 20 taxonomy frameworks that are under development globally, and many of which are not harmonised with each other. We are investing to help clients fulfil their reporting requirements against these taxonomies, regardless of which of them they are subject to.
And then of course, recent developments, such as the war in Ukraine, have prompted interest in our sanctions research. This allows investors to understand with the click of a button what companies are likely to be subject to economic sanctions. It also allows investors to identify companies where one of their directors is a sanctioned individual.
There are also self-regulatory developments, such as the drive to net zero for which we provide investor portfolio net-zero screens plus a net-zero engagement solution for participating investors. Investors can then also make their voice heard via ISS climate voting solutions.
EF: Are there any other regional developments you would highlight as areas of focus for ISS ESG over the next year?
MH: As much as ESG seems to be dominated by global topics, there are regional nuances. For example, we see great demand for our supply chain modern slavery solution, particularly from Australia, where there is regulatory focus on the topic, but also in the US and the UK.
In addition, biodiversity is currently more regionally focused, specifically in France, where there is now mandatory biodiversity reporting for investors. Similar to climate change, there is a global biodiversity agreement, which most countries have signed. That makes us believe the issue will go global, supported by efforts such as the Taskforce for Nature-related Financial Disclosures, which is attempting to find a common understanding of biodiversity among investors.
EF: Where do you see growth in demand for ESG solutions?
MH: When I think about new markets, I think about geographies on the one hand and, on the other, new types of participants coming to the table. On the geographies side, we definitely see increased momentum in North America with the latest announcements by the SEC: North America has the regulatory ESG wave likely ahead of it. In Asia Pacific, different countries are traveling at different speeds, but there is more and more focus on ESG topics by regulators, by investors, and by the general public. The same goes for Latin America, where we see pockets where there is a stronger focus on ESG topics.
There’s a mix of new participants, but the group with the biggest impact is the banks. They increasingly want to do two things. One is to understand the ESG profile of companies they are lending money to. The second is to carry out climate stress-tests, to understand if the recipient of a loan will be able to pay back the money under physical or transitional climate scenarios. Over the last year, we’ve taken on more than 20 European central banks as clients who are now using our climate data for these climate stress-tests. This marks a turning point in the world of lending, where banks and their regulators are broadly and widely considering ESG topics when lending money or engaging in other banking activities.
All figures are as of July 2022.
Maximilian Horster is head of ISS ESG.
For more information, see: www.iss-esg.com.