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ISS ESG backpedals in sustainability rating dispute

After German firm takes it to court over its D- grade


Elena Johansson

ISS ESG has ended a dispute over a corporate sustainability rating by accepting a preliminary injunction, German legal news website Juve has reported.

It is the sustainability division of US proxy advisory firm Institutional Shareholder Services (ISS) and provides ratings and analytics & advisory services on environmental, social and governance (ESG) issues.

An ISS spokesperson commented to Expert Investor: “Our willingness to accept the injunction is a pragmatic legal resolution that relates only to this very particular rating and to the very specific legal case.

“It does not have any general implications on our rating methodology.

“We continue to strongly endorse the underlying methodology and approach of our ratings, which is similar to that of other ESG ratings providers […].”

Making a judgement

When Isra Vision did not respond to a request by ISS ESG to participate in a sustainability review it was assessed based on publicly available material.

The German industrial image processing company was subsequently rated with the lowest grade of D-.

It objected, arguing that it had received poor ratings for certain items it didn’t disclose, Juve reported.

The case is the first known in Germany in which a company has challenged a sustainability rating.

A regional German court determined that a mere unavailability of certain information does not justify a poor rating of a company.

In addition, the analysis criteria would always have to be aligned closely with business operations, and this had not been done here sufficiently, the court said, according to Juve.

Main arguments

Allen & Overy partner Jens Matthes, who represented Isra Vision in the litigation, told Expert Investor: “Companies do not have to accept every judgment that a sustainability rating agency makes about them.

“When a rating agency replaces facts with mere assumptions, when it gives a bad grade because a company does not respond to a request, or when it uses absurd criteria to rate a particular company, companies do not have to put up with it.”

ISS, however, argued that it is transparent about its rating approach for non-existing information.

“Every single indicator, which has passed our industry specific materiality analysis and which is applied in the rating is made fully transparent within the rating report, including its weight and assessment.

“In cases where we do not find information on an indicator level, we describe that fact in the report and assess it negatively. In the oral hearing, the judge confirmed that this approach is protected by freedom of opinion,” the ISS spokesperson explained.

Lacking regulation

Issuing bad grades for non-disclosure of ESG information is a practice that rating agencies can apply in order to prompt companies to disclose their data.

Without sufficient and comparable ESG information, investors face barriers in understanding the sustainability of their investments.

EU non-financial reporting regulation has so far been lax, but is expected to strengthen as ESG data is the foundation of the EU’s plan to increase sustainable finance flows of private investors and reach the Paris Agreement goals.

Matthes commented: “We are explicitly not concerned with preventing sustainability ratings as a steering tool for the transformation of the economy towards a more sustainable future.

“The interaction between rating agencies and companies will make a significant contribution to establishing credible and robust standards for ESG ratings, which are a key element in making ESG ratings an important tool for all market participants.”