ISS ESG has launched an environmental, social and governance (ESG) best-in-class fund rating, which aggregates its different products into one customisable solution.
It allows investors to select leading funds by applying numerous sustainability lenses, on a broader and on a granular scale.
The ISS ESG Fund Ratings and Screening assesses 1,000 data points per fund on more than 20,000 investment funds globally. It covers funds with a minimum of 65% holdings by weight in its ISS ESG’s Corporate Ratings.
It includes three main scoring signals: a relative score that rates funds with one (bottom) to five (top) stars and defines peers according to the Lipper Global Classification, an absolute score and the ‘prime status’.
Till Jung, global head of ESG products at ISS ESG, the responsible investment arm of Institutional Shareholder Services, explained to Expert Investor that the objective of each is different.
While the relative star score analyses ESG risks and opportunities within fund groups, the absolute score measures the weighted absolute ESG performance without peer considerations, Jung said.
The prime status selects superior funds that perform above a certain ESG performance score and screens out those that underperform on certain sustainability norms or thresholds.
Funds are disqualified based on criteria, such as:
- Norm-based research
- Significant negative scores on ISS ESG’s SDG Impact Rating
- High carbon footprint
- Controversial weapons
- Voting behaviour
Jung explained that “the share of funds that are actually achieving the prime status is very low”.
This means that investors could be sure that ‘prime status’ funds are free of red flags and have low ESG risks in a variety of areas, he added.
Investors can also use the ESG rating as a second layer of analysis when they make their investment decisions.
“It could be a sign that a fund has opportunities, if it has a very good ESG performance; or if it’s performing very well but has a bad ESG performance, this could be a risk indicator.
“It’s forward looking, it is telling you something about the preparedness of the companies in terms of how they are coping with the increasing regulatory requirements [and topics] in this field,” he said.
The tool would also allow investors to align their funds closely with their responsible investment policies and monitor single portfolio holdings.
“We cover a myriad of different controversial business sectors where you can set up your exact threshold,” Jung said.
Businesses can be screened out based on specific coal production thresholds or behaviours, such as voting against sustainability proposals.
“You can see the fund managers who walk the talk, so to speak, and also vote in favour of ESG resolutions,” Jung added.