Basics
Content Category: ESG
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ISS offers a wide-ranging set of climate solutions that allow investors to understand, measure, and act on climate-related risks across all asset classes. Climate change is among the top issues for investors globally and the financial sector has demonstrated an unprecedented commitment to climate leadership. This can be seen by the prominent role financial companies have taken in international climate initiatives such as the Montreal Carbon Pledge, the Task Force on Climate-related Financial Disclosures, and the Paris Climate Agreement. ISS ESG provides decisive data and actionable intelligence on climate change risk and its impact on investments.
ISS ESG Carbon & Climate Impact data is a comprehensive solution incorporating carbon footprint data, climate impact and scenario alignment, a Carbon Risk Rating, and robust physical risks data. The feed covers companies’ Scope 1 (direct) and Scope 2 (indirect) greenhouse gas emissions and intensity, Scope 3 (other indirect emissions), and transitional and physical climate risks for global companies.
The Carbon Risk Rating assesses the climate-related performance of companies, considering not only industry-specific challenges and risk profiles, but also a company’s positive impact.
Additionally, the data feed includes information on the business involvement of companies in the Energy and Extractives industries including information on business involvement in arctic drilling, hydraulic fracturing, oil sands, and shale oil and gas.
Data Overview
Asset Class: Public Companies and Issuers of Corporate Debt
Data Frequency: Annual
Delivery Frequency: Daily
History: Varies by package
Data Methodology
The ISS ESG Carbon & Climate Impact solution is broken out into four sub-packages listed below; each one has a specific area of focus. Each package also has differing collection and calculation methodologies, coverage, and history.
Climate Core
The Climate Core package contains information on a company’s carbon footprint, including Scope 1, 2, & 3 emissions raw data along with a carbon intensity metrics representing the GHG emissions per million USD/EUR of revenue as a proxy of the carbon efficiency per unit of output. This information is available on 25,000+ companies and issuers of corporate debt with history back to 2012. Data in this package is sourced from self-reported emissions numbers and is collected from all available sources, including the Carbon Disclosure Project, company CSR reports, and other direct sources of emissions data.
The self-reported numbers are evaluated for trustworthiness and poor-quality data is discarded. ISS then applies their own industry classification system that allows for benchmarking of non-reporting companies against their reporting peers with approximations applied for non-reporting companies. The methodology was established in 2010 and developed over three years in collaboration with researchers from the Swiss Federal Institute of Technology (ETH Zurich). It includes about 800 sector and sub sector specific models, allowing ISS ESG to calculate the GHG emissions of companies based on those criteria that are most relevant to their line of business.
Climate Impact & Climate Scenario Alignment
The Climate Impact package builds on the raw underlying data available in Climate Core, adding in derived metrics and benchmarks by geographical and sector classifications. Included are data points identifying a company’s key physical risk as well as peer emissions intensity information and flags for whether a company has science-based climate or emissions targets. The science-based targets information is sourced directly from the Science Based Targets Initiative (SBTi) website for committed and approved targets as well as ISS ESG data collected on ambitious and non-ambitious targets in addition to the SBTi.
The Climate Scenario Alignment data analyzes the current and future GHG emission intensity of an issuer to understand which climate scenario it is aligned with until 2050 based on its market share’s carbon budget. The data provides three climate scenarios utilizing the International Energy Agency’s (IEA) methodology: the Sustainable Development Scenario (SDS), the Stated Policy Scenario (STEPS), and the Current Policy Scenario (CPS).
Each scenario expects a certain level of temperature increase by 2100 and is thus tied to a carbon budget. A carbon budget specifies the cumulative amount of carbon dioxide emissions permitted to remain within a certain temperature by the end of the century. For example, to remain within the limits of the SDS, less carbon can be combusted compared to the scenarios that expect a significant temperature increase (i.e., the CPS).
ISS combines the International Energy Agency’s temperature scenarios with the Sectoral Decarbonization Approach developed by the Science Based Targets initiative to analyze a company’s alignment with each scenario. Each company’s direct combustion is evaluated for carbon-intensive sectors, while other sectors indirect emissions are more impactful.
The scenario alignment data is complemented by a company-level temperature score.
Carbon Risk Rating
The Carbon Risk Rating (CRR) is a holistic and forward-looking assessment of the climate-related risk of companies. It measures to which extent a company can mitigate transition risks based on its specific baseline carbon risk exposure. For this assessment, each company is assigned a company-specific baseline risk and a performance assessment measuring to what extent a company manages these risks. The CRR is based on two complementary elements:
- Carbon Risk Classification (CRC): a classification of a company’s individual exposure to climate change risks based on its industry assignment and company-specific business activities.
- Carbon Performance Score (CPS): a metric for the current carbon-related operational performance of a company as well as its capabilities to seize climate-related opportunities and manage its industry-specific climate risks in the future.
The Carbon Risk Rating is available for the full ISS ESG Rating Universe and assesses on a scale of 0 (very poor performance) to 100 (excellent performance) how a company deals with industry-specific climate risks both in its own operations as well as in the supply chain. It allows to categorize companies according to their carbon-related performance into four groups: Climate Laggards, Climate Medium Performers, Climate Outperformers, and Climate Leaders.
Climate Physical Risks
The Climate Physical Risks package provides in-depth analysis of the financial impact of physical climate risks on assets, issuers, and portfolios. The assessment covers current and future risk exposure to the costliest physical climate hazards including tropical cyclones, river floods, coastal floods, wildfires, heat stress, and droughts.
Future physical risk exposure is assessed for both a likely and a worst-case emission scenario and contrasted with current risk levels. The methodology uses granular corporate data to assess an issuer's geographical footprint and its exposure profile.
Additionally, it uses a proprietary financial valuation model to assess the issuer's Value at Risk from considering physical risks and further evaluates the robustness of an issuer's physical risk management strategy via a score.
The output is suitable for reporting according to the TCFD and other reporting frameworks.
Energy and Extractives
The Energy and Extractives package provides detailed information on a company’s involvement in various energy-generation activities. This includes information on activities such as Arctic Drilling, Coal Mining, Hydraulic Fracturing, Nuclear Power, and Oil Sands among others. Data points cover reserves, potential emissions, and percentage of revenues sourced from each activity, along with ISS ESG’s assessment of risk associated with each activity.
The sources of data include annual reports, regulatory filings, sustainability reports, press releases, investor presentations, company websites, and other company disclosures. Third-party information such as government sources, industry databases, and reputable newspapers are cross-referenced as supplemental to company disclosures. To ensure transparency, ISS ESG clearly indicates when data is company disclosed and when it is estimated/calculated.
Use Cases
Portfolio Reporting
- Several key disclosure frameworks have emerged requiring greater transparency around climate change, the environment, and company (and portfolios) carbon footprints. ISS ESG Carbon & Climate Impact data is designed to support investors who want to comply with key disclosure frameworks such as TCFD, the Montreal Pledge, PRI, and others.
- Asset owners are demanding more transparency from the institutional managers they hire. ISS data exposes raw, detailed climate and carbon information that facilitates a thorough understanding of how an investment portfolio impacts climate change.
Portfolio Construction
- ESG investing is one of the fastest growing segments of professional asset management. ISS ESG Carbon & Climate Impact data provides investors with the tools to create differentiated products based on high quality, reliable, and relevant climate data.
- By providing investors with granular information on a company’s GHG emissions, detailed business involvement, and alignment with climate scenario’s ISS empowers asset managers to build portfolios that meet their investor’s needs. Whether it is negative or positive screening, impact investing, or corporate engagement, the data included here gives an investor everything they need to make informed decisions.
- Align portfolios with climate scenarios that are in accordance with the Paris Agreement.
Portfolio Risk Analysis
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- Identify the costliest physical risks your portfolio is exposed to and how an event could impact its value.
The details provided above are as of June 2021.
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