The Evolving Landscape of Corporate Governance and ESG

Environmental, Social, and Governance (ESG) analysis has gone from niche to mainstream over the past few decades. ESG data helps identify risk, aid in portfolio construction, and increase engagement with investors. ESG investment has evolved from a value-driven subset of the market to an integral part of the mainstream investing in capital markets. In the early 1990s, sustainability ratings were still a special service provided to a select audience such as church investors, ethical funds, or small specialty banks primarily seeking to uphold ethical values. Today, mainstream investors see sustainability research as an indispensable source of insight into the successful management of investment risks and opportunities.

The shift has been driven by events such as the financial crisis, major environmental catastrophes, and governance scandals which hurt shareholder value. This has been coupled with the availability, relevance, and permeation of sustainability information and data across capital markets which has grown exponentially in recent years. Other key drivers have included both regulatory and voluntary initiatives such as the European Union Sustainable Finance Regulation and the Sustainability Accounting Standards Board (SASB).

Using ISS data, companies in developed markets were reviewed from 2012 to 2019 to compare changes in ESG ratings. There is a clear upward trend in average ESG performance. Companies with a medium, good, or excellent rating have grown to an all-time high in 2019. Companies with the poorest rating have grown to an all-time low in 2019. New standards such as SASB as well as rising awareness of the relevance of ESG factors for business success likely contributed to this progress.

ESG data continues to expand and evolve and new thematic areas include water scarcity, data protection, political spending, and human rights risks in companies’ supply chains. Other trends include investors challenging the composition of company boards and the structure of executive compensation. 2019 was the fourth year in a row that median CEO pay levels for S&P 500 CEOs rose. Median CEO pay levels increased to $12.9 million in the S&P 500 up from $12.15 million in 2018, according to ISS.

The recent expansion of ISS data on Open:FactSet provides the investment community with a powerful solution for evaluating the impact of corporate ESG rankings and executive compensation. Watch the webcast, The Evolving Landscape of Corporate Governance and ESG, for a deeper dive. 

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