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ESG Ratings and Their Disagreements

ISS ESG: Quality Scores, Proxy Voting, and the Corporate Governance Connection

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How Does ISS ESG Work and What Makes It Distinctive?

Institutional Shareholder Services (ISS) is best known as the world's largest proxy advisory firm — providing voting recommendations to institutional investors for annual meeting agendas at hundreds of thousands of companies globally. ISS ESG is the sustainability research and ratings division of ISS, providing ESG quality scores and data that are connected to, though analytically separate from, the proxy advisory business. This dual positioning — ESG ratings provider and proxy advisor — gives ISS ESG a distinctive integration advantage: its ESG research informs governance engagement, and its governance analysis informs ESG ratings in a way no pure ESG rating agency can match.

Quick definition: ISS ESG Quality Scores assess companies on environmental, social, and governance factors, with scores delivered on a decile basis relative to industry peers. ISS ESG's distinctive feature is its deep integration with ISS's proxy advisory research — governance quality assessments from the proxy side inform ESG scoring, and ESG research informs voting recommendations.

Key takeaways​

  • ISS ESG Quality Scores use a decile ranking (D1 = best 10% in universe, D10 = worst 10%) rather than a letter grade or raw score — making them inherently relative rather than absolute.
  • ISS's corporate governance research for proxy advisory purposes directly informs the G (governance) component of ESG scores — a unique integration that gives ISS ESG's governance assessment more depth than providers without a proxy business.
  • ISS ESG provides separate product lines: ESG Quality Scores (overall ESG assessment), Climate Physical Risk Scores, Business Involvement Screening (exclusion lists), and Governance Quality Scores (specifically for governance factor analysis).
  • ISS ESG was previously known as Oekom Research (a German ESG rating agency acquired by ISS in 2018) and retains some of the more normative, values-based orientation of its predecessor.
  • ISS was acquired by Deutsche Börse Group in 2021, maintaining its operating independence as a standalone proxy advisory and ESG research company.

ISS ESG Quality Score Methodology​

The ISS ESG Quality Score assesses companies across environmental, social, and governance dimensions. The methodology has evolved significantly since the Oekom Research acquisition:

Prime threshold: ISS ESG retains the concept of "Prime" status from Oekom — companies that meet a defined threshold of ESG performance are classified as "Prime," representing sustainability leaders in their sector. Prime status requires meeting absolute thresholds (not just relative ranking) for key sustainability criteria. This absolute-threshold aspect is unusual — while the decile ranking is relative, Prime status requires meeting specific criteria.

Decile ranking: The numerical score (D1–D10) places companies in deciles relative to their universe. D1 represents the top 10% by ESG Quality Score; D10 represents the bottom 10%. Institutional investors typically use D1–D3 as a minimum quality threshold for ESG screening.

Industry-specific criteria: Like other major providers, ISS ESG weights ESG criteria by industry relevance. An automotive company faces different criteria emphasis than a pharmaceutical company.

Absolute vs. relative assessment combination: ISS ESG uses both absolute criteria (is the company meeting minimum standards on specific issues?) and relative positioning (how does it compare to peers?). The Prime threshold reflects absolute standards; the decile ranking reflects relative performance.

ISS ESG scoring framework​

The Proxy-ESG Integration Advantage​

ISS's most distinctive characteristic is the integration between its proxy advisory and ESG research businesses. ISS analyzes corporate governance at thousands of companies annually for proxy voting recommendations — board independence, audit quality, executive compensation design, shareholder rights. This governance research is among the most detailed and systematic anywhere.

This governance analysis flows directly into ISS ESG's governance assessments. When ISS analysts conclude that a company's board independence is inadequate or that its executive compensation is poorly structured, this conclusion informs both proxy voting recommendations (vote against specific directors or say-on-pay) and ESG quality score governance inputs. The integration means ISS ESG's governance scores are grounded in the same deep analysis that makes ISS's proxy recommendations influential.

E-Score (Environmental Quality): Assessed through standard ESG data collection and analysis — emissions, environmental management systems, climate risk management, biodiversity.

S-Score (Social Quality): Labor practices, human rights, community relations, product responsibility, supply chain standards.

G-Score (Governance Quality): Board structure and independence, executive compensation design, shareholder rights, audit quality, anti-corruption controls — drawing on ISS proxy research database.

Business Involvement Screening​

ISS ESG's Business Involvement Screening Research (BISR) is a separate product that provides standardized data on company involvement in specific activities for use in exclusion screening:

  • Controversial weapons (cluster munitions, anti-personnel landmines, nuclear weapons, biological weapons)
  • Tobacco production and distribution
  • Thermal coal extraction and power generation
  • Gambling
  • Adult entertainment
  • Alcohol
  • Military contracting
  • Cannabis
  • Civilian firearms

BISR provides company-level revenue and involvement thresholds that allow institutional investors to implement their exclusion policies consistently, rather than relying on ESG quality scores for exclusion decisions. Many institutional mandates use BISR for exclusion alongside ISS or other providers' quality scores for ESG tilting.

ISS ESG Climate Physical Risk Scores​

ISS ESG has developed climate physical risk scoring that assesses company exposure to climate physical hazards — heat stress, water stress, flood risk, hurricane risk — at the asset level. Physical risk scores are based on the geographic footprint of company facilities and the modeled climate hazard exposure of those locations under different warming scenarios.

This physical risk product is used by institutional investors conducting TCFD-aligned climate risk analysis for their portfolios.

Real-world examples​

Proxy research governance integration: When ISS recommended that investors vote against the remuneration report at a major European bank in 2022 (finding that the compensation design was insufficiently tied to long-term performance), the same analysis contributed to the company's ISS ESG governance quality score reduction — demonstrating the integration in practice.

Prime status in sustainable fund selection: Multiple European sustainable funds use ISS ESG Prime status as an inclusion criterion — companies must be rated "Prime" by ISS ESG to be eligible for inclusion. This creates a meaningful ESG quality threshold that goes beyond decile ranking.

Climate physical risk in infrastructure assessment: Infrastructure investors use ISS ESG's Physical Risk scores to assess which portfolio assets face the highest climate physical exposure over their expected operational lifetimes — identifying assets where climate resilience investment or insurance strategy may be needed.

Common mistakes​

Confusing ISS ESG with ISS proxy recommendations: ISS ESG quality scores and ISS proxy voting recommendations are separate products produced by different analytical teams. A company can have strong ISS ESG scores while ISS recommends voting against its management on specific proxy items, or vice versa.

Treating Prime status as universal ESG certification: ISS ESG's Prime threshold is specific to ISS ESG's methodology. A company that is "Prime" by ISS ESG standards is not certified by any universal standard and may score differently on MSCI, Sustainalytics, or other rating systems.

Ignoring the legacy Oekom methodology elements: ISS ESG retains some normative elements from Oekom Research's European SRI orientation — for example, Prime thresholds that reflect absolute quality standards rather than purely financial materiality. Investors from North American traditions who are accustomed to purely financial-materiality ESG frameworks may find ISS ESG's approach more restrictive in some areas.

FAQ​

How does ISS ESG differ from Glass Lewis on governance?​

Glass Lewis is ISS's primary competitor in proxy advisory services but does not have a standalone ESG ratings product. Glass Lewis provides governance-focused research for proxy voting but does not produce comprehensive ESG Quality Scores or Business Involvement Screening products. ISS ESG's integration of proxy research into ESG scores is an ISS-specific advantage.

Are ISS ESG scores available to retail investors?​

ISS ESG data is primarily distributed through institutional channels — investment managers, pension funds, and ESG data aggregators. Retail investors do not typically have direct access to ISS ESG scores, though they may benefit from them indirectly through funds that use ISS ESG data in portfolio construction.

How does ISS handle companies that refuse engagement?​

ISS ESG assesses companies based on available public information when direct company engagement is not possible or productive. Companies that do not respond to ISS ESG questionnaires are assessed on publicly available information, which typically results in lower scores. ISS's proxy advisory business gives it leverage in some cases — companies are motivated to engage with ISS on governance research because ISS proxy recommendations affect voting at their annual meetings.

What is the ISS ESG Prime threshold in practice?​

Prime thresholds are sector-specific minimum scores that represent sustainability leadership. The exact thresholds are proprietary, but in practice Prime status is awarded to roughly the top 10%–20% of companies by sector in ISS ESG's assessment. Prime status is roughly analogous to "Leader" tier in MSCI (AAA-AA) or "Low Risk" in Sustainalytics, though the specific criteria differ.

Does ISS ESG provide carbon footprint data?​

Yes — ISS ESG provides scope 1, 2, and 3 emissions data alongside its ESG quality scores. Carbon data is integrated with physical risk scores and transition risk assessments to provide a comprehensive climate risk picture. Portfolio-level carbon footprinting using ISS ESG data is available for institutional climate risk reporting.

Summary​

ISS ESG provides ESG Quality Scores on a D1–D10 decile basis, with Prime status awarded to companies meeting absolute quality thresholds. Its most distinctive feature is integration with ISS's proxy advisory research, giving governance assessments unusual depth and real-world grounding in actual shareholder voting analysis. ISS ESG's Business Involvement Screening product provides standardized exclusion data used by many institutional investors. The firm's acquisition by Deutsche Börse in 2021 and the legacy of Oekom Research's normative European SRI orientation shape a methodology that combines financial-materiality analysis with more values-based elements absent from purely quantitative providers.

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