Vetting of Bloomberg’s ESG Governance ISS: QualityScore [GQS™]: Discriminant Testing

Abstract

Recently, vetting investigations were conducted of the Institutional Shareholder Services [ISS] taxonomy whereby firms are assigned to Corporate Governance-Risk[CGR] decile-groups:[GQS[1] the lowest CGR-group and GQS[10] the highest CGR-group] based upon ISS:GovernanceQualityScores: (GQS™). These results are available in the Environment, Social, and Governance [ESG™]-platform offered by Bloomberg™ Professional Services. These vetting investigations indicated: (i) there was no evidence that the ISS-taxonomy used, as a driver, the reported magnitude of the accounts of the Balance Sheet or Income Statement, (ii) for the GQS[1]-group the ISS-taxonomy assignment seemed to align with Managing of the Revenue at the margin while that of the GQS(10) aligned with Net Asset management. In the second study, a group of experts were given two groups of GQS firms, 10 from each of the two-polar groups. They used the Bloomberg ANR©-platform and any other information that they desired to assign these 20-firms into two groups. There was no evidence that their assignment aligned with the ISS-CGR-assignment. These studies affirmed that the ISS-CGR assignment is not likely driven by the firm’s periodic reported performance profile. Current Study We offer an extension of the vetting of the ISS-assignment to determine if there is discriminant evidence that a set of 21-financial variables from the Balance Sheet, Income Statement, Cash Flow Statement, and the Market Reported Annual Market Price are aligned with the reported ISS-triage of the firm into one of the ISS:CGR-polar groups. This will address a question begged by the study where there was alignment with the Revenue or the Net Asset Management basis for the Firms in the ISS;polar-groups. Results We elected to use a single BBT-Account Panel matched with the ISS-Polar Assignments to form the Discriminant 2×2 Classification-profile. This allows the computation of: (i) the percentage of the Misclassifications, (ii) inferential measures, and (iii) the R2 Entropy measure. We used these inferential measures to profile the discrimination of the BBT-Panel vis-à-vis that of the ISS-Assignment. Interestingly, among the 21 Discriminant Classification Matrices there were NO cases where the Nulls of no effect of these inferential measures could be rejected in favor of alignment of the Panels with the ISS-taxonomic assignment. Summary There was no Individual Panel over the 21 Accounts that indicated that the Accounts of these BBT-Panels could have been the likely driver of the ISS-assignment.