B3’s sustainability index will disclose companies’ ESG ranking positions
São Paulo, July 20, 2021 – Pioneer in Latin America, the B3 Corporate Sustainability Index (ISE B3) has just been revised to streamline its methodology and make it more transparent for investors, allowing for rankings to be assigned to publicly-traded companies that are most advanced in the environmental, social and corporate governance (ESG) agenda. Launched in 2005, the ISE B3 index invites the companies whose listed stocks rank in the top 200 positions by liquidity to participate in its selection process.
The new methodology considers the disclosure of an overall score for all the companies that participate in the index selection process (including those that are not selected), in addition to the scores obtained in each of the 28 issues that integrate the following dimensions: Environment, corporate governance and senior management, human capital, social capital, and business model and innovation.
All this information will be available to the general public at www.iseb3.com.br in January of 2022, when the new methodology takes effect. Disclosure of such data will enable investors, for example, to more clearly direct resources to companies with the highest ESG scores according to the ISE B3 index. Currently, the index methodology does not contemplate disclosure of individual scores or of scores by issues, making it impossible to provide comparisons between different sectors and companies in the country.
“The ISE B3 index is not only an important indicator for investors who are hungry for sustainable assets, but it also plays a role in encouraging companies to advance their ESG practices in Brazil,” said Ana Buchaim, the managing director of People, Marketing, Communication and Sustainability at B3.
According to Ms. Buchaim, the index revision, the most important one to be implemented in the 16 years of its existence, reinforces the process transparency and allows for the most advanced companies in the ESG agenda to stand out in the ISE B3 index portfolio. “It is part of our commitment to the evolution of the sustainability agenda to deliver an indicator that matches the sophistication that the market has been gaining in this area in Brazil,” added Ms. Buchaim.
B3 has also brought in partners with internationally recognized methodologies to assess image risk and climate change issues, allowing assessments to be even more robust. The climate change score, for example, is now based on the Carbon Disclosure Project (CDP), an international organization created by investors that requests information on climate change from the world’s largest companies. A company’s CDP score must be equal to or above C in order to be included in B3’s index. The same goes for the companies’ reputational risk, which is now evaluated by RepRisk, whose RRI index score must always be less than or equal to 50 in the two years prior to index rebalancing.
According to Rebeca Lima, the executive director of CDP Latin America, “CDP has been helping to put climate change at the center of decision-making for the last 20 years. Today, more than 10,000 organizations report their data on climate ambitions on our platform. In this sense, CDP joins the ISE B3 index to provide an integrated reporting, in order to make it easier for the companies that disclose data through these two initiatives. But the CDP-ISE B3 partnership goes beyond the integration of data and information, as it amplifies the impact of both organizations’ efforts to promote corporate transparency and climate reporting.”
“We are excited with this partnership with B3,” said Alexandra Mihailescu Cichon, the executive vice president of sales and marketing at RepRisk. “RepRisk data enable financial decision makers to quickly react to material ESG risks that may translate into financial, reputational or compliance risks. We are proud to offer this capability to investors in the South American market by linking our daily-updated, risk-focused ESG data to B3’s sustainability-focused index. We are also proud to work with B3 to create further progress in ESG-oriented investment strategies, especially because of the unprecedented growth ESG has experienced in recent years.”
More frequent updates – The new ISE B3 methodology will also increase the portfolio revision frequency, making it possible to capture possible changes to company management in a shorter period of time. Instead of a single annual assessment, companies that make up the index will be updated twice a year, in May and September.
To assure that the scores obtained by the best companies also influence the ISE B3 index portfolio, changes made as of 2022 will ensure that the companies with the highest scores also be given greater weight in index composition. As a result, the indicator will no longer reflect only the companies’ market values, but also their grades in the overall score, which is now the main criterion used by the index.
The new methodology was built in concert with various stakeholders. B3 listened to and incorporated demands and suggestions made by investors, entrepreneurs and analysts, in addition to 55% of the 1,278 contributions from a public consultation.
“The process has become more straightforward and the questions are closer to what the market is used to reporting, considering their synergy with international standards. However, the questionnaire reduction process has not affected the issues covered. On the contrary, the level of demand for ESG has not only been climbing, but it has also become more intuitive to participate in the process,” said Luís Kondic, the managing director of Listed Products and Data at B3.
Companies can apply as of July 20th at www.iseb3.com.br.
What changes in the ISE B3 index?
- Disclosure of individual scores obtained by index constituents, including details on issues ranging from human capital to business practices and climate change, allowing for comparisons between companies and between sectors. Information will be available at www.iseb3.com.br.
- Specific questions about the sector in which each index constituent operates are included in the questionnaires, enabling a more in-depth company analysis
- Reputational risk as a criterion for a company’s removal from the portfolio
- Portfolio rebalancing twice a year, allowing for shorter term adjustments
What changes for companies?
- A 40% questionnaire simplification and reduction by reorganizing questions, combining similar topics and eliminating inconclusive issues, including climate change, which will be provided by the CDP questionnaire responses
- Free application. A top BRL35,000 fee was previously charged.
- Alignment with international standards
- Elimination of the maximum number of companies allowed in the index
- Greater transparency and comparability in each company’s ESG journeys