Institutional Shareholder Services (ISS) has launched its Annual Benchmark Policy Survey (available here) to help inform potential changes to its voting policies for the 2023 proxy season. This year, ISS includes a series of questions focused on climate-related board accountability, climate transition plans and management “say on climate” resolutions, climate risk as a critical audit matter, and financed emissions for companies in the financial sector. Other topics covered include racial equity and civil rights disclosures, multi-class capital structures, problematic governance practices, and shareholder approval of share issuances at non-U.S. companies.

The survey will close on August 31, 2022, at 5pm ET. ISS will also host roundtable discussions and other engagements as part of its policy update process. ISS typically announces proposed policy changes in October and adopts its final policy changes in mid- to late-November. More information on ISS’s policy development process is available here.

Climate Change Risk Management (Global)

Noting that climate change has emerged as one of the highest-priority stewardship issues for investors and that “there is a widely held view that directors should be held accountable for overseeing disclosure and actions to put companies on a footing to manage their various risks related to climate change,” the 2022 survey is focused on climate change risk management spanning a range of topics. ISS notes that the detailed feedback provided to the separate policy survey on climate-related matters in 2021, as we discussed here, informed the implementation of a policy for companies considered to be significant greenhouse gas (GHG) emitters, i.e., the Climate Action 100+ focus group of companies (available here), and other policy changes for 2022. For example, in 2022, ISS adopted a policy to recommend that investors vote against the incumbent chair of the committee responsible for (or other directors on a case-by-case basis) at Climate Action 100+ companies if they do not adequately disclose climate risk and GHG emissions reduction targets. Accordingly, ISS requests feedback on the following climate-related matters:

  • Board Accountability. ISS is considering what actions (or inactions) at significant GHG emitters demonstrate poor climate change risk management rising to the level of “material governance failure” such that ISS should recommend voting against directors. Potential examples cited include: the absence of adequate disclosure with regards to climate-related oversight, strategy, risks and targets according to a framework such as the one developed by the Task Force for Climate-related Disclosures (TCFD); not having declared a “net-zero by 2050” ambition; not having or tracking toward realistic medium term targets (through 2035) for GHG emissions; and/or not showing or tracking toward an absolute decline in GHG emissions.
  • Uniformity of Board Accountability Policy. As noted in 2021, ISS adopted the list of Climate Action 100+ focus group companies as the appropriate target universe for the application of its policies and for establishing benchmark standards and definitions. Noting the limited application of the new climate board accountability policy to Climate Action 100+ companies based in the U.S., Europe, UK/Ireland and Russia, ISS asks respondents whether they would support the application of the policy uniformly in all markets or it there should be differentiation by market or some other approach.
  • Adequacy of Company Transition Plan. ISS’s current policy is to recommend in favor of management proposals to approve climate transition plans on a case-by-case basis taking into account the completeness and rigor of the plan and certain other considerations. ISS is seeking to understand investor priorities when determining if a company’s climate transition plan is adequate, which could include: alignment with TCFD recommendations or other market standards; “net zero” goals; comprehensive and realistic medium term targets for reducing emissions to net zero with varying levels of detail; third-party approval of science-based targets (e.g., the Science Based Targets Initiative); disclosure of minimum commitments in a report; third party assurance of climate data; and/or financial assumptions, alignment of capital expenditures with company strategy, evaluation of changes in GHG emissions, or other considerations.
  • Climate Risk as a Critical Audit Matter. ISS notes that some investors are requesting that companies ensure that their financial reporting includes material climate change risks and are prepared using assumptions consistent with the Paris Agreement on climate change. Furthermore, ISS cites a 2021 report that indicates most of the world’s largest publicly-listed GHG emitters are not adequately considering climate risks in their financial reporting. In the survey, ISS asks whether respondents would favor auditors commenting on climate-related issues in the case of significant emitters and whether climate risk considerations should be among the “critical audit matters” or “key audit matters” (depending upon the market) considered by auditors and, if not, what should be the appropriate actions for a shareholder to take (such as voting against re-election of audit committee members or against the re-appointment of auditors, or supporting a related shareholder proposal)..
  • Financed Emissions. In response to shareholder proposals in 2022 that requested companies in the finance sector to restrict their financing or underwriting for new fossil fuel projects, ISS asks what investors should appropriately expect from large companies in the banking and insurance sectors regarding GHG emissions associated with their lending, investment and underwriting portfolios. The range of suggested responses includes: expectations of disclosure of either direct (not financed) emissions or financed emissions; expectations of targets relating to either their own emissions or financed emissions; and expectations of a commitment to cease financing or underwriting new fossil fuel projects. ISS also asks how investors’ minimum expectations on thresholds for climate-related disclosure and performance are expected to change over time, if at all.

Racial Equity or Civil Rights Audits (U.S.)

In 2022, ISS adopted a new policy pursuant to which ISS will evaluate, on a case-by-case basis, shareholder proposals requesting racial equity and/or civil rights audits taking into account a number of relevant factors relating to the company’s disclosure and performance in the areas of racial equity and/or civil rights. Noting the increased number and support of such proposals in 2022 and that certain jurisdictions permit racial equity or civil rights audits, ISS seeks feedback on whether respondents believe that companies benefit from such audits, where permissible. ISS also asks what company-specific factors would be relevant to consider if a company would benefit from a racial equity or civil rights audit, such as if there have been significant diversity-related controversies, whether the company provides workforce diversity statistics, disclosure of processes for handling implicit or systemic bias, diversity data shows lack of minority representation or increases of such representation, training initiatives and other efforts.

Multi-Class Capital Structure and Policy Exemptions (U.S.)

As announced in 2021, beginning in 2023, ISS will recommend against directors at previously “grandfathered” companies that maintain a multi-class capital structure with unequal voting rights, with a “de minimis” exception when the capital structure does not meaningfully disenfranchise public shareholders (e.g., where most of the super-voting shares have already been converted into regular common shares). Questions posed in this year’s survey seek to inform how ISS should apply this policy change, including: how to determine “de minimis” ownership (5%, 10%, 20%); factors that could lead to an exemption from the new policy; and which directors should be the target of the adverse recommendation. Further, citing companies where public shareholders do not have the ability to vote on certain directors, such as the CEO, board chair or members of the founding family, and only have the ability to vote on a limited number of independent directors, ISS asks whether shareholders of such companies should vote against those directors to protest the multi-class capital structure.

Problematic Governance Structures (U.S.)

ISS is considering various other refinements to its problematic governance practices policy.

  • Time Period for a “Reasonable” Sunset for IPO Companies. ISS is considering the time period that would be considered reasonable (e.g., 3 years, 3-7 years, 7 years) for determining whether a sunset provision would mitigate a negative recommendation when certain problematic governance structures, such as a classified board or supermajority vote requirements to amend governing documents, are adopted by newly public companies.
  • Exempting Smaller Companies. ISS asks whether smaller companies should be exempted from negative recommendations for maintaining classified boards and/or supermajority vote requirements and, if so, what size company would be considered sufficiently small (e.g., companies outside of the Russell 3000, S&P 1500 or S&P 500).
  • Supermajority Voting. Recognizing that not all supermajority vote requirements are alike, including that some provisions require the support of up to 85% of the outstanding shares, ISS asks whether a two-thirds voting requirement to amend governing documents should generally be considered acceptable.

Share Issuance Mandate Policies (U.S.)

ISS notes that companies incorporated outside of the U.S., even those considered U.S. domestic issuers by the SEC, may be required by the laws of their country of incorporation to obtain shareholder approval for all share issuances. All share issuances at U.S. companies, however, do not require shareholder approval, unless specifically required by stock exchange listing rules and, therefore, ISS does not have a U.S. voting policy or a policy for foreign private issuers (FPIs) for share issuance mandates. Currently, ISS applies the policy of the company’s local market of incorporation to such proposals. In the survey, ISS requests feedback on what policies it should apply to cross-market market companies incorporated outside the U.S. but solely listed in the U.S. citing the following alternatives: (i) the foreign market policy should continue to apply (which would generally result in recommendations against shares issuances without preemptive rights in excess of 10% of issued capital); (ii) ISS should generally recommend votes in favor of share issuance mandates regardless of the local market policy; or (iii) ISS should develop a U.S.-specific policy for share issuance mandates. In addition, ISS asks what level of dilution would be acceptable for issuances without preemptive rights if ISS adopted a U.S.-specific policy, how frequently companies should seek shareholder approval for share issuance mandates, whether the same policy should apply to dual-listed companies and companies solely listed in the U.S., and whether the same policy should apply to FPIs and U.S. domestic issuers.