ACSI’s new Governance Guidelines

The Australian Council of Superannuation Investors (ACSI) provides voting recommendations to international asset owners and institutional investors through thorough research and engagement.

ACSI’s guidelines have been updated to reflect new issues. In this tenth edition, ACSI reports that they exclude from its guidelines details of foundational principles that can otherwise be found in the ASX Listing Rules and ASX Corporate Governance Council’s principles and recommendations.

While regulation on proxy advisers set to come into effect in early February (see HERE) threatens ACSI’s existence, it is still worthwhile to note these updates to the guidelines. The essence of these guidelines may be reflected by ACSI’s white label provider, Ownership Matters.

Key guideline changes, with Guerdon Associates commentary as appropriate, are below.

Climate risk management

ACSI has updated its guidelines to include a greater attention to climate risk management, ensuring that companies align their strategy and policies to the Paris Agreement and its targets, such as net zero emissions by 2050. This was flagged in the adoption of ACSI’s Climate Change Policy (see HERE).

The pathway to a low-carbon future is not a robust one, therefore ACSI determines that industry sectors and company peer groups define how a company may react to climate risks. ACSI stipulates the use of science-based assessments and effective communication to investors.

Seven core principles are defined by ACSI, against which it analyses relevant company disclosures and climate risk management. These principles include:

1. The adoption of the Task Force on Climate-related Financial Disclosures (‘TCFD’) risk assessment and reporting framework established by the United Nations Environment Programme (‘UNEP’).

2. Company strategies must align with the Paris Agreement net zero commitment. Also expected is the integration of these standards into financial areas including remuneration practices, wherever appropriate. The disclosure of a company’s long-term strategy and annual progress is also required for greater transparency with investors.

3. Whether a company exercises stress-test analyses of its strategy resilience against varying climate future possibilities and discloses the key assumptions and impacts.

4. Investment progression towards setting short-, medium- and long-term targets which align with the Agreement commitments.

5. Whether a company assesses the physical risks to portfolio assets, with consideration to resilience strategies and estimated costs.

6. Whether a company’s policy and advocacy activities are consistent with the Agreement goals. Additionally, whether it discloses material policy differences between the company and its industry, and any appropriate response.

7. Whether a company, in its transition strategy, considers the impact on employees and other stakeholders. Expectations also include the disclosure of key risks and company implementation plans to minimise negative impacts.

GA Commentary:

The United Kingdom (UK) has recently announced that a new regulation coming into effect in April 2022 will require all premium listed companies and financial institutions within the UK to disclose climate-related financial information, in line with the TCFD. This is followed closely by New Zealand’s own commitments to mandatory disclosure of climate-related financial information by financial institutions in 2023.

Modern slavery

ACSI expects relevant companies to adhere to the Modern Slavery Act of 2018.

ACSI requires genuine company engagement with the management of modern slavery risks and public disclosure. Disclosure of risks allows investors to assess the level at which their investment sits. ACSI also recognises an indicator of significant investment risk is an inconsistency between the reporting and the implementation of modern slavery risk improvements.

ACSI expects companies to identify modern slavery, proactively address the risks identified, and report their actions in mitigating this risk. Modern slavery risks are recognised by ACSI to be subject to the nature of each industry and falls to each company to establish a robust process through which they must identify, mitigate, and respond to modern slavery risks. This expectation is of a company’s operations, including its supply chain.

Gender diversity

ACSI highlights the importance of harnessing “collective intelligence” to manage the problems which arise internally and externally. It is the principle that a collective  “cognitive diversity” allows different reactions and responses to occur. ACSI requires board composition and diversification processes be disclosed for a positive voting recommendation.

ACSI states that gender diversity and measures to diversify executive personnel is given high consideration when engaging with companies. A progression towards gender diversity and the following targets are highly encouraged:

  • A company pledge to achieve gender balance (40:40:20) in executive leadership by 2030.
  • Company declaration of medium- and long-term gender targets for 2023 and 2027.

GA Commentary:

We observe that ASX-listed companies are disclosing gender diversity statistics in addition to the WGEA requirements voluntarily. This also includes data on the gender pay gap and gender pay equity.

First Nations

International standards have imposed a greater responsibility upon companies to respect First Nations’ rights and cultural heritages, and ACSI expects this also. Where this is not adhered to, companies may incur significant social costs and financial costs. These occur due to self-incurred reputational damage, low employee retention and engagement.

ACSI requires companies to respect the rights of First Nations people to protect and enjoy their lands. It warns that the undermining of a company’s long-term success is a real outcome of an unconstructive relationship with First Nations people.

Sexual Harassment

ACSI requires boards to ensure the active collection of information prudent to the response and prevention of sexual harassment. It is no longer sufficient to respond to sexual harassment without proactive prevention. Increasingly, long-term investors are interested in ensuring their investments are secure with companies that are well-run and have prevention measures in place for workplace sexual harassment.

The recent information released by Rio Tinto has set a benchmark that several have already used as a basis for disclosure by other companies working in the Pilbara.

Virtual technology use at AGMs

Virtual technology has faced an increase in popular usage across all areas of life in recent years, and ACSI has highlighted this by supporting the use of virtual technology to increase shareholder attendance at annual general meetings (AGMs) in a hybrid-model that incorporates in-person and virtual attendance. ACSI also promotes its support of the use of secure electronic voting to replace paper-based voting.

The above updates add to ACSI’s other governance guidelines, including regarding remuneration. It would be helpful here to summarily remind you of what not to do with respect to executive remuneration. ACSI opposes:

  • Incentives for making acquisitions;
  • ‘Catch-up’ fixed pay where pay freezes have been in place;
  • The use of adjusted earnings measures that do not capture costs to the company;
  • Dividend entitlement on unvested equity;
  • Retention payments with no clear and valid explanation;
  • Waiving of performance requirements on a change of control event;
  • Vesting of relative TSR-based equity at below median percentile performance.

The new Guidelines can be found HERE.

© Guerdon Associates 2024
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