ISS putting its mark on climate change and diversity in 2022
13/12/2021
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Proxy adviser Institutional Shareholder Services (ISS) has released its proposed benchmark policy changes for 2022. They had requested for comments over November with the changes expected to take place from 1 February 2022 with a grace period to 1 February 2023. The changes focus on diversity, governance structures, climate change and compensation. Australia is off-cycle and the updates have not yet covered Australia. The changes for other large markets suggest a shift in focus which are expected to impact local ISS Australian 2022 guidelines.

Global

ISS is introducing a general policy towards Say on Climate proposals from both management and shareholders from FY2022 onwards. This is a reaction to the increased proposals presented at AGMs supported by ISS clients over 2021. The objective is to have a consistent and transparent framework of analysis across all of the markets.

For management, ISS will consider the completeness and rigour of the plan in its assessment. The main considerations are the report being in line with market standards especially TCFD, disclosure of emissions and targets, its plan towards “net zero emissions” by 2050 and any challenges that may arise. The disclosure needs to have third-party approval for being science based and the company has to commit to the report and plan for subsequent years.

The shareholder policy will take on a case-by-case basis towards shareholder proposals that request reports on the company taking actions towards mitigating climate change. ISS will consider the completeness and rigour of the current climate-related disclosure, actual GHG emissions performance, whether there has been recent controversy regarding the company’s GHG or if the report required is considered unduly burdensome.

US

ISS has expanded the scope of its gender diversity policy to include companies not in the Russell 3000 or S&P1500 from 1 February 2023 onwards. Nomination committee chairs will receive against votes if there are no women on the board unless there is a commitment to it in the coming year.

Companies with unequal voting rights will see votes against for all incumbent directors . There are exceptions for certain structures such as partnerships and where the effect is minimal. Newly listed companies would have to introduce a sunset clause of no more than 7 years to avoid against votes for the directors.

UK

ISS has added a section to focus on ethnic diversity in the UK. Constituents of the FTSE 100 without a member from an ethnic minority background will have against recommendations for the nomination chair. This will expand to the other constituents of other indexes by 2024. Currently, the smaller companies will need to publicly disclose a roadmap to this goal by 2024. This is in response to shareholder demand and taking recommendations from the recent Parker Review.

In a deviation from previous practice, ISS would allow ESG performance conditions into the performance scorecard for executives. The key is that the targets should be considered material to the business and quantifiable. This is in response to increasing investor expectations from ISS surveys and roundtable discussions. Investors are in support of ESG measures should the measure be relevant and assessed with the same stringency as financial measures. The IA Principles of Remuneration provides guidance on ESG objectives in performance measures. The amendment for ISS does not match the level of detail of IA. It supports the stance to include ESG measures in performance conditions so long that the link to strategy and business performance can be made and measured. See HERE for our response to the IA guidelines.

ISS continues to expect the majority of the incentive payout in the UK to be based on financial performance.

Europe

Non-financial performance conditions, particularly ESG criteria are now considered a relevant component of the scorecard. This is so long as it can be shown that the non-financial measure reflects an effective performance in line with the purpose, strategy and objectives adopted by the company. ISS Benchmark Policy Survey of investor respondents showed that over 50% agreed that ESG measures should be incorporated into executive remuneration. The caveat is that the measures need to be specific, measurable and transparently communicated.

ISS giving explicit guidance towards the expectations of the ESG measures shows that ISS is coming to ESG being a vital component for companies. This would be a strong precursor that similar measures would be introduced in Australia in the near future.

The latest updated to the ISS policy can be viewed HERE. The current ISS policy in Australia can be viewed HERE.

© Guerdon Associates 2022
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