ISS has released the results of its annual global benchmark policy survey, a survey that is used every year as part of ISS’ policy development process.  This year, the survey included a number of questions on climate change risk management—including board accountability, management say-on-climate proposals, climate risk as a critical audit matter, financed emissions and climate expectations—and then addressed other governance issues such as potential policy exemptions for multi-class capital structures, handling of problematic governance structures and views on proposals calling for third-party racial equity and civil rights audits. ISS received 417 responses to this year’s survey, including 205 from institutional investors or investor-affiliated organizations (an increase of 29% over last year) and 202 responses from companies and corporate-affiliated organizations, with the remainder from academic and other responders. Not surprisingly, investor and non-investor respondents often had disparate views.

Key findings of the survey identified by ISS include the following:


Climate-related board accountability. The survey questions related to companies that are considered “significant GHG emitters” (defined as those in the Climate 100+ Focus Group), asking what types of actions should be considered indicative of a “material governance failure”—leading to an ISS vote recommendation against directors.  According to the survey, 86% of investor respondents and 60% of non-investor respondents expected companies to provide climate change risk disclosure and to take action.   Likewise, a significant majority of respondents viewed a company that is a significant contributor but is “not providing 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 on Climate-related Financial Disclosures (TCFD)” to be demonstrating a material governance failure.  Investor respondents viewed the boards of companies that were large GHG emitters to be “failing” if they were not taking steps to address emissions, although there were differences of opinion on what steps to take. Following inadequate disclosure, the three most common “failures” identified by investor respondents were targets-related, including “(i) a company not setting realistic medium-term targets (through 2035) for Scope 1 & 2 only (50% of investors), (ii) not declaring a net-zero by 2050 ambition (47% of investors), and (iii) not setting realistic medium-term targets (through 2035) for Scope 1, 2 & 3 if Scope 3 is relevant (45% of investors).” “Realistic” targets are targets that “do not overly rely on technologies that are not yet commercially available and are not overly reliant on offsets.”

Management say-on-climate proposals. In connection with management say-on-climate proposals, the survey results showed that investor and non-investor respondents emphasized somewhat different criteria for assessing whether management’s climate transition plans were “adequate.” Among investor respondents, ISS identified as the top priorities “(i) whether the company has set adequately comprehensive and realistic medium-term targets for reducing operational and supply chain emissions (Scopes 1, 2 & 3) to net zero by 2050 (42 percent), (ii) whether the company’s short- and medium-term capital expenditures align with long-term company strategy and the company has disclosed the technical and financial assumptions underpinning its strategic plans (41 percent), (iii) and the extent to which the company’s climate-related disclosures are in line with TCFD recommendations and meet other market standards (38 percent).” Non-investor respondents looked to “whether the company’s disclosures are in line with TCFD recommendations and other market standards (54 percent), … whether the company discloses a commitment to report on the implementation of its plan in subsequent years (35 percent) [and] whether the company has comprehensive and realistic medium-term targets for reducing operational emissions (Scopes 1 & 2) to net zero by 2050 (23 percent).” ISS reports that some investors questioned the propriety of management say-on-climate proposals, contending that “these proposals improperly shift the responsibility for a company’s climate transition plan away from the board and management toward its shareholders.”

Climate risk as Critical Audit Matter. While non-investor respondents largely disfavored having auditors comment on climate-related risk for significant GHG emitters, investor respondents were mostly on board with the idea. According to ISS, 75% wanted to see commentary on climate risk for significant emitters by auditors in the audit report; 64% supported reporting climate-related risk as a Critical Audit Matter; and 52% would support a related shareholder proposal on this issue. Voting against the re-election of the audit committee and reappointment of the auditors in the event climate is not included among the reported CAMs was apparently a bridge too far for many, however, receiving only 42% and 35% support respectively. Some respondents raised the issue of whether assessing these risks is within auditors’ current expertise. Others observed that, depending on regulatory developments, the disclosure may soon be a market norm.

Financed emissions. There were a number of shareholder proposals this past proxy season that asked primarily financial institutions “to restrict their financing or underwriting for new oil and gas development in line with the assumptions in the International Energy Administration’s Net Zero 2050 Scenario.” In response to a question from ISS about financial institutions, ISS reported that 54% of investor respondents said that, in 2023, “large companies in the banking and insurance sectors should fully disclose their financed emissions”; 51% should “have clear long-term and intermediary financed emissions reduction targets for high emitting sectors”; 49% indicated that they should have a “net-zero by 2050 ambition including financed portfolio emissions”; 45% said that they “should publicly commit to disclose financed emissions at some point in the future by joining a collaborative group such as the Partnership for Carbon Accounting Financials (PCAF) and/or the Glasgow Financial Alliance for Net Zero (GFANZ)”; and 30% “voiced support for these companies committing to cease financing for new fossil fuel projects.” On the other hand, 40% of non-investor respondents indicated that “companies in the banking and insurance sectors should not be expected to comply with shareholder requests on financed emissions” and “expressed lower support than investors for companies in these sectors declaring targets to reduce financed emissions.”

Climate expectations. Most respondents are anticipating that more and more will be expected in terms of climate disclosure and performance over time. According to ISS, investor respondents identified heightened focus on aligning targets with net-zero, with target verification performed by organizations such as the Science Based Targets initiative (SBTi); more climate-related information (including industry-specific considerations) driven by regulatory changes and industry practices, together with more effective utilization for greater comparability between companies; increased disclosure of Scope 3 GHG emissions, which would then be integrated into investors’ strategies; and more focus on companies’ investing in low-carbon products and greater expectation of corporate climate strategies that result in reductions in GHG  emissions. On the other hand, some did not expect a change in best practices, but rather that “disclosures that are considered to be optional or nice-to-have now will become expectations in the future.”


Board accountability for multi-class share structures. In 2015, ISS adopted a policy to vote against directors of newly public companies that retained certain governance provisions that ISS disapproved, including multi-class capital structures with unequal voting rights (in the absence of a reasonable sunset provision), classified boards and companies with supermajority vote requirements to amend governing documents.  However, ISS grandfathered companies that already had those provisions. In 2021, in response to survey data, ISS removed the differential policy application that arose out of that grandfathering. Beginning with meetings on and after February 1, 2023, ISS will generally recommend a withhold or against vote for certain directors if the company has a multi-class common stock structure with unequal voting rights. The policy contained some exceptions, however, including exceptions for circumstances where the unequal voting rights do not “meaningfully disenfranchise public shareholders.”  But what does that mean? According to ISS, a “de minimis” exception will apply, for example, “where most of the super-voting shares have already been converted into regular common shares.” While a strong majority of investor respondents agreed that there should be an exception (32% preferred that there be no de minimis exception), they were divided on the exact threshold. Most often selected by both investor and non-investors was a threshold of “no more than five percent.” While most investor respondents did not consider other factors relevant—“any capital structure that disenfranchises public shareholders is problematic”—45% of non-investors considered as relevant factors limitations on super-voting rights, 38% considered whether the company is controlled (or de facto controlled) by current officers/directors (27% of investor respondents) and 25% considered the degree to which ownership of super-voting shares is dispersed to be relevant (19% of investors).  In designating appropriate targets for an adverse vote recommendation in this context, respondents generally favored any director who holds super-majority shares and the chair of the governance committee. However, 29% of non-investor respondents preferred that no directors be targeted. Investor respondents also identified as adverse vote targets the board chair and/or lead independent director (34%) and members of the governance committee (33%).

Other problematic governance structures.  With regard to other problematic governance structures (such as classified boards or supermajority vote requirements) at newly public companies, ISS views the inclusion of a reasonable sunset provision as a mitigating factor.  But what is a reasonable time period?  Between three and seven years was the time period selected by 43% of investor respondents and 37% of non-investors. 

There was a split between investors and non-investors as to whether smaller companies should be exempted from negative vote recommendations for maintaining a classified board or supermajority voting requirement:  a strong majority of investor respondents were against providing an exception, but almost two-thirds of non-investor respondents thought that smaller companies should be exempted from either one or both of those provisions. With regard to requiring a 2/3 supermajority vote to amend governing documents, 54% of investor respondents were opposed and 84% of investor respondent were in favor.


Racial equity audits. In 2021, a number of companies received shareholder proposals requesting racial equity or civil rights audits “to assess potential racial bias throughout their business practices, both internal, directed at the company’s board and workforce, and external, directed at customers, communities, and other stakeholders.”  In 2021, ISS adopted a new policy providing for a case-by-case analysis, looking at the company’s disclosure and performance in this area.  The number of these proposals grew in 2022.  In the ISS survey, only 13% of investors and 25% of non-investors thought a survey would provide no benefit for most companies. About 42% of investor respondents and 19% of non-investor respondents thought most companies would benefit from an audit irrespective of history or criteria, and 45% of investor respondents and 56% of non-investor respondents indicated that whether a company would benefit from this type of audit depended on “company-specific factors including outcomes and programs.” But what are those criteria?  Most often, respondents said that a history of “significant diversity-related controversies” was the most appropriate criterion, followed by “whether the company disclosed workforce diversity representation statistics, such as EEO-1 type data, and has undertaken initiatives/efforts aimed at enhancing workforce diversity and inclusion, including training, projects, and pay disclosure.”  Least often selected as a relevant factor was whether or not the company “offered products or services and/or made charitable donations with a specific focus on helping create opportunity for people and communities of color.”

Posted by Cydney Posner