On Monday, Institutional Shareholder Services Inc. (ISS) announced the launch of a new specialty proxy voting guideline focusing on climate-related issues. ISS explains that the new Climate Voting Policy aids investors in “incorporate[ing] climate-related considerations systematically into their engagement and proxy voting strategies across their portfolios.” This development is likely based on ISS’s 2019 annual policy survey results, which we shared in a prior summary. Those results show that 60% of the investor respondents believe that “all companies should be assessing and disclosing climate-related risks and taking action to mitigate them where possible.” Second to engaging with the company, both investor and non-investor survey respondents indicated that voting for a shareholder proposal seeking increased climate-related disclosure is a preferred way to respond to a company that fails to effectively report or address its climate change risk.
ISS explains that its Climate Voting Policy is based on principles developed from widely recognized international frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD). ISS adds that the new policy uses a “scorecard approach reflecting varied climate-related risk factors” and encompasses five topical pillars:
- Sector-specific materiality;
- Disclosure indicators aligned with TCFD disclosure requirements;
- Violations of any globally recognized climate norms;
- Current climate performance signals; and
- Future climate performance signals.
Like other ISS policies, ISS warns that it may make voting recommendations to hold individual directors accountable. Results of the ISS 2019 annual policy survey showed that over 50% of the investor respondents indicated that director accountability was an acceptable way to respond to companies that fail to provide adequate disclosure or address climate risks. The new Climate Voting Policy expressly states that ISS may issue a negative recommendation against individual directors, including responsible committee members, who ISS believes failed to “adequately address climate-related risks, realize climate-related opportunities, and improve climate-related performance.”
The Climate Voting Policy will initially apply globally across approximately 3,700 companies, covering 20 capital market indices, including the S&P 500 & Russell 1000. Indices in other geographic regions include FTSE 100 (U.K.), DAX 30 (Germany), ASX 200 (Australia), CAC 40 (France), OMX Copenhagen 20, OMX Stockholm 30, and the STOXX Europe 600. ISS anticipates regularly expanding the coverage over time.
The new Climate Voting Policy is the latest climate-related initiative geared toward investors that ISS has publicly announced. In 2019, ISS commenced offering investor custom climate change voting policies based on an institutional investor’s priorities and goals.
In addition, ISS is adding a Climate Awareness Scorecard (Scorecard) to select company reports and specialty policy research reports. According to ISS, the Scorecard is based on “publicly available data and ISS proprietary analysis on a company’s climate change-related disclosures, practices, and performance record, including its industry risk group.” Aspects of the new Climate Voting Policy appear to encompass the same or similar metrics and themes as the Scorecard.
The Scorecard includes four segments:
- Industry Climate Risk Exposure – Different industries have different exposure to climate change, and ISS takes two factors into account when classifying the absolute climate risk exposure of an industry:
- GHG emission and energy intensity of production; and
- GHG emission and energy intensity of the use of products and services.
ISS states that the Industry Level Risk has a scale of 1 (high risk) to 4 (low risk).
- Incident-Based Risk Exposure – This indicates whether the company is violating the standards of certain universally accepted climate norms, such as the Paris Agreement. ISS measures a company’s failure against these norms. ISS evaluates a company both at high and granular levels. For the granular level, the score range is from 10-1, with scores of 7 and higher indicating that there are violations.
- Current and Future Climate Performance – For the current number, the climate efficiency of a company is determined by assessing the current direct and indirect GHG emissions, normalized by revenue. ISS validates a company’s self-reported GHG emission data. If a company does not report GHG emissions, ISS will calculate a number.
For the future number, ISS uses its Carbon Risk Rating, which is a forward-looking metric composed of two elements: Carbon Performance Score and Carbon Risk Classification. The resulting score ranges from 0 to 100, where 100 is best.
- Climate Risk Disclosure – ISS believes that disclosure is a key indicator for assessing whether a company has a robust strategy to address the risks and opportunities of climate change. This segment aligns with the TCFD framework across four categories: governance, strategy, risk management, and metrics and targets. ISS applies the following scores: Standard Unmet, Partial Alignment, Meets Standard, or Exemplifies Standard.