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Fail to plan, plan to fail: Considerations for 2024 proxy voting

Fail to plan, plan to fail: Considerations for 2024 proxy voting

Laith Cahill

Senior Net Zero Stewardship Specialist

The two major proxy advisors, ISS and Glass Lewis, are currently consulting on their benchmark proxy voting policies for the 2024 season. To help investors considering those surveys, we’ve listed a summary of IIGCC’s most relevant resources to the questions asked.

The invitation to consult on the 2024 proxy season presents a fantastic opportunity for investors to feed into next year’s service and to renew calls for net zero-aligned proxy voting advice – as called for in IIGCC’s letter to ISS in August.

IIGCC takes a holistic approach to climate stewardship, believing in the importance of engaging across the ecosystem to achieve the transition to net zero in line with a 1.5°C pathway. Proxy advisors play a pivotal role in climate stewardship and it’s why IIGCC has a dedicated proxy advisor working group to help facilitate engagement.

Questions about transition plans form the bedrock of the ISS survey for investors. To help them consider transition plans in their own context, we have summarised some of our most relevant resources below.

As a market participant, we have also prepared and published our response to the ISS consultation in the IIGCC member section.

Credible and clear

First and foremost, a transition plan should provide a credible and clear map for how the company intends to navigate the transition to a net zero economy in line with a 1.5°C degree world.

Justification for retaining this level of ambition is clear, with global studies including the UN Intergovernmental Panel on Climate Change (IPCC) SR1.5 and AR6 reports highlighting the significant physical and socio-economic impacts of overshooting the target. These include estimated temperature increases in most land and ocean regions, with hot extremes and rising sea levels which will erode coastlines.

Any such disruption impacts economies and supply chains, threatening life and economic stability, as well as the natural resources which fuel industry.

This is a global challenge in a state of near-constant development. For that reason, guidelines should be revised every three years to account for new macro-movements and to rebaseline for more challenging targets. Progress along the road, however, should be disclosed on an annual basis.

Picture of flooded road - by Phillip Flores

Whole economies

Clear transition plans and climate commitments are not only important to heavy-emitting companies. Whole economies and the sectors within them will need to transition to net zero if nations are to meet their commitments in line with the Paris Agreement.

The recently launched Net Zero Engagement Initiative highlights an investor need to look beyond the heaviest-emitting companies. It is also why IIGCC’s recent letter to ISS calls for its climate coverage to extend beyond Climate Action 100+ companies.

Nonetheless, heightened expectations are reasonable for the companies facing the greatest risks, whether physical or transition, because of high emitter status or the materiality of the sector to the transition.

Looking more closely at company plans, IIGCC’s Investor Expectations for Corporate Transition Plans recommends setting comprehensive targets, with absolute and intensity emissions addressed across the short-, medium- and long-term, and across all three scopes, as relevant and material.

This comprehensive resource was developed in consultation with asset owners, asset managers and climate experts.

An exclusive focus on either absolute or intensity emissions prevents investors from gaining a full understanding of the company’s emissions profile, the resource notes. Accordingly, it recommends that:

“Companies setting targets on an intensity basis should also state how they expect their targets to convert to absolute emissions.”

Failure to set Scope 3 targets risks overlooking the most pressing and material transition risks to the company. For example, the vast majority of auto emissions (95%+) are Scope 3, primarily from the use of the cars themselves.

A coherent approach

The quality of any targets will depend on whether they are consistent with a 1.5° scenario, relative to science-based and sector-specific net zero pathways.

Where science-based public source assessments are not available, proprietary data providers are increasingly meeting this demand. We recently delivered six asks to data vendors on behalf of investors to support this development. In turn, targets should be supported by a coherent approach across the company, including through its policy advocacy and executive remuneration.

Our guidance also highlights that many emissions-intensive companies are capital-intensive. Measures needed to cut their emissions or diversify into new low-carbon products require upfront investment.

Capital expenditure (CapEx) disclosures are therefore one of the best indicators investors can use to assess the credibility of plans to reduce emissions and potentially diversify into green solutions.

For investors committed to net zero, the launch of the ISS and Glass Lewis surveys presents a particularly important opportunity to submit their views ahead of proxy season 2024. We encourage members to submit their own responses to ensure that the proxy advisors are meeting the needs of investors, especially on climate change.

If you are interested in joining the IIGCC Proxy Advisor Working Group, please reach out to Laith Cahill.

Disclaimer: All written materials, communications, surveys and initiatives undertaken by IIGCC are designed solely to support investors in understanding risks and opportunities associated with climate change and take action to address them. Our work is conducted in accordance with all relevant laws, including data protection, competition laws and acting in concert rules. These materials serve as a guidance only and must not be used for competing companies to reach anticompetitive agreements. IIGCC’s materials and services to members do not include financial, legal or investment advice.