Jack Steenson
Corporate Programme Manager
Institutional Shareholder Services (ISS) and Glass Lewis have released their annual benchmark policy surveys. Responses to these surveys will feed into the policies that inform their voting recommendations. They give investors the opportunity to engage with ISS and Glass Lewis to ensure that the views of the investment community are considered, and that climate is fully integrated into their analysis.
ISS and Glass Lewis continue to be the most dominant proxy advisors in the market and as such do essential work to support investor proxy voting, providing timely analysis and helping to inform engagements.
IIGCC welcomes the opportunity presented to investors and other stakeholders to feed into the ISS and Glass Lewis benchmark policies through the annual survey process. It is a chance to ensure that the analysis reflects a changing world, and meets investor needs. It is important that we continue to see greater ambition on climate-relevant voting issues.
We recommended that investors respond to these surveys and submit their own individual responses to ensure both proxy advisors are responsive to their needs.
To provide a resource for support, we’ve highlighted climate-related topics across both surveys below. Many of these areas have been the focus of our wider IIGCC research and publications, and are key priorities for our investor members.
The Glass Lewis and ISS surveys have now closed. IIGCC members can access our responses to the ISS survey here and Glass Lewis here.
Scope 3 greenhouse gas emissions
As we’ve outlined in our guidance on investor approaches to Scope 3, the scope 3 emissions data of investee companies is vital for investors looking to credibly decarbonise their portfolios and manage climate-related risks. Disclosures on scope 3 emissions and targets provide investors with the information to gauge and engage with the progress companies are making as part of their Paris-aligned commitments.
The survey provides an opportunity for investors to draw greater attention to the incorporation of scope 3 disclosure requirements by calling on proxy advisors to place more of a priority on scope 3 in their benchmark policies.
Non-financial reporting (including assurance)
Greater scrutiny of non-financial reporting is important, and a key part of our voting guidance. Proxy advisors have the capacity to encourage best practice by drawing attention to the quality and ambition of such reports, or lack thereof. Beyond codified requirements to publish on time, and in the correct manner, proxy advisors can be a medium to encourage higher standards on the handling of ESG controversies, underperformance and the quality of reporting.
To ensure high quality, we’d also encourage the inclusion of limited assurance on all non-financial reporting (noting that companies in scope for CSRD, must start with limited assurance and move towards reasonable assurance at a later date).
The question of whether assurance for non-financial reports should be delivered by the statutory auditor is an interesting one. Firms may use the same auditor for financial and non-financial reporting to create greater consistency across reports. However, there is also an opportunity for smaller alternative firms to gain a foothold in the market on the sustainability reporting side.
Assessing transition plans
Investors have paid more attention to transition plans in recent years. As a result, climate strategy is increasingly seen as an integral part of corporate strategy. Beyond simply having a transition plan, as highlighted in our guidance on best practice for transition plans, it is important that investors engage with the quality of any such plan.
If proxy advisors included factors like: alignment to emissions targets, credible strategy to deliver on targets, engagement commitments which work towards achieving targets, engagement with climate solutions and disclosures around emissions and accounting, as fundamental pillars of a comprehensive and ambitious plan, they would more accurately reflect investor priorities on transition plans.
Our Net Zero Voting guidance for investors specifically outlines areas which should qualify as grounds for engagements with companies, such as when proper reporting standards have not been met, long-term financial and climate outlooks have not been accounted for and targets and strategy lack credibility and alignment with global goals such as the 1.5C scenario.
Requirements for climate-related shareholder proposals
Shareholder climate resolutions have proliferated as investors push companies to respond to the risks posed by climate change. Support for shareholder climate resolutions is significant. In 2023, 62% of Net Zero Asset Managers Initiative members voted in support of climate resolutions alongside 48% of non-members, according to data from ShareAction.
Our guidance frames the use of shareholder proposals as a part of a wider conversation with the company. Rather than a form of escalation, it should be a normal part of communicating net zero expectations. Consequently, the ambition of climate-related shareholder proposals shouldn’t be limited by fears of being “overly prescriptive” or infringing on a board’s oversight of strategy.
Similar to how assessments of company transition plans are conducted, shareholder proposals can simply be a process of highlighting where fundamental pillars of climate strategy are absent in a company’s policies, or where they are out of step with best practice.
Proxy advisors can support this relationship by increasing transparency in what pillars it considers in its analysis to form the basis of a vote recommendation. Greater understanding of the process, greater reflection of investor priorities for climate action in that process, and more consistent recommendations across jurisdictions would render climate-related shareholder proposals a suitable platform to engage with companies on their approach to climate change.
Virtual-only AGMs
Both surveys highlight virtual-only AGMs as areas of interest. While we recognise the flexibility and convenience that virtual AGMs can create, our insight from investors is that they materially limit the degree of engagement pressure that shareholders can exert on companies. In-person AGMs offer the crucial opportunity to ask direct questions and hold individuals to account for their climate strategy and performance towards net zero.
Engage with proxy advisors
Proxy voting is a key strategy for investors to communicate their ambitions for climate action to companies. Proxy advisors have the capacity to facilitate these engagements by ensuring that the process and platform they provide for investors reflects investor priorities for climate.
Investors can make those priorities known by providing feedback in these surveys.
Investors will have until 30 August and 5 September to submit responses to the Glass Lewis and ISS surveys, respectively.
Note: The IIGCC does not recommend the use of any proxy advisor or other service. All decisions on the use of proxy advisor and other services remain decisions for Members. Where a particular service may be of use to Members and further the aims of the IIGCC, we may draw it to the attention of Members for information purposes.
If you’d like to take part in our working groups and help to shape the outputs of our resources, why not speak to our investor relations manager today to find out more about becoming a part of IIGCC?