2020 U.S. Climate Proxy Voting Guidelines

This post is based on a publication by Institutional Shareholder Services, Inc. Related research from the Program on Corporate Governance includes Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff (discussed on the Forum here) and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Introduction

Many investors, companies, policymakers, and other stakeholders increasingly recognize that the environmental threats of climate change pose significant economic and business risks. Following the 2015 Paris Agreement, most governments are now committed to curb carbon emissions to avoid average global warming of more than 2 degrees Celsius compared to pre-industrial levels. Climate change is today among the top issues for many institutional investors who face the risk of asset loss in a low-carbon future, and who seek to better understand how various potential scenarios could affect short-, medium-, and long-term business sustainability and investment performance.

ISS’ Climate Proxy Voting Guidelines

Proxy voting is a key shareholder right and responsibility, and, in the context of climate change, is a tool that investors can use to help actively manage and mitigate exposure to climate-related risks in their portfolio companies. In response to investor demand to be able to address climate change-related concerns through voting, ISS has developed a climate-focused specialty proxy voting policy (Climate Policy).

ISS’ extensive and unique climate data and proprietary research along with issue expertise is used to provide a model for assessment of a company’s climate-related performance and disclosures that, in turn, is used to inform climate-based proxy voting recommendations for subscribing clients. The model also draws on widely recognized frameworks including the Task Force on Climate-related Financial Disclosures (TCFD) and balances the need for good disclosure on climate-related-risks with a company’s performance on key climate-related factors. It includes a view on a company’s greenhouse gas (GHG) emissions, its climate strategy, and the impact of its activities on climate, putting these into context within its sector and incident-based climate risk exposure. Factors used to evaluate a company’s climate-related performance fall under five primary categories: climate norms violations; disclosure indicators; current performance indicators including greenhouse gas emissions data; future performance indicators drawing from the ISS Carbon Risk Classification (CRR); and Carbon Risk Classification. The factors are used to assess a company’s risks associated with the impacts of climate change, along with its preparedness to face and mitigate those risks in an increasingly carbon-restricted economy. The model’s expectations used to assess performance practices are defined by industry groups, based on the specific climate risks identified in industry and multi-stakeholder initiatives and reflected in authoritative standards such as the Global Reporting Initiative, the Sustainability Accounting Standards Board standards, and TCFD recommendations. In cases of assessed underperformance, ISS’ Climate Policy will provide relevant information, flags, and voting recommendations. As such, the Climate Policy can be part of a climate-concerned investor’s toolbox and can complement shareholder engagement and other initiatives.

On matters of corporate governance, executive compensation, and corporate structure, the Climate Policy approach is based on principles of best practice as typically defined by investors, and a focus on creating and preserving long-term economic value.

ISS will update the Climate Proxy Voting Guidelines on an annual basis to consider emerging trends on climate change and other related environmental, social, and governance issues, and on relevant developments in market standards and regulations as well as investor feedback.

1. Routine / Miscellaneous

Adjourn Meeting

Climate Policy Recommendation: Generally vote against proposals to provide management with the authority to adjourn an annual or special meeting absent compelling reasons to support the proposal.

Vote for proposals that relate specifically to soliciting votes for a merger or transaction if supporting that merger or transaction. Vote against proposals if the wording is too vague or if the proposal includes “other business.”

Amend Quorum Requirements

Climate Policy Recommendation: Vote against proposals to reduce quorum requirements for shareholder meetings below a majority of the shares outstanding unless there are compelling reasons to support the proposal.

Amend Minor Bylaws

Climate Policy Recommendation: Vote for bylaw or charter changes that are of a housekeeping nature (updates or corrections).

Change Company Name

Climate Policy Recommendation: Vote for proposals to change the corporate name unless there is compelling evidence that the change would adversely impact shareholder value.

Change Date, Time, or Location of Annual Meeting

Climate Policy Recommendation: Vote for management proposals to change the date, time, or location of the annual meeting unless the proposed change is unreasonable.

Vote against shareholder proposals to change the date, time, or location of the annual meeting unless the current scheduling or location is unreasonable.

Other Business

Climate Policy Recommendation: Vote against proposals to approve other business when it appears as voting item.

Audit-Related

Auditor Indemnification and Limitation of Liability

Climate Policy Recommendation: Vote case-by-case on the issue of auditor indemnification and limitation of liability. Factors to be assessed include, but are not limited to:

  • The terms of the auditor agreement–the degree to which these agreements impact shareholders’ rights;
  • The motivation and rationale for establishing the agreements;
  • The quality of the company’s disclosure; and
  • The company’s historical practices in the audit area.

Vote against or withhold from members of an audit committee in situations where there is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.

Auditor Ratification

Climate Policy Recommendation: Vote for proposals to ratify auditors unless any of the following apply:

  • An auditor has a financial interest in or association with the company, and is therefore not independent;
  • There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of the company’s financial position;
  • Poor accounting practices are identified that rise to a serious level of concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures; or
  • Fees for non-audit services (“Other” fees) are excessive.

Non-audit fees are excessive if:

  • Non-audit (“other”) fees > audit fees + audit-related fees + tax compliance/preparation fees

Tax compliance and preparation include the preparation of original and amended tax returns and refund claims, and tax payment planning. All other services in the tax category, such as tax advice, planning, or consulting, should be added to “Other” fees. If the breakout of tax fees cannot be determined, add all tax fees to “Other” fees.

In circumstances where “Other” fees include fees related to significant one-time capital structure events (such as initial public offerings, bankruptcy emergence, and spin-offs) and the company makes public disclosure of the amount and nature of those fees that are an exception to the standard “non-audit fee” category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.

Shareholder Proposals Limiting Non-Audit Services

Climate Policy Recommendation: Vote case-by-case on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services.

Shareholder Proposals on Audit Firm Rotation

Climate Policy Recommendation: Vote case-by-case on shareholder proposals asking for audit firm rotation, taking into account:

  • The tenure of the audit firm;
  • The length of rotation specified in the proposal;
  • Any significant audit-related issues at the company;
  • The number of audit committee meetings held each year;
  • The number of financial experts serving on the committee; and
  • Whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive price.

The complete publication, including footnotes, is available here.

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