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ISS tightens up climate target voting guidelines for 2023

By Jessica Tasman-Jones

This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards

ISS, an influential proxy adviser, has tightened up its policy about what constitutes adequate climate targets for high-emitting companies.

Last year ISS asked for “any well-defined GHG (greenhouse gas) reduction targets". Such disclosure was considered sufficient and would avoid ISS recommending a vote against directors.

But this year its global voting policy guidelines are more specific. ISS wants carbon-intensive companies to set medium-term GHG reduction targets – or net zero by 2050 targets – for scope 1 and 2, which covers operations and energy use respectively.

ISS has also tightened its policy on how much of a company’s emissions these targets should cover. In 2022, it said targets should cover a “significant” portion of direct emissions. But the 2023 global policy stipulates targets have to cover "the vast majority" of a company's operations, and ISS quantifies this as 95 per cent of scope 1 and 2 emissions.

Without these, ISS will deem a company’s disclosure to be inadequate and will recommend voting against appropriate directors (this will apply to board chairs in the UK and Ireland).

The rules apply to all company meetings held from February onwards. The businesses affected are those in the Climate Action 100+ (CA100+) list of high emitters. This includes BP, Volkswagen, Unilever and others.

Disclosure requirements are unchanged between 2022 and 2023. ISS expects them to be in line with frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD).

A majority of companies, 57 per cent, supported using the TCFD framework as a basis for the policy, according to an ISS consultation. However, only a minority of companies, 27 per cent, supported using scope 1 and 2 reduction targets.

In the UK, reporting against the TCFD has been mandatory for premium-listed companies for a year, but it will kick in for 2022 fiscal years for standard-listed companies, says Lindsey Stewart, director of investment stewardship research at Morningstar Europe.

There is still a learning curve for many directors, particularly those on audit committees, he adds.

ISS acknowledged some institutional investors wanted it to go further and recommend voting against directors at high-emitting companies that do not disclose scope 3 emissions. These include much wider factors such as business travel, investments, waste disposal and even commuting.

Financial institutions such as banks and insurers should fall into the scope of the policy too, argues Peter Uhlenbruch, director of financial sector standards at responsible investment charity ShareAction. These sectors are responsible for financing the real economy that the CA100+ initiative is trying to decarbonise, he argues.

The update also focuses on reporting rather than the actions a company takes to reduce emissions. "Though the voting policy allows for voting against directors in cases of absent climate targets and disclosure, there remain important absent criteria for more impactful areas such as 1.5C aligned business strategies, lobbying and capital expenditure plans,” says Uhlenbruch.

Voting against directors over climate reporting is already happening, says Stewart.

In 2021, for example, ExxonMobil shareholders voted in favour of the appointment of three independent directors put forward by activist hedge fund Engine No. 1.

"If they haven’t already started, there’s an urgent need for boards to think about how climate risk and disclosure is embedded into the company’s strategy and risk management, especially for businesses that are highly exposed to climate risks, and dedicating resources to meet regulatory and investor demands for better information and disclosure," he says.

Eos, the proxy adviser owned by US asset manager Federated Hermes, last year recommended voting against directors at Volkswagen and ConocoPhillips over climate risks.

Volkswagen's disclosure and public policy engagement activities around climate change were concerning, says head of stewardship for Eos at Federated Hermes Bruce Duguid.

Meanwhile, directors at ConocoPhillips had failed to address a successful shareholder vote from the previous year requesting the setting of emissions targets covering scopes 1, 2 and 3, he adds.

"Ultimately, recommending a vote against a director signals our belief that the director is failing in their duties to promote the success of the company and create long-term value for shareholders," says Duguid. It is one of the strongest actions a shareholder can take and therefore can be very effective, he adds.

But AGM votes are also a relatively blunt tool, says Duguid. Boards only see an aggregated percentage of votes for or against a resolution and which likely represents a collection of different rationales from shareholders, he says.

This article is based on a story written for Agenda by Lindsay Frost.

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