ISS ran their 2021 Global Benchmark Policy Survey from 28 July 2021 to 27 August 2021 and, on 1 October 2021, released the results of this survey. On 4 November 2021 ISS made available for public comment a number of proposed changes to ISS’s benchmark voting policies for 2022. Finally, on 7 December 2021, ISS announced their policy updates for the 2022 AGM season3.
The updates will be effective from 1 February 2022 and apply to all shareholder meetings thereafter. The below memo summarises the policy changes that will be applied across UK & Ireland and Continental Europe.
The most important changes applicable to large-cap companies across the UK & Europe fall under the following categories:
Social and Environmental Issues (applicable across UK & Europe)
- Climate accountability
UK & Ireland
- Board diversity (ethnic diversity)
- Non-financial ESG performance conditions
- Election of a former CEO as Chair of the Board
- Board gender diversity
- Share issuance requests
- Increases in authorised capital
- Executive compensation-related proposals
- Equity-based compensation guidelines (with removal of French exception)
Say on Climate (SoC) management proposals
ISS has introduced guidelines for Say on Climate management proposals. Their general recommendation policy states that ISS will “vote case-by-case on management proposals that request shareholders to approve the company’s climate transition action plan, taking into account the completeness and rigour of the plan. Information that will be considered where available includes the following:
- The extent to which the company’s climate related disclosures are in line with TCFD recommendations and meet other market standards;
- Disclosure of its operational and supply chain GHG emissions (Scopes 1, 2, and 3);
- The completeness and rigour of company’s short-, medium-, and long-term targets for reducing operational and supply chain GHG emissions (Scopes 1, 2, and 3 if relevant);
- Whether the company has sought and approved third-party approval that its targets are science-based;
- Whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1, 2, and 3) by 2050;
- Whether the company discloses a commitment to report on the implementation of its plan in subsequent years;
- Whether the company’s climate data has received third-party assurance;
- Disclosure of how the company’s lobbying activities and its capital expenditures align with company strategy;
- Whether there are specific industry decarbonisation challenges; and
- The company’s related commitment, disclosure, and performance compared to its industry peers.”
ISS has also introduced guidelines for Say on Climate shareholder proposals. ISS will recommend to “vote case-by-case on shareholder proposals that request the company to disclose a report providing its GHG emissions levels and reduction targets and/or its upcoming/approved climate transition action plan and provide shareholders the opportunity to express approval or disapproval of its GHG emissions reduction plan, taking into account information such as the following:
Governance Failures: Material Environmental & Social Risk Oversight Failures
Under its policy on board accountability, ISS has added explicit reference to poor risk oversight of environmental and social issues amongst the examples of material failure that may result in adverse vote recommendations for directors individually, committee members, or the entire board.
- The completeness and rigour of the company’s climate-related disclosure;
- The company’s actual GHG emissions performance;
- Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to its GHG emissions; and
- Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive.”
When it comes to climate accountability, ISS will focus on the 167 companies currently identified as the Climate Action 100+ Focus Group list.
In 2022, the updated guidelines state that “for companies that are significant greenhouse gas (GHG) emitters, through their operations or value chain, generally vote against the responsible incumbent director(s) ”[in the UK & Ireland “against the board chair”]” or any other appropriate item(s) in cases where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate change to the company and the larger economy.”
ISS clarifies that “for 2022, minimum steps to understand and mitigate those risks are considered to be the following. Both minimum criteria will be required to be in compliance:
- Detailed disclosure of climate-related risks, such as according to the framework established by the Task Force on Climate-related Financial Disclosures (TCFD), including:
- Board governance measures;
- Corporate strategy;
- Risk management analyses; and
- Metrics and targets.
- Appropriate GHG emissions reduction targets.”
For 2022, “appropriate GHG emissions reductions targets” will be any well-defined GHG reduction targets. Targets for Scope 3 emissions will not be required for 2022 but the targets should cover at least a significant portion of the company’s direct emissions. Expectations about what constitutes “minimum steps to mitigate risks related to climate change” will increase over time.”
United Kingdom & Ireland
Board diversity (ethnic diversity)
Under the new ISS guidelines the scope of board diversity is expanded beyond gender diversity to include ethnic diversity. From 2022, ISS “will generally recommend against the chair of the nomination committee (or other directors on a case-by-case basis) if the company is a constituent of the FTSE 100 index (excluding investment companies) and has not appointed at least one individual from an ethnic minority background to the board.
Furthermore, there is an expectation for constituents of the following indices (excluding investment companies) to appoint at least one individual from an ethnic minority background to the board by 2024:
- FTSE 250 index;
- FTSE SmallCap;
- ISEQ 20;
- Listed on the AIM with a market capitalisation of over GBP 500 million.
The abovementioned companies are expected to publicly disclose a roadmap to compliance with best market practice standards of having at least one director from an ethnic minority background by 2024.”
Non-financial ESG performance conditions
ISS has clarified that “Environment, Social and Governance (ESG) performance conditions may be used but targets should be material to the business and quantifiable. There should also be a clear link between the objectives chosen and the company's strategy.”
Election of a Former CEO as Chair of the Board
ISS has removed the circumstances they considered an exception in case a former CEO is nominated as chair of the board. The new guidelines state to “generally vote against the (re)election of a former CEO to the supervisory board or board of directors in Austria, Germany, and the Netherlands if the former CEO is to be chair of the relevant board. To this end, companies are expected to confirm prior to the general meeting that the former CEO will not be (re)appointed as chair of the relevant board. Given the importance of board leadership, ISS may consider that the chair of the board should be an independent non-executive director according to the ISS' Classification of Directors.”
Board gender diversity
ISS has updated their guidelines when considering to vote against the chair of the nomination committee (or other directors on a case-by-case basis) if the under-represented gender accounts for less than 30 percent (or any higher domestic threshold) of board shareholder-elected directors of a widely held company. The new guidelines clarify that the 30% gender diversity quota is not applicable to employee shareholder representatives.
Share issuance requests - general issuances
ISS added a section to clarify that under the guideline the “thresholds are mutually exclusive”, and adding that “when calculating the defined limits, all authorised and conditional capital authorisations are considered, including existing authorisations that will remain valid beyond the concerned shareholders’ meeting.”
In terms of explanation, they clarify that “share issuances that may lead to a capital increase of up to 60 percent are generally supported: 50 percent with pre-emptive rights plus 10 percent without pre-emptive rights”. Additionally, “all authorisations are considered: both the existing authorisations that remain effective after the concerned general meeting and the authorisations proposed at the general meeting under analysis”.
Increases in authorised capital
ISS has rewritten the guidelines around increases in “authorised capital”. In the new guidelines a distinction is made between dilutive and non-dilutive measures, the limitation is removed, and the case-by-case approach depends on the local legal framework of authorised capital, taking into account shareholders’ interest.
From 2022, the general recommendation will be to “vote for proposals to increase authorised capital on a case-by-case basis if such proposals do not include the authorisation to issue shares from the (pre-) approved limit. In case the proposals to increase authorised capital include the authorisation to issue shares according to the (pre-) approved limit without obtaining separate shareholder approval, the general issuance policy applies.”
Executive compensation-related proposals
ISS have updated their expectations, in line with SRDII, around remuneration disclosure, making three main additions to their existing guidelines.
Firstly, they now state that companies “are expected to provide meaningful information regarding the average remuneration of employees of the company, in a manner which permits comparison with directors’ remuneration”.
Secondly, when outlining their expectation that companies adequately disclose all elements of the compensation including, they now refer to a “derogation policy, if applicable, which shall clearly define and limit any elements (e.g., base salary, STI, LTI, etc.) and extent (e.g., caps, weightings, etc.) to which derogations may apply”.
Lastly, ISS has clarified their expectation over how to avoid arrangements that risk “pay for failure”. The new guidelines now state that there “shall be a clear link between the company’s performance and variable awards incentives. Financial and non-financial conditions, including ESG criteria, are relevant as long as they reward an effective performance in line with the purpose, strategy, and objectives adopted by the company”.
Equity-based compensation guidelines (with removal of French exception)
ISS updated their guidelines to align with current investor sentiment and local best practice standards on performance criteria and their measurement, including a cliff three-year performance period, and removes the preference for relative performance measures.
Additionally, they have removed from their guidelines the market-specific provision for France relating to the unadjusted burn-rate. They explain that “French market specifics are removed, as the burn rate has nearly never been used to oppose an equity-based compensation plan but as a flag to alert shareholders. This provides consistency across Continental European markets.”
The updated guidelines state: “generally vote for equity-based compensation proposals or the like if the plan(s) is(are) in line with long-term shareholder interests and align the award with shareholder value. This assessment includes, but is not limited to, the following factors:
- The volume of awards (to be) transferred to participants under all outstanding plans must not be excessive: awards must not exceed 5 percent of a company’s issued share capital. This number may be up to 10 percent for high-growth companies or particularly well-designed plans (e.g., with challenging performance criteria, extended vesting/performance period, etc.);
- The plan(s) must be sufficiently long-term in nature/structure: the vesting of awards (i) must occur no less than three years from the grant date, and (ii) if applicable, should be conditioned on meeting performance targets that are measured over a period of at least three consecutive years;
- If applicable, performance conditions must be fully disclosed, measurable, quantifiable, and long-term oriented;
- The awards must be granted at market price. Discounts, if any, must be mitigated by performance criteria or other features that justify such discount.”