Investors slam ISS for not heeding climate concerns

Investors have called on the influential proxy adviser to consider climate-related improvements before it announces its final benchmark policy changes.

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Investors including Aegon, AP3, Danske Bank and Sarasin & Partners have criticised ISS Governance for not including climate in its proposed benchmark voting policy changes.

The influential proxy adviser this week launched a consultation on its proposals for 2024. These cover Canada’s policy on board diversity, Japan’s policy on election of directors and on takeover defence plans, and APAC’s regional policy on equity compensation plans.

The comment period closes on 30 November, and ISS expects to announce final changes in December.

ISS Governance last year consulted on 17 policy changes, including social and environmental shareholder proposals in the US and climate board accountability for high-emitting companies. This year, it has only proposed four.

In August, more than 30 investors, led by the Institutional Investors Group on Climate Change’s (IIGCC) proxy adviser working group, asked ISS to integrate climate on a “more robust and consistent basis” through its benchmark, which is one of the most widely used voting recommendations services.

The letter called on the proxy adviser to provide a speciality net-zero policy for the 2024 proxy season, as well as board accountability, transition plans, shareholder resolutions and Climate Action 100+ net-zero company benchmark alignment.

IIGCC corporate programme director Peter Taylor told Responsible Investor he was “disappointed” not to see climate-related changes or improvements.

“By failing to integrate climate into their widely used benchmark voting policy, ISS is failing to respond to a clear need expressed by its clients in the investor community, and undermining their ability to mitigate against systemic climate risks to their portfolios,” he said.

This was echoed by Natasha Landell-Mills, head of stewardship at Sarasin & Partners. She noted that ISS’s own recent annual benchmark survey revealed clients want to see “more comprehensive and consistent coverage” of material climate factors in voting analysis.

“None of this” seems to have been reflected in ISS’s proposals, she said, which “raised questions” over the firm’s responsiveness to clients, as well as the quality of its voting analysis.

Landell-Mills said a new proxy provider should be created “that listens to investors, provides a credible net zero-aligned voting service, and reinvigorates a market that appears to have become stagnant”.

A spokesperson for AXA Investment Managers added that ISS’ survey results show investors expect a “consistent approach” on how climate, biodiversity and human rights issues are considered, as well as a “strong expectation that ESG risks should override risks from ESG politicisation”.

Samantha Chew, stewardship lead at Aegon UK, said the investor had “concerns” with ISS’s approach to director accountability, transition plans, shareholder resolutions and alignment to the CA100+ net-zero company benchmark alignment.

“We would also like to see more focus by ISS on companies’ policy engagement, which we believe is typically underutilised, but is key to addressing climate change,” Chew added.

Peter Lundkvist, head of corporate governance at AP3, supported the proposed changes, but said he would like to see ISS go further by requiring companies to include Scope 3 (where applicable) in their targets, and set absolute emissions targets consistent with halving emissions by 2030.

Companies should also have to adapt their investment plans in line with 1.5C, he said, and ISS should consider how to approach the election of board members in companies that do not adhere to this criteria.

Danske Bank Asset Management’s head of active ownership Oshni Arachchi said the manager would also welcome a focus on nature-related risks, “given the increased understanding on the importance of the issue”.

She welcomed the updates proposed on board diversity in Canada, which aligns with Danske Bank AM’s approach.

The manager believes companies “should strive for equal gender representation at board and executive level, and may vote in favour of proposals aiming to increase disclosure regarding the gender pay gap ratio and measures taken to promote gender equality”, she said.

Arachchi added that boards should also identify how sustainability issues impact risks and business opportunities for companies.

ISS has been approached for comment.