Specialty voting guidelines proliferate at the proxy advisors, but to what end?

RI looks at what custom policies mean for shareholder voters

ISS’ specialty Climate Voting Policy is the latest addition to its custom voting policies. The others are: SRI, Sustainability, Faith-Based, Taft-Hartley (mostly labour funds so-called after the Act that established them), and Public Fund policies. Like the other specialty voting policies, there is both a US-based policy and an international version. Along with the voting policy, ISS is also offering a custom climate voting service so clients can: “Tailor your voting at portfolio companies based on their climate change risk, disclosures and performance.”

ISS, of course, is not the only proxy advisor to offer custom voting policies, though it is better at commoditising them. Most of its competitors offer similar services. 

While not specifically focused on climate change, Glass Lewis’ E&S Services provides custom analysis of shareholder resolutions, allows users to incorporate E&S performance into voting decisions and helps firms with E&S investment mandates. It is not solely focused on climate as is the new ISS product, but would seem to be roughly equivalent to ISS’ sustainability voting policy. A representative from Glass Lewis told RI: “We’ve certainly seen an increase in the number of clients adopting our ESG guidelines in recent years. Though, more often than not, it really serves as a jumping off point for our team of policy experts to work with the client to tailor an approach that codifies their own policy priorities.”

Similarly, Egan Jones proxy voting service also offers voting principles and guidelines that focus on SRI. Egan Jones also offers Taft-Hartley voting guidelines, and Catholic and Conservative investor guidelines, alongside its standard policies. In its press release announcing the latest round of changes to voting guidelines in 2020, the firm gives a grid showing how each of these sets of principles would recommend voting. Fairly predictably, the Taft-Hartley, SRI and Catholic principles show a good deal of overlap.

Moving to Europe, Manifest/Minerva has its own Minerva Sustainability Score which is “fully incorporated into shareholder voting policies so that investors can vote to encourage change at companies which fail to disclose their climate change risk management plans”. But, rather than offer custom off-the-shelf voting products, Minerva customizes voting guidelines individually, reflecting its belief that most responsible investors agree that “one size doesn’t fit all” in ESG.

Only Proxinvest in France appears not to offer pre-packaged specialized SRI, Sustainable or climate-related voting guidelines, either through its French arm or its UK-based ECGS service, instead offering customized guidelines depending on client needs, similarly to Manifest/Minerva.

But this leads to a question: how different are SRI, E&S, Sustainable, and Climate voting policies? An assessment by law firm Baker Hostetler of the new ISS policy found the same level of overlap between several voting guidelines as could be identified in the Egan Jones press release: “The Sustainability guidelines and the Climate guidelines provide the same voting guidance to groups,” it notes, “that differ only due to the slightly broader scope of issues of concern for the Sustainability guidelines as opposed to the carbon emissions-focused Climate guidelines. Finally, the SRI guidelines and the Catholic Faith-Based guidelines provide nearly the same guidance, with the exception of some specific shareholder proposals that a faith-based investor might elect to vote against rather than abstain from.” 

Most of the distinctions between ISS’ standard voting guidelines and these specialty ones are focused on voting recommendations for shareholder resolutions, with standard voting guidelines recommending clients to vote against climate resolutions while Climate voting guidelines recommend support. Standard guidelines and specialty guidelines in general show little distinction in voting recommendations for directors, management resolutions and other standard governance issues, except in one specific instance noted in the press release: “ISS’ Climate Voting Policy may recommend adverse votes on the re-election and/or discharge (in applicable markets) of board members responsible for climate-related risk oversight or for failures to sufficiently oversee, manage, or guard against material climate change-related risks.”

ISS’ special counsel, Pat McGurn, in an interview with RI, said: “It does echo existing specialty policies but it does diverge in some important aspects; for example, support for some of the more aggressive shareholder resolutions on climate change risk. Also votes recommended against directors under the climate voting policy are more systemic, based on a lack of adequate oversight.”

It’s a little early in the voting season to give many examples of distinctions between the climate voting policy and the benchmark policy, though McGurn did offer two examples. At Broadcom, the US semiconductor and infrastructure software company, a vote was recommended by the new policy against Eddy Hartenstein, the chairman of the environmental oversight committee, “for failing to adequately address the risks and opportunities of climate change”. He did, indeed, receive fewer votes than his board colleagues. At Bank of Montreal, the climate policy recommended support for a ‘cutting edge’ shareholder resolution from Harrington Investments regarding the bank’s financing of fossil fuel projects not sitting well with its public statements about climate risk. The proposal received just over 10% support.