In its recently updated “Policies & Procedures FAQs,” influential proxy advisor ISS explains its approach to environmental and social-related shareholder proposals. The proxy advisor prefaces the discussion by saying that most of its clients are long-term shareholders – so they’re focused on issues that affect long-term value.
The General Approach
In FAQ 103, ISS says that it will generally recommend “for” proposals that ask for additional disclosure – if the proxy advisor believes that the disclosure will help the company understand its risks and isn’t burdensome. The FAQ doesn’t explain how ISS determines whether something is burdensome, but making a case for that in a statement of opposition could help companies get a favorable recommendation. ISS also says it’ll generally support proposals that request a feasibility study – if the issue is material and there’s a sound rationale that it will benefit shareholders. Lastly, the proxy advisor will support direct action requests if there are significant controversies and/or the company’s policies and practices lag “accepted norms.”
What’s “Financially Material”
FAQ 104 says that ISS takes a long-term approach to assessing “financial materiality.” Here’s an excerpt:
ISS analyzes potential metrics by sector and seeks to focus on the E&S factors that could impacta company’s business model and value drivers, such as revenue, capital, and risk. ISS uses ISS ratings such as the E&S Quality Score and the Climate Awareness Scorecard and external ratings such as the CPA Zicklin Index, the Corporate Human Rights Benchmark, and the CDP scorecard, which aim to identify and measure areas of financially material environmental and social risks through company disclosure. ISS also refers to the metrics identified as materialby the Sustainability Accounting Standards Board, which are developed in collaboration with market participants.
Data shows that firms with better E&S practices incur lower costs, experience greater employee productivity and satisfaction, and are more aware of and able to manage risks. In contrast, companies with E&S-related controversies are coming under increasing scrutiny as stakeholders become more aware of the risks and opportunities associated with E&S. Moreover, the regulatory environment and international investment community continue to push for improved disclosure, as most recently shown by the commitments made to the UN’s Principles for Responsible Investment (PRI)
Controversies & Peers
In FAQ 105, ISS explains that its reports will include a “potential controversy” section if a company has allegedly violated internationally accepted norms. Note, Glass Lewis has also started issuing “Controversy Alerts” this proxy season – these are based on reputational issues and media coverage, versus an analysis of international norms.
FAQ 106 says that when appropriate, ISS will compare a company’s E&S practices to peers – these could be different than compensation peers and are selected based on the E&S topic at hand. The peer comparison is just one aspect of the analysis.
