Yesterday, the proxy advisory firm Institutional Shareholder Services (“ISS") proposed and published for comment voting policy changes for the 2022 proxy season. There are five proposed updates that would apply to U.S. companies, including two related to “Say on Climate" proposals and a third related to climate issues.

In addition, ISS is proposing (starting in 2023) to begin issuing negative voting recommendations for directors at all companies with multi-class stock structures. Companies that went public before 2015 would no longer be grandfathered under ISS policy. ISS is requesting comment on whether to take a similar approach for companies that have other “poor" governance practices—specifically, a classified board, or the requirement of a supermajority vote to amend the governing documents.

The proposed U.S. policy changes are available here and are summarized below. Comments on the proposals can be submitted by e-mail to policy@issgovernance.com until 5 p.m. ET on November 16, 2021. ISS will take the comments into account as part of its policy review and expects to release final changes to its voting policies by or around the end of November. It is important to note that ISS's final 2022 proxy voting policies may reflect additional changes, beyond those on which ISS is soliciting comment. The final voting policies will apply to shareholder meetings held on or after February 1, 2022, except for policies subject to transition periods.

Comments submitted to ISS may be published on its website, unless requested otherwise in the body of email submissions.

The proposals for U.S. companies address:

1. Climate-Related Management and Shareholder Proposals. In 2021, both shareholders and management have submitted Say on Climate proposals at companies that are considered “high impact" as well as at companies that would not be considered “high impact" from a greenhouse gas emissions (“GHG") emissions perspective. ISS is proposing voting policies on both management and shareholder Say on Climate proposals that would document the frameworks it has developed for analyzing these proposals, as supplemented by feedback from ISS's 2021 Annual Benchmark Policy Survey and its Climate Policy Survey. Under the proposed policies, ISS will vote case-by-case on both types of proposals, taking into consideration a list of factors set forth in each policy.

For management proposals, ISS will vote case-by-case on management proposals asking shareholders to approve a company's climate transition action plan, “taking into account the completeness and rigor of the plan." Information that ISS will consider would include:

the extent to which the company's climate-related disclosures align with Task Force on Climate-Related Financial Disclosure (“TCFD") recommendations and other market standards;

disclosure of the company's operational and supply chain GHG emissions (Scopes 1, 2 and 3)[1];

the completeness and rigor of the company's short-, medium- and long-term targets for reducing operational and supply chain GHG emissions in line with Paris Agreement goals (Scopes 1, 2 and 3 if relevant);

whether the company has sought and received third-party approval that its targets are science-based;

whether the company has made a Net Zero commitment 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 capital expenditures align with company strategy;

whether there are specific industry decarbonization challenges; and

how the company's commitments, disclosure and performance compare to industry peers.

For shareholder proposals requesting Say on Climate votes or other climate-related actions (such as a report outlining the company's GHG emissions levels and reduction targets), ISS will vote case-by-case taking into account information such as:

the completeness and rigor of the company's climate-related disclosures;

the company's actual GHG emissions performance;

whether the company has recently been the subject of significant violations, fines, litigation or controversy involving its GHG emissions; and

whether the proposal is unduly burdensome (in scope or timeframe) or overly prescriptive.

2. Board Accountability on Climate at High-Impact Companies. ISS is proposing a new policy that would apply to companies that are “significant GHG emitters" through their operations or value chain. For 2022, these would be companies that Climate Action 100+ has identified as disproportionately responsible for GHG emissions. Under the proposed policy, ISS will generally recommend “against" or “withhold" votes for the responsible incumbent director(s) or committee, or the full board, in cases where ISS determines a company is not taking minimum steps needed to understand, assess and mitigate climate change risks to the company and the larger economy. The proposed policy states that expectations about the minimum steps that are sufficient “will increase over time." For 2022, minimum steps are:

Detailed disclosure of climate-related risks, such as according to the TCFD framework, including board governance measures, corporate strategy, risk management analyses, and metrics and targets; and

“Appropriate GHG emissions reduction targets," which ISS considers “any well-defined GHG reduction targets." Targets for Scope 3 emissions would not be required for 2022, but the proposed policy states that targets should cover at least a significant portion of the company's direct emissions. ISS plans to provide additional climate-related data (beyond Scope 1 and 2) in its reports for informational purposes, for its clients that wish to take different approaches.

3. Companies with Multi-Class Stock or Other Unequal Voting Rights. ISS is proposing to begin issuing adverse voting recommendations with respect to directors at all U.S. companies with unequal voting rights. If adopted, this change would be subject to a one-year transition period and would take effect in 2023. Stock with “unequal voting rights" would include multi-class stock structures, as well as less common practices such as maintaining classes of stock that are not entitled to vote on the same ballot items or nominees, and loyalty shares (stock with time-phased voting rights).

ISS's policy since 2015 has been to recommend “against" or “withhold" votes for directors of newly-public companies with certain “poor" governance provisions that are not subject to a reasonable sunset, including multiple classes of stock with unequal voting rights, classified boards and supermajority voting requirements to amend the governing documents. Companies that were publicly traded before the 2015 policy change, however, were grandfathered and so were not subject to this policy. As part of the 2021 Annual Benchmark Policy Survey, ISS sought feedback about whether to continue the practice of grandfathering. According to ISS, investor feedback reflected substantial support for revisiting this practice, and investors ranked multi-class stock structures as the most problematic of the “poor" governance provisions.

ISS has specifically requested comment on whether this policy (if extended to all public companies) should provide for adverse voting recommendations on all nominees, which is the current approach for newly-public companies, or only some nominees (such as the nominating/governance committee or directors who are beneficiaries of the superior voting rights).

ISS has also requested comment on whether to address classified boards and supermajority voting requirements to amend the governing documents as part of the 2022 policy changes. It appears that ISS is considering whether to eliminate grandfathering for companies that were publicly traded before 2015 and that have one or both of these governance practices. ISS is also seeking comment on how broadly it should apply negative voting recommendations—for example, whether it should recommend “against" or “withhold" votes for the nominating/governance committee chair for one “poor" governance practice and the full committee for both.

For the proposed transition year (2022), the policy would continue to apply to newly-public companies, but with a minor change. Currently, these companies can avoid negative voting recommendations by reversing or removing the multi-class voting structure. A “newly added reasonable sunset" would also be an option. ISS considers a sunset period reasonable if it is no more than seven years.

4. Board Diversity. ISS is proposing to expand its policy on gender diversity to companies outside the S&P 1500 and Russell 3000 indices. Under this policy, which has been in effect since February 2020 for S&P 1500 and Russell 3000 companies, ISS generally recommends “against" or “withhold" votes for the chair of a company's nominating/governance committee (or other directors, on a case-by-case basis) where there are no women on the board. There is an exception to the policy for companies where there was at least one woman on the board at the prior annual meeting and the board makes a firm commitment to return to “a gender-diverse status" within a year.

As a reminder for S&P 1500 and Russell 3000 companies, as part of its voting policy updates for 2021, ISS adopted a similar policy on racial/ethnic diversity with a one-year transition period. That policy is now set to take effect in February 2022. Accordingly, beginning in February 2022, ISS will generally recommend “against" or “withhold" votes for the chair of the nominating/governance committee (or other directors, on a case-by-case basis) at S&P 1500 and Russell 3000 companies where the board “has no apparent racially or ethnically diverse members." The policy includes an exception analogous to the one in the voting policy on gender diversity.

[1] Greenhouse gas emissions are categorized into three categories, or “scopes," by the most widely-used international accounting tool, the Greenhouse Gas Protocol. Scope 1 covers direct emissions from sources owned or controlled by the company. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the company. Scope 3 is defined more broadly to include all other indirect emissions that occur both upstream and downstream of the company's operations, such as emissions from the company's supply chain, the company's non-energy inputs and the full life cycle of the company's products, including the electricity the company's customers may consume when using their products. Given this broad range, a company's Scope 3 emissions are often far larger than its Scope 1 and 2 emissions combined.

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