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Article | Executive Pay Memo North America

ISS policy survey focuses on climate change risk management

By Mike Biggane and Brian Myers | August 17, 2022

Building toward 2023 policy, the survey includes questions around climate risk and governance structure-related topics.
Executive Compensation

The Institutional Shareholder Services (ISS) annual benchmark policy survey is now open, with a focus on climate and environment, or the “E” in ESG (environmental, social and governance). The survey collects feedback from institutional investors, corporate issuers and other interested parties to inform the ISS 2023 voting policy, which is typically published in November each year. The ISS press release (which contains links to the surveys) can be found here.

While most large institutional investors rely on their own policies and procedures, proxy advisor policies can influence voting decisions and signal broader areas of focus by institutional investors. For this reason, stakeholders are encouraged to respond. The survey will close to participation on August 31, 2022 (5:00 p.m. ET).

Climate-related questions (Global)

Climate change risk management continues to be a high-priority issue for many investors and companies, an area in which ISS notes “there is a widely held view that directors should be held accountable for overseeing disclosure and actions to put companies on a footing to manage their various risks related to climate change.” ISS originally sought feedback on climate-related matters in the 2020 policy survey and during the 2021 comment period to proposed policy updates (see our WTW Executive Pay Memo article ISS launches comment period for draft 2022 policy changes, November 11, 2021).

  • Board accountability: Following the implementation of policies related to greenhouse gas (GHG) emitters (Climate Action 100+) for 2022, ISS again seeks feedback to determine what actions or lack of actions should be considered as poor climate risk management for significant GHG emitters that rises to the level of “material governance failure.” Such failure would ultimately call for ISS to recommend against a director or directors. Areas of focus include the lack of climate risk management disclosure, not declaring a “net-zero by 2050” target, and no medium-term targets for scopes 1, 2 and 3 (if relevant).
  • Application of board accountability: ISS also asks if policies should be expanded beyond the markets currently under the scope of review (U.S., Europe, U.K./Ireland and Russia). ISS questions if there is support for uniform application of the climate policy in every market globally where data and disclosures allow.
  • Climate transition plans: ISS policy currently favors management proposals covering climate transition plans, though on a case-by-case basis. Digging deeper, ISS want to understand what top three factors would be important to investors in determining whether a company’s climate transition plan is adequate.
  • Climate risk as a critical audit matter: Focusing on calls from investors that high GHG emitters should ensure their financial reports include material climate change risks, ISS asks if auditors should provide commentary on climate-related issues and what actions should be taken if these are not included in a company’s critical or key audit matters (e.g., vote against audit committee members, vote against reappointment of auditor).
  • Financed emissions: 2022 saw shareholders target proposals on the finance sector calling for adoptions of policies restricting financing or underwriting to projects not considered to be in line with climate change priorities (e.g., new fossil fuel projects). ISS is seeking to understand what the appropriate expectations are for large banking and insurance companies as they relate to GHG emissions that may result from their portfolios. The potential responses range from no accountability to shareholder requests to disclosures to “Net-Zero by 2050” targets.
DEI-related questions (U.S.)

On the topic of diversity, equity and inclusion (DEI), ISS solicits feedback around racial equity and/or civil rights audits. ISS began a policy in 2022 that assessed shareholder proposals covering these issues on a case-by-case basis. Given the increasing prevalence of this type of proposal during 2022, ISS is asking for updated viewpoints around third-party racial equity or civil rights audits and whether companies would benefit from such audits. ISS also seeks to understand if there are specific factors that should be considered when determining the need for audits, to include such things as significant diversity-related controversies, lack of workforce diversity statistics and no initiatives undertaken to enhance workforce diversity.

Multi-class capital structure-related questions (U.S.)

Originally announced in 2021 for initiation in 2023, ISS will recommend votes against directors at companies with multi-class structures with unequal voting rights, to include those that were previously grandfathered. ISS is again asking for views on a de minimis exception (e.g., total voting power of 5%, 10%, 20%), which it plans to implement, and what other factors should influence ISS voting recommendations. In addition ISS asks for feedback on the appropriate targets for adverse vote recommendations, to include any director holding super-voting rights, governance committee chair or members, and all directors.

Problematic governance structures (U.S.)
  • Sunset provision: In 2020, ISS codified its policies regarding newly public companies with problematic capital to indicate that no sunset provision of greater than seven years would be reasonable. The sunset provision, which is a standard mitigating factor for many other ISS policies related to governance structures (e.g., classified board structure, supermajority vote requirements), has previously never been formalized and defined in the policies. Accordingly, ISS is asking for the length of time that should be acceptable for the sunset of problematic governance structures for new public companies with responses ranging from three to seven years.
  • Supermajority votes: Lastly, ISS asks for clarifications around supermajority vote requirements, which the 2021 policy survey indicated most investors were opposed to. The questions focus on whether smaller companies should be exempted from negative vote recommendations, and if so, what size should be considered sufficiently small (e.g., outside the Russell 3000). Further, ISS seeks feedback on what level of supermajority vote requirement would be acceptable, focusing on whether two-thirds of outstanding shares is appropriate for respondent opinions.
Share issuance mandate questions (Cross-market companies under ISS U.S. coverage)

Companies domiciled in the U.S. generally do not need to seek additional shareholder approval for share issuances beyond the approval of authorized capital. Certain other markets may be required by laws of the country of incorporation to seek approval for all share issuances, to include those U.S. domestic issuers. On the topic of share issuance mandates and preemptive rights, for which ISS currently does not have a U.S. specific benchmark, ISS solicits feedback. Questions include whether the policy of the market of incorporation should continue to be applied or whether a U.S.-specific policy should be developed. ISS further asks what dilution levels would be considered acceptable for issuance without preemptive rights (e.g., 20%, 33% of shares outstanding), how often should shareholder approval be required, and should the same policy be applied to dual-listed companies and foreign private issuers as to those in the U.S.

Timing and next steps

The survey is open for participation until the close of business (5:00 p.m. ET) on Wednesday, August 31, 2022. Results are typically released approximately three weeks after the survey closes. An open public comment period will occur after the final proposed policy changes are released.

It’s too early to predict which, if any, changes or updates will ultimately be adopted for 2023. It should also be noted that ISS does not always include potential policy updates in the survey. Final policy updates are typically released in November followed by an FAQ release in December. The final policies become effective for shareholder meetings taking place on February 1, 2023, or later.

We encourage companies to stay current on evolving policies for shareholder voting on executive compensation and to weigh in via the ISS policy survey and the broader policy formation process.


Director, Executive Compensation and Board Advisory (Cincinnati)
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Governance Team Lead, North America & Director, Executive Compensation and Board Advisory (Arlington)

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