2018 iss edinburgh briefing...iss edinburgh briefing tu e s d a y 2 5 s e p t e m b e r 2 0 1 8...

2 0 1 8

ISS EDINBURGH BRIEFING

T u e s d a y 2 5 S e p t e m b e r 2 0 1 8

Lorraine Kelly, Head of ISS Governance Solutions

C O R P O R AT E U P D AT EI S S ’ V I S I O N & M I S S I O N

M I S S I O N

Empowering investors to effectively manage ESG risks and opportunities to realize long-term value.

4

T O D AY ’ S I S S

I N N O V A T I V E

Experienced and diverse management team passionate about the company

G L O B A L

To succeed globally we believe in serving clients through local presence and expertise from our 19 offices around the world

I N D E P E N D E N T

Privately held with a long term view to sustainable growth

G R O W I N GPrioritizing innovation and growing into markets adjacent to the core business organically and through acquisitions

F O C U S E D O N T E C H N O L O G Y

Every company today is a technology company. We are building and investing in application development, building on our resilient infrastructure and keeping security under the spotlight

R E G I S T E R E D I N V E S T M E N T A D V I S O R

Subject to a mature and comprehensive regulatory regime that covers virtually every aspect of our business

Bringing together people, solutions, and systems to help action your investment mandates with ease and confidence.

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C O M P R E H E N S I V E S O L U T I O N S

I N S U P P O R T O F YO U R E VO LV I N G

G OV E R N A N C E N E E D S

G O V E R N A N C E R E S E A R C HIndustry-leading research services and global resources for analysis of company specific governance practices and for policy-based vote recommendations.

P R O X Y V O T I N GUnmatched control and transparency over your proxy activities. Advanced platform enables you to flawlessly execute your mandates, season after proxy season.

D A T A & A N A L Y T I C SAccess critical but non-traditional sources of data on companies, giving investors a more complete picture of extra-financial risks and opportunities.

E S G R A T I N G S , S C R E E N I N G , A N A L Y T I C S & A D V I S O R YInnovative solutions that allow investors to factor in ESG risks and opportunities when analyzing portfolio companies.

D I A L O G U E & E N G A G E M E N TSupport for dialogue within investor organizations and dialogue with external stakeholders.

P O L I C Y G U I D E L I N E SFull spectrum research to support your investment philosophy at every point of need.

S E C U R I T I E S C L A S S A C T I O N S E R V I C E STurnkey services and RecoverMax platform to maximize recoveries from litigation settlements.

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E S G N O L O N G E R O P T I O N A LFrom niche and narrow to a necessary part

of institutional investing and asset management.

I N V E S T O R S A S E S G C H A M P I O N S

E S G A M I L L E N N I A L M I N D S E T

93% Of millennials agree that ESG impact is important to investment decisions

News coverage and public attention to sustainability issues increasing

E S G I N T H E P U B L I C E Y E

13% Average 2018 growth in PRI signatories globally from 2017

$89,654 B Total AUM of PRI Signatories

Source: The PRI in Numbers 2018

• Growth of Responsible Investment assets & strategies• Increasing use of UN SDGs as roadmap to align investments with

broader societal objectives• 1 in 6 PRI signatories report that they invest in assets with

a focus on environmental and/or social issues• Explosion of ESG-based products, particularly on climate change• Move to science-based targets

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S E P T 2 0 1 5

ethix SRI Advisors

ESG GROWTH & INTEGRATION

I N T E G R AT E D E S G S O L U T I O N S

D E C 2 0 1 6

IW Financial

J U N 2 0 1 7

CNI climate solutions

To deliver solutions that help clients stay ahead of ESG requirements & investment mandates.

M A R 2 0 1 8

oekom research

Alison Kennedy, Governance & Stewardship Director, Aberdeen Standard InvestmentsRyan Smith, Head of ESG Research, Kames Capital

Chaired by: Georgina Marshall, Global Head of Research, ISS

PA N E L D I S C U S S I O NE V O L V I N G S T E W A R D S H I P D E V E L O P M E N T S

A ground-breaking solution to bridge an institution’s corporate governance team with its investment professionals and proxy voting committee.

I N T R O D U C I N G

I S S C O M M U N I C AT O R

• Lorraine Kelly, Head of ISS Governance Solutions• Jamie Munnion, Vice President, Client Service and Consultants, ISS• Shelley Keep, Associate Vice President, Client Service and Consultants, ISS

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D E C 2 0 1 7

• Release of the new ProxyExchange: Proxy Voting Reimagined

CONTINUOUS PROXYEXCHANGE INNOVATIONInvesting in enhanced user experiences that span the entire governance workflow. Continued improvements to deliver industry-leading content, features, and end-user customization.

S E P T 2 0 1 8 N E W : I S S

C O M M U N I C A T O R

Enabling dialogue and connecting governance professionals with internal stakeholders.

F E B 2 0 1 8

• 1st of two pre-season releases to address feedback and requests from clients

• Refinement of workflow features/settings

M A R 2 0 1 8

• 2nd of two pre-season releases to address feedback and requests from clients

• New ‘Follow’ technology, Workload tagging feature

J U N 2 0 1 8

• Interactive Proxy available in meeting source materials

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NEW: ISS COMMUNICATOR

• Delivers curated content to identified users via email • Provides feedback solutions to users outside of the

traditional ProxyExchange platform.

P R O X Y C O M M I T T E E SI N V E S T M E N T

P R O F E S S I O N A L S

C U S T O M I Z E T H E F O L L O W I N G :

• Establish levels of vote authority for each user – full vote, suggested vote or read-only (full service only)

• Determine which companies, topics, and critical information each end user wants to view

• Select the general layout of the e-mailed content through customizable e-mail templates

• Set rules-based conditions and criteria to trigger delivery of content

ISS Communicator is a customizable, full-service tool that connects governance teams with investment professionals, proxy committees and other parties involved in proxy voting or ESG integration.

G O V E R N A N C E T E A M S

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N E W : I S S C O M M U N I C A T O R

E N A B L I N G D I A LO G U E A N D CO N N EC T I N G G OV E R N A N C E P RO F ES S I O N A L S W I T H I N T E R N A L S TA K E H O L D E RS .

01. I S S C O M M U N I C AT O R F U L L S E R V I C EAn integrated notification and vote execution tool to users outside of the traditional PX platform system with a fully transparent audit trail.

02.I S S C O M M U N I C AT O R C O N T E N T O N LY Can be leveraged for one-way delivery of subscribed content to users via e-mail and lite listing screens.

C O N T E N T S E T S• Proxy Research, Custom Research• Proxy Meeting Agendas• Links to Source Materials, Interactive Proxies• Vote History Reports - by Issuer, Vote Confirmation Reports

A V A I L A B L E P L A N S

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ISS COMMUNICATOR

P R O X Y C O M M I T T E E SI N V E S T M E N T

P R O F E S S I O N A L S

Designed to save governance teams time, resources, and money by automating the delivery of curated proxy content to investment professionals via customized and targeted e-mails. Those stakeholders in-turn can send back their voting decisions and accompanying content through a discrete and streamlined ProxyExchange portal that flows directly into the governance teams’ ProxyExchange workflow screens and native e-mail systems in a fully transparent manner.

G O V E R N A N C E T E A M S

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Portfolio Manager Alexandra receives the email below on a Critical Meeting for one of her Holdings

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Alexandra clicks on the meeting link and goes to to an Interactive Meeting Agenda

Alexandra enters her votes for this meeting and includes rationales & attachments, in a secure manner all from her desktop

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Alexandra’s votes flow directly to the ISS Communicator Central Box managed by the Governance team

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ISS Communicator is fully transparent and provides audit trails.

Governance Teams can view and download meeting specific Communicator Summaries

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SO HOW DOES ISS COMMUNICATOR

DO IT?

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ISS Communicator set up with full support from ISS Client Service Team

1. You complete Communicator user set up and associate users with accounts, issuers and/or industry sector

2. You create and customize e-mail templates that will be sent to Communicator users

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ISS Communicator customized rules for triggering and scheduling e-mail delivery

Users create and activate Communicator rules that trigger and send customized emails to targeted recipients (e.g., Analysts, PMs, etc.). Create multiple rules to provide custom experiences for different individuals and groups.

C O F F E E B R E A K1 : 1 I S S C O M M U N I C A T O R D I S C U S S I O N S

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Georgina Marshall, Global Head of Research, ISSCatherine Salmon, Head of UK, France, Middle East & Africa Research, ISSJonathan Haymon, Head of UK Research, ISS

I S S V O T I N G P O L I C YR O U N D T A B L E D I S C U S S I O N

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• U K C o d e U p d a t e : C h a i r ’s Te n u r e

• A u d i t Q u a l i t y a n d A c c o u n t a b i l i t y

• P r e - e m p t i o n R i g h t s

• E x e c u t i v e R e m u n e r a t i o n I s s u e s

• B o a r d R e f r e s h m e n t

• O n e S h a r e - O n e Vo t e

2018 ISS Policy Survey Primary Topics & Results

Potential PolicyUpdates

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ISS BENCHMARK POLICY SURVEY RESULTS

E X T E R N A L A U D I T O R S

ISS voting guidelines often consider non-audit services and fees as one factor when assessing the independence of the external auditor. In principle, what other audit-related factors could be considered in evaluation of the independence and performance of the external auditor? (Check all that apply)

Audit-related Factors Investor Responses Non-Investor Responses

Regulatory fines on the auditor for weaknesses or errors in audit practices #1 (89) #3 (247)

Significant audit controversies #2 (88) #4 (222)

Identity of audit partner and any links to the company or its management #3 (87) #1 (329)

Regulatory fines on the company related to financial disclosure practices #4 (82) #2 (255)

Audit firm tenure #5 (72) #6 (183)

Audit partner tenure #6 (60) #5 (215)

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A U D I T C O M M I T E E S

What information should be considered by shareholders in evaluating the company’s Audit Committee? (Check all that apply)

Datapoints/Analytics Investor Responses Non-Investor Responses

Skills and experience of audit committee members #1 (104) #1 (475)

Significant financial reporting or audit controversies #2 (93) #3 (320)

Quality of the company’s financial reporting #3 (88) #2 (376)

Disclosure of factors used in the audit committee’s assessment of the external auditor #4 (68) #5 (142)

Frequency of audit committee meetings #5 (53) #4 (174)

Frequency of audit committee refreshment #6 (48) #6 (65)

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N O W O M E N O N B O A R DDoes your organization consider it to be problematic if there are zero female directors on a public company board?

45

37

15

3

43

2623

8

30 30

24

13

25

2927

19

0

5

10

15

20

25

30

35

40

45

50

Yes, it may indicate problems in theboard recruitment process.

Concerns may be mitigated if there isa disclosed policy/approach

Maybe, but the level of concern isbased on a case-by-case

determination

No, directors are best-suited todetermining the composition of the

board

%

Investors 2018 Investors 2017 Non-investors 2018 Non-investors 2017

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F A V O R E D A C T I O N

If your organization answered "Yes" or "Maybe" to the preceding question, what actions do you consider may be appropriate for shareholders to take at a company that lacks any gender diversity on the board, and/or has not disclosed a policy on the issue? (Check all that apply)

Favored Action Investor Responses Non-Investor Responses

Engage with the board or management #1 (91) #1 (378)

Consider supporting a shareholder proposal aimed at increasing diversity #2 (82) #2 (114)

Consider voting against the chair of the nominating/governance committee #3 (53) #3 (72)

Consider supporting a shareholder-nominated candidate to the board #4 (47) #4 (69)

Consider voting against all members of the nominating/governance committee #4 (47) #5 (53)

Consider voting against the chair of the board or the lead director #6 (36) #6 (46)

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A D J U S T V O T E R E S U L T S ?

At companies with multi-class capital structures with unequal voting rights, should ISS in the future provide such adjusted vote results where possible to do so?

92

4 4

59

31

10

0

10

20

30

40

50

60

70

80

90

100

Yes No It Depends

%

Investors Non-investors

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G R A D E R E S P O N S I V E N E S ?

Does your organization consider that ISS should use such adjusted vote results to determine the need for board responsiveness to shareholder vote results in the following year?

72

1712

4246

12

0

10

20

30

40

50

60

70

80

Yes No It depends

%

Investors Non-investors

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1.9

3.1

4.3

7.8

1.2

2.2

1.31.5

Companies without double voting rights Companies where double voting rights have low importance(< 50%)

Companies where double voting rights have high importance(> 50%) and the free float holds some double voting rights (>

5%)

Companies where double voting rights have high importance(> 50%) and the free float holds almost none of the double

voting rights (< 5%)

Free float dissent DissentSource: ISS Analytics

DISSENT MEASURESD O U B L E V O T I N G R I G H T S I N F R A N C E

Free-float dissent is higher when double voting rights have more importance and are mainly in the hands of strategic shareholders

Median dissent and free-float dissent (%) per sub-samples of French companies

Georgina Marshall, Global Head of Research, ISSCatherine Salmon, Head of UK, France, Middle East & Africa Research, ISSJonathan Haymon, Head of UK Research, ISS

L O O K I N G A H E A D T O 2 0 1 9

G O V E R N A N C E T R E N D S

G L O B A L G O V E R N A N C E H O T T O P I C S• US Governance Trends• UK Governance Trends

E U R O P E A N V O T I N G R E S U LT S R E P O R T• Level of Dissent • Market by Market• By Topic• Trends on Remuneration Policies and Reports• Board Accountability and Responsiveness

A G E N D A

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GLOBAL GOVERNANCE HOT TOPICSBig themes, plus local flavours

US

Australia/NZ

Canada• Gender diversity and Say on Pay• Integration and disclosure of E&S risks • Canada Business Corporations Act amendments

• Board oversight failures and responsiveness• Gender diversity• Calls for E&S risk disclosures• CEO pay practices• One-share, one vote• Mid-term elections

• Updated CG codes in FR, DE, NO and UK• Greater ESG reporting expected• Audit quality: Kingman review in UK• More say on pay resolutions in Germany & Austria• One share one vote: new legal framework in Belgium

• Updated CG code: focus on capital efficiency• Investor concerns over lack of transparency

and accountability re: performance/equity-based compensation

• UAE Foreign ownership restrictions relaxed • CG code released in Nigeria• Egyptian laws strengthen investors’

protection• South Africa: regulatory improvement

• Two separate votes on remuneration

• Mandatory auditor rotation• Diversity policy

▪ ASX Governance code consultation ▪ Australian prudential Regulation Authority calls for better

pay metrics and remuneration committee oversight▪ Potential annual director elections and term limit reform

LatAm

ME & Africa Asia ex-Japan

• China Audit: increased qualified opinion• Taiwan: increased audit committee independence• Taiwan and Hong-Kong Listing rule changes re:

unequal voting rights• Korea and Taiwan increased environmental

protection regulation • China – greater disclosure of ESG information• Updated CG codes in China, HK and Singapore

▪ Corruption - Brazil and cross-border▪ 2019: remuneration disclosure in Brazil▪ Increase in cumulative elections▪ Green bonds adoption

EuropeJapan

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Hot Governance Topics for 2019

• Hedge funds remain active• Board risk oversight in the spotlight• Say-on-pay failure rate doubles in 2018 as

median CEO pay reaches all-time high

Changes in Regulations

• Year 2 for CEO/median worker pay ratio disclosures – will investors start to make use of the data?

• SEC Chair Clayton expected to restrict shareholder proposals

• SEC revisits “proxy plumbing”• Will California mandate board gender diversity?

Law now awaits governor’s signature, but legal challenges loom.

E&S Issues

• Demand expected to rise for disclosure of climate change risks• Record number of withdrawn proposals signals more productive

engagement• Gender diversity debate heats up • Opioid and firearm risks emerge as new areas of concern

2019: US Key Meetings to Watch

• Enhanced scrutiny by investors and index-makers of unequal voting rights

• Will investors act to rein in badly-behaving CEOs, if boards do not?

U S G O V E R N A N C E T R E N D S

L O O K I N G A H E A D T O 2 0 1 9

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U K G O V E R N A N C E T R E N D SL O O K I N G A H E A D T O 2 0 1 9

Hot Governance Topics for 2019

• Audit quality• Effectiveness of audit questioned, particularly the

dominance of the Big 4• Kingman review

• Director accountability

Changes in Regulations

• New UK Code of Corporate Governance• Chair tenure• Board balance (smaller companies)• Remuneration• Engagement with the workforce

• Companies Regulations 2018• Enhanced s.172 reporting• New reporting around employee engagement

E&S Issues

• Gender pay gap reporting in force; CEO pay ratios coming soon

• TCFD: Some early adopters, calls for mandatory reporting on comply-or-explain basis

2019: UK Key Meetings to Watch

• Persimmon• Royal Dutch Shell• Inmarsat• WPP plc• Stobart Group

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DISSENT MEASURESA C R O S S D I F F E R E N T M A R K E T S A N D O W N E R S H I P S T R U C T U R E S

FR BE IT CH DE AT IE ES GR NL UK PT DK NO LU FI

Dissent 5.7 5.3 4.8 4.6 4.6 4.5 3.8 3.7 3.7 3.3 2.9 2.8 2.3 1.7 1.5 0.6

Free float dissent 11.7 11.8 14.1 5.6 8.7 13.8 5.1 7.5 8.9 5.0 4.0 6.9 4.8 5.0 6.9 0.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Sorting on average dissent or on average free-float dissent gives different resultsAverage dissent and free-float dissent (%) on management proposals per market in 2018 - All

markets except Sweden

Source: 2018 ISS European Voting Results Report

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EUROPEAN MAPB Y D I S S E N T L E V E L S


Continental Europe records the highest levels of shareholder

free-float dissentAverage free-float dissent (%) in 2018 per market – All markets but Sweden

Average free-float dissent > 10%

10% > Average free-float dissent > 6%

Average free-float dissent < 6%

Market is not in sample

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DISSENT BY TOPIC


Remu- neration Share plans Capital Nomi- nations Dis- charge Bylaws Other Auditor Transac- tions Annual report

2018 16.1 15.4 7.8 7.0 5.5 4.7 4.6 3.0 2.8 1.3

2017 16.5 14.7 9.5 6.1 5.8 6.1 4.5 3.1 10.0 1.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Remuneration proposals remain the most contested onesAverage free-float dissent (%) per type of proposal and per year - All markets but Sweden

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DISSENT BY TOPIC


DE policy IT policy SE policy PT policy ES policy DK policy FR policy NO policy UK policy NL policy BE report CH report ES report IE report FR report UK report

2018 33.4 35.1 24.3 18.5 21.2 9.7 19.6 14.7 12.6 18.8 32.1 16.5 23.3 15.5 17.3 11.7

2017 44.4 29.1 25.7 13.0 23.0 12.3 22.9 8.8 9.9 10.9 38.5 18.6 27.3 10.2 23.1 10.1

0.0

10.0

20.0

30.0

40.0

50.0

Average free-float dissent on say-on-pay votes decreases in some markets but increases in othersAverage free-float dissent (%) per market and type of votes and per year - All markets with such votes

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BOARD ACCOUNTABILITY


1.1 1.1

2.4

6.7

Board includes 25% of women or more Board includes less than 25% of women

Lack of gender diversity is associated with higher free-float dissent on director reelections

Median free-float dissent (%) on reelections of nominating committee chairmen and members - UK

Members Chairmen

1.0

5.2

1.5

7.7

Absence of problematic pay practice Existence of problematic pay practice

The existence of poor remuneration practices is associated with higher free-float dissent on director reelections

Median free-float dissent (%) on reelections of remuneration committee chairmen and members - All markets

Members Chairmen

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BOARD RESPONSIVENESS


1.1 1.0

7.86.6

1.7

8.7

11.7

25.1

No problematic proposal in 2017 Additional statement for all problematicproposals

Statement in results for all problematicproposals but no additional statement

for at least one

No statement for at least oneproblematic proposal

Lack of board responsiveness is associated with higher free-float dissent on director reelections Median free-float dissent (%) on reelections of board committee chairmen and members in 2018 - UK

Members

Chairmen

D E V E L O P I N G A N I N T E G R AT E DA C T I O N A B L E A P P R O A C H T O E S GI n c l u d i n g I n c o r p o r a t i n g C l i m a t e C h a n g e I n t o Y o u r V o t i n g P o l i c y

• Reinhilde Weidacher, Head of Research, ISS-ethix• Viola Lutz, Head of Investor Consulting, ISS-climate• Andrius Tilvikas, Head of U.K. Custom Research, ISS

Reinhilde Weidacher, Head of Research, ISS-ethix

E S G T R E N D S

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Australia/New Zealand

Canada

Japan

Europe

United States

Responsible and Sustainable Investing AUM

NICHE TO MAINSTREAM

Source: The Global Sustainable Investment Alliance (GSIA), Global Sustainable Investment Review 2016

$ 8.7 tr

$ 12 tr

$ 0.5 tr

$ 1 tr

$ 0.5 tr

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PUBLIC OPINION

IMPENDING REGULATION

FINANCIAL PERFORMANCE

MARKET DRIVERS

Globalization

Demographic change

Automation & digitization

Climate change & resource depletion

Social vulnerability & exploitation

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ACTIVE OWNERSHIP

ExclusionVoting & Engagement

Integration Thematic investment / Inclusion

Sustainability governance

Climate change mitigation & adaptation

Sexual harassment and discrimination

Supply chain management

Cybersecurity

Positive contributions to SDGs: health, decent work, climate change mitigation, natural resource management

Forced labour, child labour

Tobacco

Fossil fuel, coal

Controversial weapons

48

0 50 100 150 200 250 300 350 400 450

Automobiles & Components

Banks

Capital Goods

Commercial & Professional Services

Consumer Durables & Apparel

Consumer Services

Diversified Financials

Energy

Food & Staples Retailing

Food Beverage & Tobacco

Health Care Equipment & Services

Household & Personal Products

Insurance

Materials

Media

Pharmaceuticals, Biotechnology & Life Sciences

Real Estate

Retailing

Semiconductors & Semiconductor Equipment

Software & Services

Technology Hardware & Equipment

Telecommunication Services

Transportation

Utilities

S TA K E H O L D E R P R E S S U R E & CO R P O R AT E D U E D I L I G E N C ENumber of significant ESG controversies, by industry

Under observation by ISS-ethix

Severe and unaddressed, verified by ISS-ethix

Source: ISS-ethix

49

Commission on Transnational Corporations 1970s OECD Guidelines for MNEs

UN Global Compact 2000 OECD Guidelines for MNEs (update)

UN Draft Human Rights Norms 2003

Special Representative of the SG 2005

‘Protect, Respect and Remedy’ FrameworkHuman Rights Translated

2008

UN Guiding Principles on Business and Human RightsWorking Group on human rights and business

2011 OECD Guidelines for MNEs (update)OECD Due Diligence Guidance for Responsible Supply Chains

OHCHR advice to OECD on minority shareholdings 2013 Working Party on Responsible Business Conduct

UN Guiding Principles Reporting Framework 2015 Responsible Agricultural Supply ChainsMeaningful Stakeholder Engagement in the Extractive SectorResponsible Supply Chains in the Garment Footwear SectorResponsible Business Conduct in the Financial Sector

2016

2017

EVOLVING STANDARDS FOR RESPONSIBLE BUSINESS CONDUCT

50

0 100 200 300 400 500 600 700

10. Corruption

7-9. Environment

6. Discrimination

5. Child labour

4. Forced labour

3. Union rights

2. Human Rights complicity

1. Human Rights (labour standards, OHS)

1. Human Rights

GLOBAL FRAMEWORKS

Under observation by ISS-ethix

Severe and unaddressed, verified by ISS-ethix

Source: ISS-ethix

Number of significant ESG controversies, by UN Global Compact principle

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Environmental controversies most frequently concern the failure to mitigate cumulative environmental impacts, pollution and loss of biodiversity.

Climate change controversies rapidly increase as a result of public scrutiny and regulatory developments.

Norm-Based Research focus

▪ O B S T R U C T I O N O F R E G U L A T I O NSignatories to the Paris Agreement are in the process of elaborating and adopting climate change mitigation policies aimed at drastically curbing emissions.

Controversies involve companies violating climate change regulation, lobbying against or otherwise obstructing climate change mitigation policies.

▪ C A R B O N I N T E N S I V E O P E R A T I O N SThe global carbon budget under the 1.5-2°C scenario supports the notion of unburnable carbon, or global fossil fuel reserves that cannot be combusted with today’s technologies.

Controversies involve companies undertaking large-scale investments in fossil fuel extraction projects in frontier conditions, and pursuing other large-scale projects with cumulative environmental impact, including impact on climate change.

CLIMATE CHANGE CONTROVERSIES ON THE R ISE

Significant Environmental Controversies

Source: ISS-ethix

52

SUSTAINABLE DEVELOPMENT GOALS

EconomicEnvironmentalSocial

1. No poverty2. No hunger3. Healthy lives4. Access to education5. Gender equality6. Water and sanitation for all 7. Affordable, reliable, sustainable energy8. Sustainable economic growth

9. Resilient infrastructure 10. Reduced inequality within and among countries 11. Inclusive, safe, resilient and sustainable cities12. Sustainable consumption and production13. Climate change mitigation14. Sustainably use the oceans, seas and marine resources15. Sustainable use of terrestrial ecosystems 16. Peaceful and inclusive societies17. Global Partnership for Sustainable Development Finance

17 goals 169 targets 232 measurable indicators

53

SUSTAINABIL ITY SOLUTIONS ASSESSMENTCompanies‘ business models‘ contribution to the achievement of the SDGs

Significant obstruction

Limited obstruction

No net impact Limited contribution

Significant contribution

▪ 2,300 companies assessed

▪ > 36% foster the SDGs’ achievement

▪ > 22% obstruct the SDGs’ achievement

Viola Lutz, Head of Investor Consulting, ISS-climate

C L I M AT E A N D T H E F I N A N C I A L S E C T O R

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ABOUT USISS-climate

The only global full-fledged ESG provider with a dedicated climate change team.

10+ experts providing holistic advisory and data in the area of climate change and investments to the ISS client base of 2000+ institutional investors.

Drawing from 200+ sector and topic analysts from ISS-ethix and ISS-oekom, 500 governance analysts from ISS, as well as external research.

We help our clients ▪ understand climate change implications for their investments and their

investment impact on the climate▪ measure climate impact, risk and opportunities ▪ act by reporting, investing and voting

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THERE IS A GLOBAL CONSENSUS

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TO AVOID THIS

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THE CHALLENGE: 2° C IN THE FUTURECurrent pathways lead to warming considerably above 2°C

Source: UN PRI

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REPORTING AND ACTION INITIATIVESI n i t i a t i v e s s p a n g e o g r a p h i e s a n d s h o w d i f f e r e n t l e v e l s o f a m b i t i o n

Location Initiative Description Owner

Global

Task force on Climate-related Financial Disclosure (TCFD)

The TCFD have developed voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors and other stakeholders.

Self governance

ISO 14097 Framework and principles for assessing and reporting investments and financing activities linked to climate change. Self governance

Asset Owners Disclosure Project (AODP)A ranking of the climate-related financial disclosures of the world’s largest pension funds, insurers, sovereign wealth funds and endowments.

Civil Society

France Article 173 of the Energy Transition LawLegislation on mandatory carbon disclosure requirements for listed companies and carbon reporting for institutional investors, defined as asset owners and investment managers.

Regulator

California Climate Risk Carbon Initiative Initiative to evaluate the degree to which California investors are impacted by effects of climate change on the economy. Regulator

Sweden National Pension (AP) funds Co-ordination of carbon footprint reporting for investment portfolios within the AP funds. Self governance

NetherlandsPlatform Carbon Accounting Financials (PCAF)

Collaboration of 12 Dutch financial institutions to develop a carbon accounting methodology for financed emissions. Self governance

UK Green Finance Taskforce (GFT)This Taskforce will work with industry to accelerate the growth of green finance, and help the UK government to deliver the investment required to meet the UK’s carbon reduction targets.

Regulator

CanadaCSA Staff Notice 51-354 Report on Climate change-related Disclosure Project

The CSA has developed new guidance and initiatives to educate issuers about the disclosure of climate change-related risks, opportunities and financial impacts. It also intends to consider new disclosure requirements regarding non-venture issuers’ corporate governance practices in relation to material business risks.

Regulator

ChinaCarbon emissions data mandated by 2020 for listed companies in China

Seven government agencies have collectively issued guidelines stating China’s intention to develop a ‘green financial system’. The roadmap will have three stages, finishing in 2020 whereby all listed companies will be required to disclose .

Regulator

Germany Bundesbank: The Role of Central Banks Conference and call for papers on the role of central banks in scaling up green finance Regulator

AustraliaAustralian Prudential Regulatory Authority (APRA) climate disclosure action

Australia’s financial regulator has stepped-up its warning to banks, lenders and insurers, saying climate change is already impacting the global economy, and flagged the possibility of “regulatory action”.

Regulator

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TCFD – DISCLOSURE RECOMMENDATIONSF o u r g e n e r a l c a t e g o r i e s

1 . M E T R I C S & T A R G E T S

4. The organization’s governance around climate-related risks and opportunities

2. The processes used by the organization to identify, assess, and manage climate-related risks.

3. The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning

1. The metrics and targets used to assess and manage relevant climate-related risks and opportunities

2 . R I S K M A N A G E M E N T

3 . S T R A T E G Y

4 . G O V E R N A N C E

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EU TECHNICAL EXPERT GROUP ON SUSTAINABLE F INANCEF r o m d i s c l o s u r e t o i m p a c t

The European Commission set up a Technical Expert Group on Sustainable

Finance (TEG).

Development of:

• an EU classification system – the so-called taxonomy – to determine whether an economic activity is environmentally sustainable;

• an EU Green Bond Standard;• benchmarks for low-carbon investment strategies; and• guidance to improve corporate disclosure of climate-related

information.

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DATA AND ANALYSIS ARE KEY UNDERSTANDING FOR ACTIONI S S - c l i m a t e c a n a c c o m p a n y i n v e s t o r s a l o n g t h e e n t i r e v a l u e c h a i n

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COMPANIES’ GHG EMISSIONS DISCLOSURE T h e l e v e l o f G H G e m i s s i o n d i s c l o s u r e o f m a j o r c o m p a n i e s r e m a i n s i n c o m p l e t e

Russell 1000

Year Total Emissions Disclosing Companies Disclosure (company) Disclosure (weight)

Avrg. Trust Metric

2014 2,558,530,761 337 32% 63% 0.76

2015 2,709,875,223 468 45% 79% 0.77

2016 2,540,710,690 390 39% 73% 0.82

MSCI ACWI

Year Total Emissions Disclosing Companies Disclosure (company) Disclosure (weight)

Avrg. Trust Metric

2014 6,144,561,423 741 58% 70% 0.81

2015 5,775,723,157 951 73% 86% 0.82

2016 5,978,593,072 884 67% 80% 0.86

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COMPANIES’ TARGETS AND STRATEGIESC o m p a n i e s s e t t i n g t a r g e t s i n l i n e w i t h t h e 2 ° C c l i m a t e g o a l

14.2% 7.6% 1.6%

35.4%

11.8%

0%

50%

100%

No ClimateStrategy

Weak ClimateStrategy

ModerateClimate Strategy

Robust ClimateStrategy

2°C -Commitment

Port

folio

Be

nch

mar

k

16.3% 10.4%0.5%

36.4%

10.3%

0%

50%

100%

No ClimateStrategy

Weak ClimateStrategy

ModerateClimate Strategy

Robust ClimateStrategy

2°C -Commitment

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COMPANIES’ PRODUCTS AND SERVICESA s s e s s i n g c o m p a n i e s ’ c o n t r i b u t i o n t o S D G 1 3 « C l i m a t e C h a n g e M i t i g a t i o n »

» To stabilise greenhouse gas concentrations in the atmosphere at a level that would hold the

increase in the global average temperature to well below 2°C or even 1.5°C above pre-industrial

levels (in line with UNFCCC, COP21 Paris Agreement). «

Renewable energy generation, insulating materials, LEDs

Significant Obstruction Limited (Net) Obstruction No (Net) Impact Limited (Net) Contribution Significant Contribution

Products/services helping to mitigate climate changeProduct/services with clearly positive side effects on climate change mitigation

Public transport, energy-efficiency certified products

Products with no

Direct (Net) Impact

on Climate Change

Mitigation

Products/services with clearly negative side effects on climate change mitigation (e.g. products mainly consuming coal/oil)

Combustion engines, conventl. palm oil, oil pipelines, petrol stations

Products/services significantly aggravating climate change

Oil and coal production

Products/services directly addressing the root causes of climate change

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COMPANIES’ CL IMATE CONTROVERSIES

N o r m s - b a s e d r e s e a r c h

• Assessments are based on established expectations for Responsible Business Conduct and related principles set out in international instruments.

• Guidelines and international instruments that are relevant in the review of climate change controversies include UN Global Compact (2000), Rio Declaration on Environment and Development (1992), The United Nations Framework Convention on Climate Change (1992) Paris Agreement (2015).

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VOTING AS A KEY STRATEGY TO ACHIEVE IMPACT

Andrius Tilvikas, Head of U.K. Custom Research, ISS

I N C O R P O R AT I N G C L I M AT E C H A N G EI N T O Y O U R V O T I N G P O L I C Y

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INCORPORATING CL IMATE CHANGE INTO YOUR VOTING POL ICYE&S shareholder proposals in the US

E&S proposals now represent the majority of all shareholder proposals in the US:

33.3%31.1%

33.8%31.9%

37.3%

47.5%45.4%

40.0%

45.6% 44.9% 43.5%

53.4% 54.4%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

Source: ISS Analytics

Percentage of U.S. Shareholder Proposals Relating to E&SProposals Submitted to Companies, including Withdrawals and Omissions (as of August 10, 2018)

70

125 123

35

10

41 41

31

5

137

110

30

40

1722

29

15

137

101

28

68

2924

36

15

121

90

40 3932

29 2922

Environment (includingClimate Change)

Political Spending Human Rights Labor (Human CapitalManagement)

Workplace Diversity(EEO/SO&GI)

Sustainability Board Diversity Executive Pay

Top E&S IssuesNumber of Resolutions Filed (as of August 10, 2018)

2015 2016 2017 2018 YTD Source: ISS Analytics


Among E&S proposal, environmental – climate change related proposal are the most represented:

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Shareholder support rises for E&S proposals:

16.0%

22.8%

23.2%

22.1%21.7% 21.7%

23.4%

2012 2013 2014 2015 2016 2017 2018 YTD

Source: ISS Analytics

E&S Issues With High Median Support Levels:

Shareholder Resolution 20172018

YTD

Sustainability Reporting 28.5% 41.4%

Workforce Diversity 33.3% 36.4%

Climate Change 27.5% 30.7%

Political Issues 26.6% 30.5%

Board Diversity 14.3% 20.7%

The number of majority-supported E&S resolutions rises to 9 in 2018 from 6 in 2017:

Company Shareholder Resolution SupportSturm Ruger & Company,

Inc.Report on Gun Safety

68.8%

Depomed Inc. Governance Measures Related to Opioids 62.3%

Kinder Morgan Report on Sustainability 60.4%

Kinder Morgan Climate Risk - Two Degree Scenario 59.7%

Middleby Corporation Report on Sustainability 57.2%

Genesee & Wyoming Adopt GHG Emissions Reduction Goals 57.2%

Ameren Corporation Report on Coal Ash Risks 53.2%

Anadarko Petroleum Climate Risk - Two Degree Scenario 53.0%

Range Resources Corp. Report on Methane Emissions Reduction 50.3%

Median Vote Results for All E&S Proposals (as of August 10, 2018)

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INCORPORATING CL IMATE CHANGE INTO YOUR VOTING POL ICYCustomizable Climate Module

ISS is working on a solution to integrate climate change data in reports for custom clients from March 2019.

Examples of data points that can be used in a custom voting policy:

• Does the company have a climate strategy? Does itreference frameworks such as the TCFD?

• How robust is the climate strategy and does itinvolve targets?

• Does the company reference benchmarks, such as a2 Degree Scenario?

• Does the company disclose its greenhouse gasemissions and climate risks?

• How well are risks and opportunities of climatechange understood and governed?

• Is the company involved in climate-linkedcontroversies ?

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I N C O R P O R AT I N G C L I M AT E C H A N G E

I N TO YO U R V OT I N G P O L I C Y

R E S O L U T I O N S T O TA R G E T:

• Financial statements

• Discharge (management board / supervisory board)

• Directors’ Election (chair of Audit Committee, Chair of the board, all incumbent directors).

• Shareholder proposals

P O S S I B L E V O T I N G A C T I O N :

• Low concern (e.g ISS Ethix low-Amber alert, « Under observation cases »): Refer.

• Medium concern (e.g ISS Ethix AMBER alert): Abstain

• High concern (e.g ISS Ethix RED alert): Against

• Abstain in year 1, Against in year 2

R E S O L U T I O N S T O TA R G E T A N D P O S S I B L E V O T I N G A C T I O N

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I N C O R P O R AT I N G C L I M AT E C H A N G E I N TO YO U R VOT I N G P O L I C Y

E x a m p l e : Tra n s C a n a d a C o r p .

CLIENT CONFIDENTIAL | 19 DECEMBER, 2018

ALERT: Developments concerning TransCanada Corp. (alleged failure to mitigate

climate change impacts in the United States)

In a statement released on 18 January 2018, TransCanada Corp. announced that it has secured 500,000 barrels a day of 20-year commitments for the Keystone XL

project after concluding an open season. This amount reportedly represents about 60 percent of the 830,000 barrels of planned capacity for the pipeline.

Although the company confirmed that construction preparation has commenced and is expecting primary construction to begin in 2019, media reported that a

final investment decision has not been made.

The company’s statement was released after reports that the government of Alberta, Canada, through its Alberta Petroleum Marketing Commission

committed to 50,000 barrels a day from Keystone XL. Reacting to the statement, Greenpeace Canada stated that the ‘government's decision to work with the

Trump administration to push through a pipeline that endangers the water supplies and climate of millions of people is both disappointing and reckless.’

The 1,900 km Keystone XL pipeline has been criticized by environmental activists,

scientists and the US Environmental Protection Agency for potentially enabling a significant increase in greenhouse gas emissions, thus contributing to climate

change. The project has also faced opposition from landowners and indigenous people along the pipeline’s route in Nebraska.

ISS-Ethix will continue to monitor these developments and update its clients

accordingly.

Note that the overall company assessment for Norm-Based Research for TransCanada Corp. remains AMBER regarding its alleged failure to mitigate

climate change impacts in the United States.

The company received an AMBER assessment for climate change related events:

• How could this be transposed in a voting policy ?

• What voting resolution can be targeted ?

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P O S S I B L E R E S O L U T I O N S T O TA R G E T: • Shareholder Proposal

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P O S S I B L E R E S O L U T I O N S T O TA R G E T:• Director elections:

• Chairman of the board;• All incumbent directors.

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E x a m p l e : G a z p ro m PJ S C

The company received an AMBER assessment for climate change related events :

• How could this be transposed in a voting policy ?

• What voting resolution can be targeted ?

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P O S S I B L E R E S O L U T I O N S T O TA R G E T: • Financial statements

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P O S S I B L E R E S O L U T I O N S T O TA R G E T:• Director elections:

• Chairman of the board;• All incumbent directors.

C O N C L U D I N G R E M A R K S

Richard Redfern, Managing Director, ISS

2018 iss edinburgh briefing...iss edinburgh briefing tu e s d a y 2 5 s e p t e m b e r 2 0 1 8...

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