Environmental and Social Non-Financial Performance Compensation-Related Proposals (U.S.)

Background and Overview

The incorporation of environmental and social non-financial performance metrics, often referred to as sustainability metrics, into executive compensation is becoming more commonplace in certain industry sectors. This is particularly true for companies in the extractive industry sector or other sectors where companies have greater exposure to environmental issues. In addition such non-financial performance metrics are increasingly addressed in investor initiatives, such as the UN Principles for Responsible Investment (UNPRI), initiatives which are seeing growing participation by institutional investors.

In addition,according to ISS’ 2012-2013 policy survey, approximately two-thirds of investor respondents either indicated that the use of environmental and social non-financial performance metrics in executive compensation would be beneficial for shareholders or indicated that a case-by-case approach is appropriate.

Key Changes Under Consideration

ISS is proposing to make the following changes to its existing policy on proposals addressing environmental and social non-financial performance metrics:

  • Modify the general position of the policy from "Generally vote AGAINST" to "Vote CASE BY CASE";
  • Replace the listing of specific social and environmental criteria with a general reference of sustainability criteria and clarify that sustainability refers to environmental and social issues; and
  • In the first bullet point, change "significant and persistent" to "significant and/or persistent."

The proposed policy would read as follows:

Vote CASE-BY-CASE on proposals to link, or report on linking, executive compensation to sustainability (environmental and social) criteria. The following factors will be considered:

  • Whether the company has significant and/or persistent controversies or violations regarding social and/or environmental issues;
  • Whether the company has management systems and oversight mechanisms in place regarding its social and environmental performance
  • The degree to which industry peers have incorporated similar non-financial performance criteria in their executive compensation practices; and
  • The company's current level of disclosure regarding its environmental and social performance.

Intent and Impact

The changes under consideration will allow the proposed policy to better incorporate developments in what appears to be an evolving issue, particularly for certain industry sectors as noted above.

Historically, the current policy has not supported shareholder proposals on environmental or social non-financial performance measures. If the changes under consideration are implemented, the proposed policy would be more likely to support such proposals depending on the structure and scope of the specific proposal and the particular circumstances at the company in question.

Request for Comment

Please feel free to add any additional information or comments on the proposed policy change.  In addition, ISS is specifically seeking feedback on the following:

  • Would your organization consider factors in addition to those currently considered by the policy when a proposal requesting the addition of environmental and social non-financial performance measures to an executive compensation plan is being evaluated? If yes, please specify.
  • Does your organization make a distinction between proposals requesting the addition of environmental and social non-financial performance measures to executive compensation plans and those proposals that request a report on linking, or on the feasibility of linking, environmental and social non-financial performance measures to executive compensation plans? If yes, please specify.

To submit a comment, please send via e-mail to policy@issgovernance.com.Please indicate your name and organization for attribution. While ISS will consider all feedback that it receives, comments will not be published without attribution.

All comments received will be published as received, unless otherwise requested in the body of the e-mail submission.