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Institutional Shareholder Services (ISS)

Service Providers Framework 2018

You are in Active Ownership Services » Engagement

Engagement

AOS 04. Prioritizing engagement topics

04.1. Describe how you select priority engagement topics to raise with companies.

          By way of background, ISS and ISS-Ethix services are designed in part as support tools to facilitate clients’ own engagement. ISS does not conduct bespoke engagement activities on behalf of specific individual clients.

ISS-Ethix provides Pooled Engagement for clients to exercise active ownership through dialogue with companies on environmental, social and governance (ESG) issues. Pooled Engagement also supports signatories in fulfilling their commitment to active ownership; to incorporate ESG principles into ownership policies and practices; to seek disclosure on ESG issues from companies they invest in; and to report on activities and progress.

Both ISS and ISS-Ethix interact with companies as part of the standard research process. The objective of this interaction is to ensure that our research is based on the most comprehensive and accurate information available, and is for the benefit of all ISS clients. This type of interaction is considered by the PRI as part of the research activities to support Principle 1 - incorporate ESG issues into investment analysis and decision-making processes.

The rest of this response will focus on the ISS-Ethix Pooled Engagement product.

Pooled Engagement is a tool for investors to exercise their active ownership through a focused dialogue with companies on environmental, social and governance (ESG) issues. Pooled Engagement is an extension to Norm-Based Screening, the research methodology that analyses companies’ involvement in failures to respect global norms on environmental protection, human rights, labour standards and anti‐ corruption and attaches a Red assessment signal (Companies verifiably involved in an unaddressed failure) or Amber assessment signal (Companies allegedly involved in an unaddressed failure).

Annually, Pooled Engagement facilitates dialogue with around 100 listed companies exposed to alleged or verified violations of norms for environmental protection, human rights, labour standards and anti‐ corruption (i.e. with a red or amber signal.)

ISS-Ethix’s Pooled Engagement service focuses on companies that are assessed under Norm-Based Screening to face alleged or verified severe, systematic or systemic violations of international norms. Engagement under the service is preceded by the feasibility study undertaken under Norm-Based Screening through which we determine whether the desired change to norm-violating practices can be achieved through dialogue. Influential factors include the company’s perceived level of responsibility, steps it has taken to mitigate the possibility of a norm-violation and availability of both stakeholder and expert sources to facilitate constructive dialogue. Engagement is also accompanied by clear and time- bound engagement targets.
        

04.2. Describe how you define the objectives and milestones of the engagements and how you involve your clients in this process.

          In line with the targets established under the feasibility study, ISS-Ethix addresses shortcomings in the context of the business case, including the standards for the company’s industry. ISS starts by building a dialogue with the subject company, a relationship that creates conditions for a constructive discussion through which investors may in turn gather information to information their own engagement efforts (at their discretion). Next ISS identifies how the company addresses operational, legal and reputational risk, and how its risk management processes compare to its peers. The objective with ISS-Ethix’s Pooled Engagement approach is improved disclosure - to encourage companies to elaborate on their efforts to design and implement better risk management systems, effective at the operational level. 

In terms of reaching agreement, institutional clients who have opted in to the pooled engagement service receive an e-mail containing approximately 25 draft letters in the beginning of each quarter (the exact number varies by quarter but is always at least 25). Upon reviewing the draft engagement letters, clients then have the possibility to opt-out of any company dialogue process. Letters are then signed by the investors who remain in the opt-in pool and sent to companies.
        

04.3. Additional information [OPTIONAL]

          
        

AOS 05. Channels of engagement

05.1. Indicate what channels you use to engage. Tick all that apply and indicate the frequency with which you typically use the channels.

Engagement type

Frequency

Frequency

05.2. Describe your typical execution method.

          An initial letter will be sent to the company. Over the next few months, if there is no response, the analyst will make multiple attempts to get in touch via phone calls and e-mails. By 6 months, if no satisfactory response has been received, a letter to the CEO will be sent with the initial contact on email copy. There will then be follow up to another 6 months of attempts at engagement. Over time gradual progress is often noted with most companies with which engagement is sought. Other companies require repeated follow up to respond, and some companies steadfastly fail to respond to these pooled engagement efforts. To address these challenges in communication, regular and courteous follow-up is built into our approach. Once ISS has made every effort to engage both investor relations and the company CEO, the feasibility of engagement is re-evaluated at 12 months. In certain cases, where a company has proven unresponsive to investor efforts to seek dialogue and information, the decision is taken by ISS-Ethix to discontinue dialogue on verified reports of norm violations.
        

05.3. Additional information [OPTIONAL]

          
        

AOS 06. Accessing the appropriate teams when engaging with companies

06.1. Indicate from the options below the employee at the companies you typically engage with.

Employee level

Frequency

Frequency

Frequency

06.2. Describe how you ensure the client’s rationale and engagement objectives are being communicated clearly to the company at the beginning and during the dialogue phase.

          Institutional clients who have opted in to the service receive an e-mail with approximately 25 draft letters in the beginning of each quarter, which they review and sign. The investor always has the option to opt- out of an engagement and to query the text with the Pooled Engagement team if anything is unclear.
        

06.3. Describe the escalation strategies you take (or suggest that your clients take) if the engaged companies are not responsive or become disengaged.

          Some companies steadfastly fail to respond to investor concerns. To address these challenges in communication, regular and courteous follow-up is built into our approach.
        

06.4. Additional information [OPTIONAL]

          
        

AOS 07. Monitoring engagements

07.1. Indicate how you monitor the progress of engagements.

07.2. Describe how you typically decide what recommendations for next steps to give to clients.

07.3. Additional information [OPTIONAL]

          
        

AOS 08. Defining and measuring success

08.1. Describe how you define success when evaluating/reviewing engagements on ESG factors.

          The objective with ISS-Ethix’s Pooled Engagement approach is to encourage companies to elaborate on their efforts to design and implement better risk management systems – effective at the operational level.
        

08.2. Describe how you measure success when evaluating/reviewing these engagements.

          Of the 105 companies that ISS-Ethix was conferred the mandate to represent investors over the course of 2017, 67 (64%) disclosed their efforts to mitigate risks associated within their operations or their involvement in controversial projects, The following represents activities where companies have, taking note of investor interest, proactively reported on their efforts to manage identified ESG risks or where engagement has been closed as information provided to ISS-Ethix through the Norm-Based Screening process has resulted in a revision to the assessment on the company and indicated that further engagement with the company is unnecessary.
        

08.3. Additional information [OPTIONAL]

          Over time gradual progress is noted with most companies with which engagement is sought. Others require repeat follow up to respond, and some companies steadfastly fail to respond to investor concerns. To address these challenges in communication, regular and courteous follow-up is built into our approach. Once ISS has made every effort to engage both investor relations and the company CEO, the feasibility of engagement is re-evaluated. In certain cases, where a company has proven unresponsive to investor efforts to exercise active ownership, the decision is taken by ISS-Ethix to discontinue dialogue on verified reports of norm violations.
        

AOS 09. Companies changing practices/behavior following engagement (Private)


AOS 10. Engaging with policy makers and industry bodies (Private)


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