Asset managers discuss how engaging with other companies has led to major improvements in ESG policies and practices.
EMMA LUPTON, SENIOR ESG ANALYST, BMO GLOBAL ASSET MANAGEMENT
Engaging companies on ESG issues presenting threats and opportunities to long-term shareholder value is a cornerstone of our overall approach to investing. In 2018, we had 1,251 engagements with 665 companies, across 46 countries.
Twenty percent of our engagement was on environmental issues, with climate change remaining in the spotlight. Dialogue was had with highly exposed companies regarding emissions management, adaptation and innovation. We also engaged on the environmental degradation due to plastic pollution, and solutions around this.
Forty percent of our engagement was on social themes and we continued doing extensive work on labour practices. We focused on modern slavery, freedom of association and supply chains. We also engaged around nutrition policies and their implementation.
Forty percent of our engagement was on corporate governance, with a focus on board effectiveness, director nomination, board composition, diversity, internal controls and executive remuneration.
Fifty-four percent of milestones linked to SDGs in 2018 and it was a pivotal year for the advancement of climate strategies, a long-term focus area for us. Following extensive engagement, we have seen significant improvements here, as well as on improving working conditions and workers’ rights, and reducing corruption.
Our engagement focus areas for 2019 are: gender equality, the protection of vulnerable workers, climate change, biodiversity and water, and antimicrobial resistance.
In relation to corporate governance, they are: emphasis on direct board member accountability, environmental and social factors and climate risk, the distribution of pay across the workforce, diversity of boards and in the executive pipeline, and auditor accountability.
ALICE EVANS, CO-HEAD OF RESPONSIBLE INVESTMENT, BMO GLOBAL ASSET MANAGEMENT
We were pleased to see good progress in 2018 on a number of topics that have been a longstanding focus of our corporate engagement programme. In particular, it was a pivotal year for the development and implementation of climate strategies, where we have seen significant improvement following engagement. We have also seen traction in improving working conditions and workers’ rights and addressing corruption.
In 2018, we also advanced our understanding of how our engagement can support the SDGs, moving beyond the top-level goals to use the detailed underlying SDG targets to frame company-engagement objectives. We have found this has created a useful common language and reference points and our experience is that companies welcome this development in our engagement approach.
LISA BEAUVILAIN, MANAGING DIRECTOR, HEAD OF SUSTAINABILITY AND ESG AND CO-HEAD OF IMPACT INVESTING, IMPAX ASSET MANAGEMENT
Approximately one-third of Impax’s company engagements in 2018 were followed by a tangible positive outcome or improvement in disclosure. As part of our 2018 engagement focus on Asian companies, the following cases are examples of companies having improved their ESG policies and practices as a result of our engagement.
- Water utility company, Hong Kong: Following multiple engagements over the course of 2018, in which we advised the company on improving its sustainability processes and disclosures, as well as recommended improving its disclosure on climate-related risks including disclosing to CDP, in 2018 the company established ESG processes and disclosures, including to CDP.
- Industrial energy efficiency company, Japan: After extensive engagement over several years regarding their diversity profile, the company announced that they are making three female appointments to the board and management team. The company chief financial officer confirmed that Impax’s engagement had been instrumental in driving these positive changes.
- Pollution control company, China: We had been engaging with the company for many years on improving its ESG processes and disclosures, when in 2018 they told us they are working on improving their ESG monitoring and reporting. We further stressed the importance of climate-related disclosures. When we were asked to provide feedback on the company’s new sustainability report, we were pleased to find it was much more comprehensive than the previous version. It was particularly encouraging that the company included climate-related metrics.
Our engagement areas for 2019 are:
- Physical climate risks – Task Force on Climate-related Financial Disclosures (TCFD): Processes, management and transparency.
- Focus on smaller and emerging market companies – encouraging development of material sustainability processes and disclosures.
- Focus on governance: global best practices and Asia.
- Focus on US companies with poor transparency on pay: diversity of senior management teams and boards, as well as pay equity.
FARYDA LINDEMAN, SENIOR RESPONSIBLE INVESTMENT SPECIALIST, NN INVESTMENT PARTNERS
Engagement on material issues enables NN Investment Partners to help the companies in which we invest to improve their ESG performance. We look at material risks as defined by the World Economic Forum and the SDGs. We engage in a number of ways and monitor our investee companies and keep track of our engagements in an ESG dialogue database.
Typically, we engage with a company for up to three years. In 2018, we had 512 dialogues and carried out engagements with 119 companies.
We expect companies to monitor and manage the carbon intensity of their operations, and where relevant, of their entire value chain. To this end, we engage in dialogue with our investee companies to encourage them to adopt renewable and low-carbon strategies and to measure, disclose and reduce emissions.
At the end of 2017, we joined the global Climate Action 100+ initiative, a five-year investor initiative to engage with the world’s largest corporate greenhouse gas emitters to curb emissions, strengthen climate-related financial disclosure and improve governance on climate change.
By joining this initiative, we strive to implement the commitment expressed in the Global Investor Statement on Climate Change of the Paris Climate Change Conference in 2015. A clear engagement agenda is set for all companies involved in the initiative and each year, a progress report is published.
We entered into dialogue with two major companies in the chemicals sector. We asked for more transparency and more alignment, as it was unclear what their long-term targets were for reducing their carbon footprints and how these were embedded in the organisation. One of the companies has published a new strategy and provided more transparency. We are in ongoing discussions with the other.
CAROLA VAN LAMOEN, HEAD OF ACTIVE OWNERSHIP, ROBECO
Robeco’s active ownership proposition builds on three integrated and complementary elements:
• Extensive engagement track record of active ownership team;
• RobecoSAM’s sustainability research expertise; and
• Robeco’s asset management expertise.
Following engagement with Royal Dutch Shell by Robeco and the Church of England on behalf of Climate Action 100+, the company agreed to set short-term targets for cutting carbon emissions and to link executive pay to meeting these objectives for the first time.
Shell was already the first oil and gas company to introduce an ambition to reduce its carbon footprint, stretching out to 2050. They aim to reduce their net carbon footprint (NCF) by around half by 2050 and by around 20% by 2035 as an interim step. Shell will now start setting specific NCF targets for shorter-term periods of three or five years.
Shell will also incorporate a link between energy transition and long-term remuneration as part of its revised remuneration policy, which will be subject to a shareholder vote at the 2020 annual general meeting (AGM). If approved at the AGM, the policy will include an NCF-related measure, as well as other measures, to have a balance of leading and lagging performance metrics over a three or five-year performance period.
The measures for each performance period will be set on an annual rolling basis at the time of the award and will be subject to the annual remuneration target-setting process as well as to the final plan design. The measures and targets will evolve as time progresses over the years to 2050.
GABRIEL WILSON-OTTO, HEAD OF STEWARDSHIP – ASIA-PACIFIC, BNP PARIBAS ASSET MANAGEMENT
Over the last 12 months, we enhanced our commitment to sustainable investment through the launch of our ambitious global sustainability strategy, and significant new senior hires including Jane Ambachtsheer as the new head of our Sustainability Center, Mark Lewis as head of sustainability research, Adam Kanzer as head of stewardship in Americas and myself as head of stewardship in Asia-Pacific.
Our global sustainability strategy sets out our strong commitment to investment stewardship and three forward-looking investment objectives that will guide our engagement activities:
- The energy transition;
- Environmental sustainability; and
- Equality and inclusive growth.
To date in 2019, we have commenced a number of engagements targeting these three areas of focus, including engaging with companies as part of the Climate Action 100+ initiative, which has contributed to enhanced climate disclosure from some targeted companies.
Furthermore, alongside AP7 and the Church of England, we developed the ‘Investor Expectations on Corporate Climate Lobbying’ in 2019, which received the backing of the Institutional Investors Group on Climate Change and investors with €3.5 trillion in AuM [assets under management]. The expectations were then used to launch an engagement programme to address corporate climate lobbying – transparency and coherence between companies’ lobbying and their messaging around climate change, and their strategies – as well as lobbying by the trade associations they are members of. We called for greater transparency and for corporate lobbying to be in line with Articles 2.1(a) and 4.1 of the Paris Agreement. The engagement concentrates on the 55 higher-emitting companies in Europe and is part of Climate Action 100+.
For Asia-Pacific, our key areas of focus for engagement with issuers and regulators over the next 12 months include:
- The energy transition – implementation of our coal policy and participation in the Climate Action 100+ initiative;
- Building and enhancing ESG ecosystems through work with local regulators, NGOs and other stakeholders;
- The quality and transparency of corporate governance and gender diversity on boards;
- Water stewardship; and
- Labour standards in regional supply chains.
We look forward to enhancing our impact and implementing the ambition behind our global sustainability strategy.
NICOLAS HUBER, HEAD OF CORPORATE GOVERNANCE, DWS
We believe that good corporate governance is an important source of higher relative shareholder returns on equity investments in the long term. We exercise the voting rights and conduct engagements in our clients’ best interests, following the proprietary corporate governance and proxy voting policy of DWS, a quality-driven proxy voting and engagement process.
Our stringent quality-driven approach on governance engagements with companies is based on a thorough analysis e.g. of the composition of boards, executive compensation, the overall company structure and transparency.
As signatories of the Climate Action 100+ initiative, an engagement initiative which aims to encourage more than 100 of the world’s largest corporate greenhouse gas emitters to curb emissions and improve their governance on climate change risks, we engaged with an Italian company in the utilities sector to discuss their governance regarding climate risk. We also attended the AGM in person.
The company made significant improvements to the governance of ESG aspects. They enhanced their transparency on non-financial aspects, following the recommendations of the TCFD, and established an oversight at a board level via a dedicated committee.
In another case, we engaged with an American healthcare company to discuss the board composition, e.g. long tenures and a low degree of independence. Moreover, the company had a combined chief executive/chairman in place. Key improvements were noted in a follow-up engagement: the company appointed a new chief executive and thus separated the chief executive and chairman roles, thereby engaging the lead independent director as the board chair.
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