PRI Signatory

Epworth is a PRI Signatory and takes its obligations seriously.

The PRI is the world’s leading proponent of responsible investment.

It works to understand the investment implications of environmental, social and governance (ESG) factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions. The PRI acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole.

The PRI is truly independent. It encourages investors to use responsible investment to enhance returns and better manage risks, but does not operate for its own profit; it engages with global policymakers but is not associated with any government; it is supported by, but not part of, the United Nations.

For more information go to https://www.unpri.org.

Montreal Pledge Disclosure

Epworth Investment Management (‘Epworth’) has long recognised the challenges posed by global climate change. To help direct its selection of investments, in 2009 Epworth adopted a climate change policy, which has since been supplemented with two further policies: electricity generation; and different fuel types. The fundamental aim of these policies is to ensure that companies in which Epworth invests are consistent with a target of reducing the UK’s greenhouse gas emissions by 80% from 1990 levels by 2050, and limiting increases in global temperatures to 2°C.

One of the guidelines provided by Epworth policy on climate change is: “To create and manage portfolios with a carbon footprint that is relatively low and measurably declining”. As a result since 2015, Epworth has commissioned an annual carbon footprint analysis of the UK portion of its Affirmative Equity Fund for Charities (AEFC) from Trucost, and signed up to the Montréal Carbon Pledge committing to a voluntary disclosure of the results. All the data in this report are to 28 February 2017.

Methodology

Trucost estimates the total greenhouse gas emissions of each company within the portfolio and the relevant benchmark, estimating both the portfolio’s proportionate share of each company’s emissions, and that of the benchmark. These emissions are then summed to provide the total greenhouse gas emissions of the portfolio (in tonnes of CO2 equivalent (tCO2-e) per million pounds of market capitalisation) and for the benchmark. More details of Trucost’s methodology can be found on its website: www.trucost.com

Results

According to the Trucost analysis, at 28 February 2017 the carbon footprint of the UK portion of the Affirmative Equity Fund for Charities was 270tCO2-e per million pounds of market capitalisation. This was 3.0% lower than its relevant benchmark, the FTSE All Share Index at the same date.

The main reasons for the outperformance were that in more polluting sectors such as utilities and basic resources the Epworth portfolio was significantly less intensive than the overall stock market. Interestingly the tobacco and alcohol sectors act to reduce the carbon intensity of the market. Despite excluding these relatively ‘clean’ sectors on other ethical criterion, the Affirmative Equity Fund for Charities has a lower carbon intensity than the market as a whole.

The change in the Affirmative Equity Fund for Charities footprint is estimated by dividing the total carbon footprint of the Fund (measured in tCO2-e) by the number of units in the Fund; this compensates for changes in size of the Fund due to inflows/outflows and movements in market values. The table below compares the total footprint of the fund, the number of units and the trend in emissions per unit.

AEFC total emissions (tCO2-e)AEFC units in issue“Emissions per unit (kg per unit)”
201524,78257,515,3410.43
201622,93062,019,4320.37
201718,50557,290,9220.32

This would suggest that the carbon intensity of the portfolio fell by 12.6% between 2016 and 2017.

The analysis is based on the UK portion of the Affirmative Equity Fund for Charities, which comprised £68.63m as at 28 February 2017.

Continuing the work

In line with the aims of its policy on climate change, Epworth seeks to continue to reduce its portfolio carbon footprint through the prioritisation of good environmental performance as a factor in investment decisions. Epworth is also working to persuade all companies that are heavy users of fossil fuels to reduce their carbon footprints through initiatives such as ‘Aiming for A’ and the ‘CDP Climate Change Program’. In addition, climate change issues have been integrated into Epworth voting practice which means that we will oppose the re-election of the Chair or members of appropriate board committees if a high-carbon footprint company is failing to improve its emissions performance.

For further information on Epworth’s work on climate change or to feedback on these results please contact us.

UK Stewardship Code Statement

The UK Stewardship Code was published by the Financial Reporting Council in July 2010. It aims to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities by setting out good practice on engagement with investee companies to which the Financial Reporting Council believes institutional investors should aspire.

The Central Finance Board of the Methodist Church (CFB) and Epworth Investment Management Limited (Epworth) signalled their support of the Code in a preliminary response issued in November 2010.

The CFB and its sister organisation, Epworth, welcome publication of the Stewardship Code and this Statement publicly signals our endorsement of the Code’s Principles. The Principles of informed engagement with companies set out within the Code, lie at the heart of our investment approach; the Stewardship Code provides a valuable, additional context for enhancing the responsibilities of shareholder ownership.

Our detailed Statement in response to the seven Principles contained within the Code is set out below, and this incorporates revised recommendations made in autumn 2012.

Principle 1: Policy Disclosure

“Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities”

  • Stewardship responsibilities are discharged internally as part of an integrated investment process
  • We are long-term investors concentrating heavily on the faith and charity investment communities and we integrate the Stewardship principles of ethical and responsible investment into our investment philosophy and practice
  • We seek long-term shareholder value in which, as responsible owners, dialogue and engagement with the companies in which we invest is a fundamental part
  • We subscribe to the view that companies that take ESG (environmental, social and governance) issues into account as part of their business model, will over the long-term provide superior returns for shareholders
  • We only utilise external service providers to support and inform our in-house decision making; these include proxy voting and ethical research service providers
  • Our model is to produce qualitative Position Papers on a range of material ethical and ESG subjects that subsequently lead to a Policy being adopted
  • We have produced Position papers on a range of subjects including:
    • Climate change
    • Mining
    • Defence
    • Children
    • Prisons
    • Caste discrimination
    • Human rights and conflict
    • Israel/Palestine
    • Nestlé and Breast Milk Substitutes
    • Gambling
    • Food & Beverage industry
    • Alcohol

Our detailed position papers and policies are published on our two websites: www.cfbmethodistchurch.org.uk/ethics, www.epworthinvestment.co.uk/investment-approach/ethical-policy-and-guidance/

Principle 2: Conflicts of Interest

“Institutional investors should have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed”.

  • The CFB is the investment arm of the Methodist Church in the United Kingdom; Epworth is wholly owned by the CFB. Investment policies, staff, systems and premises are shared by the CFB and Epworth
  • We do not advise or publish advice that might conflict with the responsibilities of managing investments on behalf of CFB or Epworth clients
  • Our policy regarding potential conflicts of interest and “Treating Customers Fairly” (TCF) in the conduct of investment business forms a key part of our overall compliance regime
  • Customers are at the heart of what we do, which is managing investments in an ethical and responsible way
  • Staff training, procedures and processes are in place to comply with regulatory requirements regarding TCF, however as an ethical House this is a key differentiator in the way we attract and retain clients
  • Epworth Investment Management is regulated by the FCA. The regulatory Compliance Manual retains a full conflicts of interest policy and a conflicts register. The register is reviewed annually in January
  • The Conflicts of Interest Policy defines what a conflict is or could be and sets out procedures to identify and manage such conflicts. For example there may be conflicts between clients, relating to external directorships or other appointments, arising out of the way duties are segregated, or the way funds are valued or how Personal Account Dealing is carried out. Conflicts may relate to staff remuneration, inducements or the delegation of duties and functions within the organisation. The policy refers to additional controls to manage conflicts. These include whistleblowing, voting strategies, compliance monitoring and disclosure. The Compliance function maintains a wide cross section of information, returns and disclosures including a comprehensive list of staff and directors and their outside interests, Personal Account dealing records, gifts and benefits register. A conflicts of interest register is maintained and reviewed annually and more frequently as required at Board level. Senior Management receive a formal report from the Compliance Function annually in respect of conflicts of interest. There are procedures which set out disclosure to clients and voting strategies. All remuneration paid to staff is presently fixed and is not determined by the results generated.
  • The CFB is an unregulated body and is not required to maintain a conflicts policy or register in the same way as Epworth, however, in accordance with best practice these conflicts of interests policies and procedures are mirrored on a voluntary basis across the CFB’s activities
  • There have been no incidences where the interests of clients diverge or where a client relationship raises a potential conflict; clients of the CFB and Epworth have a full understanding of how their investments will be managed in accordance with our declared ethical and responsible investment policies

Principle 3: Monitoring Companies

“Institutional investors should monitor their investee companies”

  • We are active managers and underlying investments are closely monitored in respect of their financial and ethical performance
  • Ethics are always on the agendas of the CFB Council and Epworth Board whose tasks are to hold the executive management and staff to account for their investment oversight
  • The Joint Advisory Committee on the Ethics of Investment (JACEI) has been established to provide advice to the CFB and Epworth. Through its regular meetings, it scrutinises our investment portfolios from an ethical perspective as well as our regular corporate governance activity
  • Engagement and oversight is normally prioritised according to the material risks (financial and non-financial) attendant on the underlying investments. Where we assess there are material concerns, these will be discussed with the relevant company
  • Our priorities for pro-active and on-going engagement currently are
    • Climate change
    • Water risk
    • Labour rights and the Living Wage
    • Farm Animal Welfare
    • Corporate lobbying
    • Human Rights
  • Staff actively monitor ethical issues as part of their standard research into companies; reports assess the material ESG issues pertinent to the company, whether there are any business areas that conflict with our negative screens, and any areas requiring pro- active engagement
  • Ethical issues are the focus at our internal monthly Ethics Meetings, which also prioritise workflow, including engagement with companies and attendance at collaborative engagement initiatives
  • Owing to resource limitations it is currently our policy to notify companies when we have taken action to oppose or abstain management proposals on an exceptional basis only. Voting is contracted to a third party provider based on an agreed template. We have built certain ESG priorities into our voting template e.g.
    • Climate change laggards
    • Diversity
    • Companies that depart from standard Corporate Governance practice
  • In the course of routine business, the CFB and Epworth, may, from time to time, become involuntary ‘insiders’. Whilst we do not willingly seek insider status, should this occur, we have internal compliance procedures in place to report it that accord with best practice

Principle 4: Escalation Policy

“Institutional investors should establish clear guidelines on when and how they will escalate their Stewardship activities.”

  • We have adopted clear practices and processes for the escalation of engagement oversight, depending on the nature of the issue
  • As responsible investors we seek to meet and engage with company management in an open and constructive manner in order to understand the issues and raise our concerns
  • Escalation would normally occur if a request goes unanswered or is inadequately addressed. An internal mechanism has been adopted for escalating engagement in the event of a company’s unwillingness to respond or engage
  • Typically we engage with companies via written communication, allowing approximately 30 days for a response, after which a written reminder will be sent
  • Where no response thereafter is forthcoming, the usual method of escalating contact with investee companies is via senior management; the Chief Executive (for strategic and operational matters) or the Chairman and Senior Independent Non-executive Director (for governance and other issues)
  • Senior CFB/Epworth management, including the Chief Executive Officer, would be available to lead any escalated activity
  • We are willing to share and make our views known when concerns are not fully met, and we actively collaborate with other like-minded investors in the event of an escalated approach
  • We do not subscribe to the view that one size fits all, and a nuanced, case by case approach may be appropriate depending on the circumstances. Our general principle of seeking to escalate via individual or collaborative action is however a fundamental principle of Stewardship

Principle 5: Collective Action

“Institutional investors should be willing to act collectively with other investors where appropriate”

  • We actively seek to partner collaborative initiatives with like-minded investors in particular the Church Investors Group, a collaborative organisation of faith based investors in Britain and Ireland, but also through other groups of responsible investors in the UK and overseas: www.churchinvestorsgroup.org.uk
  • We are willing to co-file and take an active role in the preparation of shareholder resolutions with other investors where these are deemed to be appropriate and in response to material ethical and investment concerns that would otherwise have gone unaddressed
  • We have been active partners in the ‘Aiming for A’ investor coalition that seeks material risk disclosure from high-impact companies on climate change portfolio resilience
  • The CFB and Epworth are signatory participants in a number of investor coalition initiatives that support collaborative action on material ESG (environmental, social and governance) risk. These include:
    • Access to Medicines Index (ATMI)
    • Access to Nutrition Index (ATNI)
    • Business Benchmark on Farm Animal Welfare (BBFAW)
    • Carbon Disclosure Project (including CDP Water and Forest Footprint)
    • Extractives Industry Transparency Initiative (EITI)
    • Institutional Investors Group on Climate Change (IIGCC)
    • Principles of Responsible Investment (PRI)
    • Members of the UK Sustainable Investment & Finance Association (UKSIF)

The Chief Executive of the CFB is the named contact for collaborative engagement

Principle 6: Voting Disclosure

“Institutional investors should have a clear policy on voting and disclosure of voting activity”

  • The CFB and Epworth supports the principle of considered voting, believing that shareholders have a vital role to play in encouraging high standards of corporate governance from the perspective of being long-term investors. We will therefore register and vote proxies at all UK and European meetings in which we have a shareholding
  • We have adopted a policy of voting in support of company management except where proposals are considered to be in breach of UK or in-country European corporate governance best practice, or are viewed as not being in the economic interests of shareholders
  • As long-term investors we believe a pragmatic approach best fulfils the objective of building shareholder value over time. We will seek to engage pro-actively with companies where either existing corporate governance arrangements or management proposals cause concern. A decision either to abstain or oppose is taken based on the guiding principles set out in our voting template. Specifically we take a strong view on
    • Executive pay
    • Board independence and diversity
    • Climate change laggards
  • The CFB and Epworth actively vote their directly held shares. These are principally domiciled in the UK and Continental Europe
  • Our proxy voting policies and templates, developed in partnership with other like- minded investors are published on the website
  • Our summary UK and European proxy voting reports are published electronically each quarter, whilst a full voting record is available on request
  • We have been instrumental in facilitating greater coherence in voting among the British and Irish Christian churches to emphasise the importance we collectively place on sound corporate governance
  • Proxy voting is outsourced to an external specialist voting agency. The current agency employed in exercising proxy voting is ISS for our UK and Continental European equity holdings
  • Voting recommendations are based on a Voting Policy Template developed in partnership with other churches and executed by ISS. Voting outcomes are monitored closely to ensure they are appropriate and comply with the Policy Template. Voting decisions can, and are, manually over ridden if required
  • In accordance with their policies, the CFB and Epworth do not arrange stock lending and recall

Principle 7: Periodic Reporting

“Institutional investors should report periodically on their stewardship and voting activities”

  • We report to clients on our investment and Stewardship activities on a quarterly basis. As well as the required financial performance and Fund activity reports, this includes detailed coverage of our ethical and responsible investment engagement work on behalf of clients
  • Each quarterly report provides an informed roundup of the main areas for engagement during the period and any outcomes and would normally include disclosure on
    • Climate change
    • Extractives industries including oil & gas and mining
    • Engagement initiatives such as the Living Wage, Funeral Poverty and Corporate Lobbying
    • Corporate governance proxy voting
    • Other collaborative initiatives, principally via the Church Investors Group
  • An Annual Report is published of the work of the CFB. In addition, JACEI reports annually to the governing body of the Methodist Church (the Methodist Conference), and this contains an assessment of whether the CFB has managed the Funds under its control in accordance with the aims of the Methodist Church. These annual reports are available to all CFB and Epworth clients and are publicly available online. Each Annual Report includes detailed disclosure on
    • Significant Stewardship issues
    • Regular reporting items
    • Role and function of the Committee
    • Named contacts
  • Annual Reports of the Funds managed by Epworth are freely available from the Epworth website as are quarterly ethical and responsible investment and summary voting reports, and copies of the Funds’ policies
  • The Joint Advisory Committee on the Ethics of Investment (JACEI) was established in 1983 by a Resolution of the Methodist Conference to provide a mechanism for the Methodist Church to tackle ethical dilemmas and to report annually. Its Terms of
  • Reference, Procedures and membership are published annually in the JACEI Annual Report
  • JACEI draws its membership from CFB Council and the Joint Public Issues Team (JPIT) and provides independent external oversight of all CFB and Epworth Stewardship policies, processes and procedures, consistent with current best practice
  • JACEI serves as the CFB’s independent assurance function and its Annual Report serves as the document of record and accountability of all the CFB’s Stewardship interventions.
  • Given the strong focus on Stewardship within and across the CFB and Epworth, we believe JACEI provides the appropriate and relevant external oversight commensurate with our being accountable to the Methodist Church.

Our stewardship activities are an integral part of how we manage our Funds on behalf of the Methodist Church and our Epworth clients. These activities are fully integrated into our operating compliance procedures and reporting lines through the Church and to Epworth clients.

This Statement has been endorsed by the CFB Council and the Epworth Board.

September 2016