Ethical Investment Review December 2019

Climate change – evaluation of companies

We are nearing the completion of our project to assess the extent to which fossil fuel companies are aligned with the Paris Agreement. The baseline assessment of our portfolio holdings has been completed. We are now engaging with companies and conducting further research. We intend to meet with the largest oil and gas holdings well ahead of Methodist Conference later this year. So far we have had fruitful engagements. We are also encouraged by news that more fossil fuel companies are setting zero emissions targets and moving to publish estimates of Scope 3 emissions. A report will be sent to the Conference outlining the conclusions of the work, which are likely to include recommendations to exclude more oil and gas companies.

Climate change – company engagements

Meanwhile, our engagement work on climate change continues to be extensive. We have co-filed a shareholder resolution at Barclays. This resolution is the first at a UK bank regarding climate change and calls for Barclays to set and disclose targets to phase out financial services to those parts of the energy sector which are not aligned with the Paris climate goals. This includes lending to specific fossil fuel projects, as well as to companies themselves. This resolution was organised by ShareAction, and will be voted on at the Barclays AGM in May 2020.

We have engaged with successfully engaged with Anglo American on its lobby activities, on behalf of the Climate Action 100+, and in collaboration with the Church of England Pensions Board. Anglo American had previously released an independent audit of its lobbying activities in 2018, however there was a feeling amongst investors that there was further for the company to go to assure that it is has robust governance and oversight procedures to monitor its trade associations. Following meetings with the company, a statement was released by Anglo American outlining its response.

It has committed to ensure that there are no fundamental misalignments between industry associations’ policy positions and the Paris Agreement. It will also publish a full list of membership of industry associations including any fees paid and the rational for the membership.

Climate change – policy engagements

We were signatories to a letter sent to all EU heads of state and governments on the 2050 net-zero emissions target, noting our support for a net-zero emissions target for the EU and the alignment of all relevant EU legislations to the temperature reduction goals set out in the Paris Agreement. This was coordinated by IIGCC and noted the urgent “need to act” in the face of the climate emergency and how “the costs of inaction will be catastrophic”.

Without greater action, projected losses from a 4°C global temperature rise are €21 trillion over the next 80 years. Greater action on climate change could deliver €23 trillion in global economic benefit to 2030. The estimated benefits of adopting the target include an estimated two percent boost to GDP across the EU through to 2050 and the creation of 2 million new jobs. Importantly, this does not include the additional benefit of avoided climate change and adaptation related costs.

Access to Medicine

We participated in a conference call with GlaxoSmithKline as part of the Access to Medicine initiative. The Access to Medicine Foundation ranks, stimulates and guides pharmaceutical companies to do more for the people living in low- and middle-income countries without access to medicine. GlaxoSmithKline is scored as the top company in the 2018 ranking of the index; however, as with all of the companies in the index, there is room for improvement. A good discussion was had between investors and GSK representatives around the opportunities and complexities the company faces.

Modern slavery

We participated in the Church Investors Group conference in November, where work done on our behalf on modern salvery was discussed. A report on the topic has been published outlining the engagement work that has been undertaken over the last 2 years. The report outlines the engagement that began in 2016 on behalf of all members of the Group. Letters have been written to a total of 265 companies to encourage greater awareness and action around ending modern slavery.

The engagements encouraged companies to develop better policies, processes and procedures for identifying and then addressing modern slavery. One of the main causes of modern slavery is debt bondage, and companies were pressed to adopt the ‘Employer Pays Principle’. This is a provision which prohibits employers from charging recruitment fees. In addition, there were attempts to increase awareness of modern slavery amongst stakeholders and call for increased global legislation and regulation aimed specifically at tackling modern slavery.

Corporate governance and voting

In the UK, we voted at 13 AGMs in the quarter. We opposed 75% of remuneration votes, including those for ABFoods, BHP Group and Ferguson. The Epworth Global Equity Fund voted at 22 AGMs, opposing 82% of remuneration votes.

We voted in favour of the shareholder resolution at BHP Group to approve the suspension of memberships of industry associations that are involved in lobbying inconsistent with the goals of the Paris Agreement. This gained 22% of votes, despite being opposed by the board, and we anticipate a response by the company in due course. Full voting reports are available on request and a summary is published on our website.

Ethical Investment Review September 2019

Climate change

Our project to examine the extent to which fossil fuel companies are aligned with the Paris Agreement has made further progress. Following a review of the indicators we are using, we have analysed more companies. We have also extended our work from oil and gas to mining companies. We remain on track to make judgments on oil and gas, and coal, companies in the first half of next year. We are assessing these companies in the round and over time because a snapshot of current information does not reveal which companies appear committed to change in practice. It is clear considerable further change is required in this sector.

We analysed Fortis, a Canadian utility company according to our electricity generation policy. We decided to exclude it because it had a high exposure to power generation from coal.

We supported a shareholder resolution at the BHP Billiton AGMs, calling for membership of lobbying groups to more clearly reflect the need to support transition to a low carbon economy. This followed the news that the company remained a member of the Minerals Council of Australia which has spent significant sums on pro-coal lobbying and advertising.

Our work on low carbon transition across portfolios continues, including in collaboration with other investors. We have joined the IIGCC Paris Aligned Investment Initiative, focusing on listed equity and corporate bond assets.

Beyond fossil fuels

Over the summer months we have been engaging with some of our investors around the issue of investments in fossil fuels. It is clear that some of our investors would like to proceed more quickly and disinvest from oil and gas producers now. Following those discussions we held a successful client conference, Beyond fossil fuels, to discuss how a new fund avoiding oil and gas producers would look.

This discussed the investment focus of a new fund, the investment implications of disinvesting from oil & gas and whether investors were comfortable remaining invested in heavily polluting industries such as airlines or cement. Following the conference we have consulted further and we are now engaging in detailed fund design.

Carbon footprint

We are committed to managing portfolios with carbon footprints that are relatively low and measurably declining. We commission Trucost to analyse our portfolios annually. The emissions allocated to each company include Scope I & II emissions (direct and energy) and the supply chain elements of Scope III, though not the customer use elements of Scope III. In particular, the emissions released by burning fossil fuels are not allocated to the fossil fuel companies.

The data for 28 February shows the carbon footprint of the UK equity portfolios rose over the year and is above the market. One reason for this is that our ethical approach excludes the relatively lower carbon intense tobacco sector and is therefore more likely to have a higher weighting in utility companies. In addition, much of the difference between the portfolios and the market can be explained by the fact that the portfolios hold Cranswick and Hilton Food Group. These are food production companies involved in the meat industry. Trucost attributes to their footprint the carbon emissions from the animals in their supply chains.

This result raises some interesting issues. Animals do release greenhouse gasses yet we have not taken the view that meat consumption is unethical. It highlights that there are trade offs for society. We are reviewing the result nevertheless. It should also be noted that there is no consensus about how a portfolio carbon footprint should be calculated and other methodologies produce different results.

Plastics

Alongside other investors, we are engaging with the Marine Stewardship Council to encourage it to reference ‘ghost gear’ in its sustainable fisheries standard. ‘Ghost gear’ is old fishing gear that can be lost or abandoned in the ocean, significantly contributing to the level of plastic pollution.

Modern slavery

We supported an investor response to a UK government consultation, entitled Transparency in the supply chain. The response called for mandatory reporting to be expanded from the private to the public sector, noting that Modern Slavery is a risk in all organisations. It recommended improved reporting on the outcomes of actions companies take. Separately, we engaged with Watkins Jones and The Renewables Infrastructure Group about their policies and approach towards combatting Modern Slavery.

Access to medicine

We are participating in the Access to Medicines engagement programme, which will be engaging with 19 listed pharmaceutical companies on both access to medicine and the third Sustainable Development Goal, which focuses on healthy lives and promoting wellbeing for all ages. The purpose is to encourage companies to continue their efforts to improve access to medicines in low and middle income countries.

Child obesity

Healthy and adequate nutrition has long been an ethical investment concern of ours. Our policies on children’s issues and on the food industry highlight it as an area for engagement, noting both the challenges of childhood obesity and malnutrition. We have joined with an initiative run by ShareAction which aims to engage with companies about childhood obesity. ShareAction is working with Access to Nutrition, an initiative with which we are already involved. We are likely to sign a supportive investor statement later in the autumn.

Corporate governance

The quarter marks the end of the main voting season. We voted at 14 UK AGMs, opposing 67% of remuneration votes, including those for Berkeley Group, BT Group, Burberry, Cranswick, Experian, SSE and Vodafone. Insufficient boardroom gender diversity prompted votes against Nomination Committee chairs at BT Group, DS Smith, National Grid and SSE. The Epworth Global Equity Fund for Charities voted at 10 AGMs, opposing all three remuneration votes.
Full voting reports are available on request and a summary is published on our website.

Ethical Investment Review June 2019

Climate change

Climate change continues to be one of the main areas of our ethical work. We co-filed a shareholder resolution at BP’s AGM, calling on the company to explain how it will align with the Paris Agreement. The resolution secured the BP board’s backing and was passed with 99.47% of votes. We also supported a resolution organised by the activist group ‘Follow This’ calling on BP to go further, including publishing Scope 3 emissions targets; unfortunately, this only secured the backing of 8.35% of investors.

We attended the Anglo American AGM, where we made a statement on behalf of the Climate 100+ investor coalition; we co-lead on engagement with Anglo American. This is part of an ongoing dialogue being lead by the CFB and Hermes in regard to Anglo American’s transition to a low carbon economy. This involves biannual meetings with the company to raise issues related to climate change, including climate linked remuneration, scope 3 emissions, and the reduction of coal mining. We look forward to the next meeting with Anglo American.

We continue to work on our project to evaluate the consistency fossil fuel companies’ business models with the Paris Agreement. We remain on track to draw final conclusions in 2020. With the launch of the new Global Equity Fund for Charities, we had to undertake an interim judgement on a number of global oil companies and decided that some would be highly unlikely to meet the criteria and so excluded Chevron, ConocoPhillips and ExxonMobil from investment.

We have already excluded several other fossil fuel producers under our existing policies and it is likely we will exclude further companies in future. However, we are aware that some clients want to move faster so we are consulting on the potential for launching a fund which excludes all companies with significant involvement in fossil fuel extraction.

The approach banks have been taking with their lending policies and climate change has been another area of focus. We have engaged directly with the Canadian banks to which we have exposure with respect to their lending to companies involved in tar sands projects, and found their responses to be disappointing. We are reflecting on the next steps. We have also joined other investors in writing letters to Barclays and Unicredit regarding their lending to fossil fuel projects.

Mining

The tailings dam disaster near Brumadinho in Brazil earlier this year remains very much in the minds of investors. We are part of an investor coalition organised by the Church of England which engages with mining companies on their tailing dams. This initiative has seen letters sent to 651 listed mining companies, in order to create a global register of tailings storage facilities. This is designed to raise awareness of the tailings facilities that the company owns or operates in order to see which company has responsibility for the facilities, and the scale of the risks that it faces.  As of 5 July 2019, 31% of companies contacted have responded, and we were pleased to see that included 34 of the top 50 mining companies. We continue to be active in this coalition.

The Mining and Faith Reflections Initiative (MFRI), of which we are part, organised a conference in the Vatican on Mining and the Common Good. Delegates included church, NGO, and local community representatives along with mining CEOs and other executives.

Tea & workers’ rights

We have been engaging with tea producers for some time, recognising the abuses that can take place within the sector. We wrote to Unilever to ask for greater transparency on the estates from which it sources tea and requesting this to be disclosed publically. We were pleased to receive a response from Unilever, which confirmed that the company will now publish the tea estates it sources its UK and Ireland tea from on its webpage.

Israel Palestine

We continue to monitor investment issues with respect to Israel Palestine, applying our dedicated policy. We had engaged for some time with Heidelberg Cement; however for unconnected reasons our funds no longer hold shares in this company.

Living Wage

As part of our work with ShareAction, we engaged with Reckitt Benckiser and Intercontinental Hotels Group in June to encourage both companies to become Living Wage accredited.  We look forward to hearing their responses in due course.

Plastic

We have continued to engage with companies on the issue of plastic pollution. We contacted Ted Baker about the use of plastic micro fibres used in the clothing industry. These can end up in oceans. In its response, Ted Baker highlighted its commitment to using sustainable fibres where possible and it noted that natural fibres can also have negative impacts from the use of natural resources such as water. We co-signed a letter to 50 global consumer goods companies organised by As You Sow, an American NGO, encouraging them to complete a survey on plastic packaging, to allow an assessment of their approaches.

Principles for Responsible Investment

The PRI annually undertakes an assessment of its members’ approaches and activities with respect to responsible investment. We achieved A+ ratings for our overall ESG strategy and governance, A+ for our approach with indirect holdings, A+ for our incorporation of ethics into our management of our equity holdings, and As for active equity and corporate bond ownership.

Corporate governance

Q2 was a busy quarter for voting with many companies holding their AGMs. Our voting policies resulted in voting against three quarters of remuneration reports in the UK, in many cases because of excess levels of remuneration. We oppose the election of directors where policies or outcomes on remuneration, board diversity, tax transparency, climate change or corporate governance are particularly poor. This resulted in opposing 14% of directors in the quarter. Our voting policies are applied to all of our holdings in the new Global Equity Fund as well as our UK Funds.

Ethical Investment Review March 2019

Climate change

Our work evaluating fossil fuel companies’ alignment with the Paris Agreement has made considerable progress. We are assessing the extent to which the business plans of these companies are aligned with ‘well below 2C’. Our project looks at companies’ current asset mix, capital expenditure plans, climate strategy & governance, transition plan and direct emissions. We have developed methodologies for all five assessment areas and have begun to apply them to companies. Overall, we are examining 29 metrics on each company. Our next steps are to refine our approach and engage with the companies we are assessing.

We continue to be active in investor coalitions such as Climate 100+. This includes co-filing a shareholder resolution at the BP AGM later this year, calling on the company to outline how it will align with the Paris Agreement.

Mining

In January a tailings dam near Brumadinho, Minas Gerais, in Brazil, collapsed, almost certainly killing over 300 people. The mining company responsible for the dam was Vale, which had operated the Samarco dam which collapsed in November 2015. Our portfolios did not hold Vale but the disaster highlighted the risks associated with such tailings dams.

We are part of an investor coalition organised by the Church of England to put pressure on mining companies to reveal more information about their use of tailings dams and to adopt independent standards. We participated in an investor roundtable in March with investors and mining companies. We have been encouraged by the acknowledgement of some leading mining companies of the need for change and have been engaging on this issue with companies held in our portfolios. We are working to encourage disclosure from mining companies on their exposure to tailings dams as there is very little information available and the risks to life are considerable. We will be working as part of the coalition on engagement around the tailings issues.

We continue our work helping church and mining leaders discuss what mining for the common good means in practice, especially for communities directly affected. The Methodist Church, Church of England, and the Vatican continue to explore ways we can share perspectives and engage with mining companies.

Pooled investment funds

Investment in pooled investment funds, also known as collective investment schemes, raises some challenges for ethical investors. Pooled funds are used to provide access to specific asset classes, thematic investments or strategies that could not otherwise be accessed cost effectively or in the appropriate size without a heightened risk of liquidity becoming unbalanced. However, there can be a risk that owning stakes in such funds can indirectly expose portfolios to business activities and companies that would otherwise be excluded on ethical grounds. This is similar to owning shares in a large company with a small division involved in activities which would disqualify it from investment were it the main business.

On JACEI recommendation, we have published a policy on investment in pooled funds. The policy acknowledges the advantages of pooled funds when specialist expertise or geographical exposure is required. We will seek pooled funds with a similar ethical investment approach to our own where possible and we will engage with the fund managers. We will avoid pooled funds with significant exposure to companies in which we would avoid direct investment. The policy is available on our website.

Israel Palestine

Continuing the long running engagement that we have had with Heidelberg Cement regarding a quarry in the West Bank, the company has told us that the quarry is to be sold to a private party, and that production at the site has ceased.

Living Wage

We engaged with BT Group last year to encourage it to become Living Wage Accredited. We continued engagement through to February 2019, when it became clear that the company would not become accredited, which was disappointing. We will continue to monitor this situation, and will engage again in the future. The engagement was part of a larger effort, where we encouraged seven companies to become Living Wage accredited. We continue to work with ShareAction on this issue.

Worker rights

Our letter to the Chairman of Ted Baker, a clothing retailer, following allegations of inappropriate behaviour in the workplace, received some publicity. The CEO later voluntarily suspended himself from duties and in March the company announced that he had resigned.

Farm animal welfare

In collaboration with FAIRR, we joined other investors engaging with Whitbread regarding antibiotic use in its supply chain. Although Whitbread has now sold its Costa Coffee division, it still owns other restaurants and food outlets. Questions were asked around the development of targets and a timeline for implementation to encourage suppliers to report the quantity and type of antibiotics used in different species of animal. There was also a detailed discussion around the audits that take place with regard to animal welfare. Whitbread was forthcoming on the subject and we look for progress during the year.

Stewardship Code

Our 2019 Stewardship Code Statement is now available. Our Statement continues to be rated Tier 1. In future the Code is expected to place more emphasis on environmental, social, and governance considerations.

Corporate governance

In association with other Church Investors Group members we revised our voting template in time for the 2019 voting season. The standards we expect on remuneration and boardroom gender diversity remain high and we made some small adjustments this year. We extended the boardroom diversity requirement beyond the UK where possible and we added an element on tax transparency.

There were relatively few company meetings this quarter. Full voting reports are available and a summary is published online.