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.