The developing COVID-19 pandemic and the response to it has dominated events this quarter, and also impacted our ethical work. Many companies are receiving government, ultimately taxpayer, subsidies in the form of grants, including to maintain jobs, and guaranteed loans. Companies’ priorities have been ensuring their survival and the well-being of their employees. We recognise that and so we will not for the time being be voting against the re-election of board chairs and executive directors at AGMs, unless there has been particularly poor performance responding to climate change. This temporary policy will be reviewed at the end of Q2.
Looking further out, there will be greater expectations for companies which receive government support, whether direct or indirect, to be good corporate citizens. This includes paying a fair rate of tax, preventing excessive executive pay, and paying the Living Wage.
We have completed our review of 15 oil and gas companies, examining the extent of the alignment of their business models and investment plans with the Paris Agreement. We assessed climate change scenarios and looked at 25 metrics for each company. The Paris Agreement targets an average temperature rise of ‘well below 2°C’ but we were also mindful of growing calls for a 1.5°C target. A new development was the inclusion of companies’ Scope 3 emissions targets and ambitions in our assessment.
Our assessment was reviewed by the Joint Advisory Committee on the Ethics of Investment. Both our assessment and JACEI’s deliberations have concluded that further oil and gas companies should be excluded from investment on ethical grounds. We will make a further announcement about this soon. We have also committed to further engagement with other oil and gas companies. The Committee’s report will be published in Q2.
During the quarter there were further positive developments in companies’ responses to climate change. The most significant was from BP, with its new CEO announcing an ambition of zero net Scope 3 emissions from upstream operations by 2050. This represents a major step by the company. However, it has yet to provide any details on how it will achieve this aim and it does not currently rank amongst the leading oil and gas companies in our analysis. In the current quarter, Royal Dutch Shell has announced a new ambition for Scope 3 emissions intensity based on a 1.5°C scenario rather than 2°C.
Following the results of the CFB carbon footprint analysis, and in line with our 2009 policy, we have engaged with both Cranswick and Hilton Food Group. These companies were found to have higher than average carbon footprints by Trucost, due to Scope 3 emissions from the meat supply chain. We asked what actions the companies were implementing to reduce supply chain emissions, as well as what measures they were taking to reduce those Scope 1 and 2 emissions within their control. We were encouraged by Cranswick’s response: looking at the impact of animal feed of the animals, steps to reduce waste, and a commitment that all of its owned farms will be carbon neutral by 2030. We look forward to hearing back from Hilton Food Group in due course.
Barclays responded to the shareholder resolution we co-filed through ShareAction by proposing a resolution of its own. The Barclays resolution includes a net zero emissions by 2050 ambition along with a commitment to transition its activities to align with the Paris Agreement. While the management commitment is a welcome step, it does not commit to any targets to phase out lending to fossil fuel industries. We are, therefore, continuing to co-file the shareholder resolution. The AGM is in early May.
In line with our engagement policy on tax justice, we engaged with two of our holdings in the quarter. We spoke to both MJ Gleeson and The Renewables Infrastructure Group about the Fair Tax Mark and encouraged them to seek accreditation. Both companies are considering the Fair Tax Mark and the implications of accreditation further as a result. We look forward to their responses. Separately, our voting policy responds to poor disclosure of management action on tax.
As part of the Healthy Markets initiative, which we support through ShareAction and Access to Nutrition, we attended a briefing on Supermarkets and the role that they play in tackling obesity. We are looking at new ways we can engage on this topic.
We engaged with Segro and DS Smith on the Real Living Wage. ShareAction had contacted both companies previously but they had not become accredited. We asked the companies about barriers to accreditation. Segro told us it paid at least the Real Living Wage to its employees, but to be accredited would also need its supply chain to be Real Living Wage compliant. We look forward to hearing back from DS Smith.
During the quarter we refreshed our voting policy, working alongside the Church Investors Group, in time for the 2020 voting season. This already holds companies to high standards on executive pay, boardroom gender diversity, climate change, and tax justice. We regularly vote against executive remuneration schemes and against the reappointment of directors when pay schemes are particularly egregious. This year, new measures extend expectations on diversity and hold directors to account on Modern Slavery. Mining companies face additional scrutiny on the issue of the management of tailings dams following the Brumadinho disaster that killed 270 people last year.
During Q1 we voted against 64% of remuneration reports in the UK Equity Fund and 86% in the Epworth Global Equity Fund. Our voting policy also led to the Funds voting against a number of directors.
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.
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.
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.
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.
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.
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.
Epworth Investment Management, along with its owner, the Central Finance Board of the Methodist Church (CFB) has defined its mission as: seeking practical solutions which combine Christian ethics and investment returns.
Our aim is to:
Epworth invests with Christian ethics. We aim to construct and manage investment portfolios which reflect this approach. We integrate ethical considerations into our investment process, evaluating ethical, environmental, social, and governance (ESG) risks and concerns in the businesses in which our portfolios invest.
We are advised on our ethical approach by the Methodist Church’s Joint Advisory Committee on the Ethics of Investment (JACEI).
When analysing a potential investment in a company, we are concerned with what a company does and how significant and serious is any exposure to issues of ethical concern. We also examine how a company is run.
Epworth ethical policies enable the identification of companies which are not consistent with our Christian ethical investment approach, as advised by JACEI. Epworth operates proprietary ethical exclusion lists derived from these policies and advice on securities in global markets.
Our ethical investment policies and quarterly Ethical Investment Reviews can be found at https://www.epworthinvestment.co.uk/news-and-library/ethical-hub.
Screening is applied both to equity and fixed income securities.
Screening for exclusions is derived from our unique ethical investment approach, as described above. We use a number of screening tools to assist us, but the criteria are determined by Epworth and reflect its policies and approach.
We apply ethical exclusions to avoid investment in companies with material or significant exposure to the following areas of business activity:
Companies in the extractives sector are excluded from investment until being ‘positively’ screened as acceptable for investment, usually following a period of engagement.
Under our climate change policies companies are excluded where they have a significant exposure to carbon intensive fuels such as coal and oil sands, or where they are ‘wholly or mainly’ committed to fossil fuel exploration.
Other ad hoc exclusions are applied from time to time, for instance where there may be human rights concerns. This will normally follow a period of close engagement and dialogue.
The principal means by which we exercise ethical stewardship is through engagement with investee companies. This is sometimes known as ‘active ownership’. Engagement is applied both to stock exchange and fixed interest securities. The way we approach Stewardship is set out as part of our annual Statement under the UK Stewardship Code, to which we are a Tier I signatory.
We encourage high standards of ethical business practice and will seek to engage where we:
Engagement is carried out by all members of the investment team, including senior management, via written correspondence (letters and email), telephone conference calls, or face to face meetings.
We may choose to engage with investee companies collaboratively. We are involved in a number of collaborative investor initiatives in which effort is pooled.
The principal, but not sole, means of exercising such engagement is through the CFB’s membership of the ecumenical Church Investors Group (CIG), https://churchinvestorsgroup.org.uk/ where the CFB leads or supports various engagement strands. One of the core strategic goals of the CIG has been defined as:
Other collaborative engagements are conducted through our memberships of the IIGCC (Institutional Investors Group on Climate Change), PRI (Principles of Responsible Investment), BBFAW (Business Benchmark on Farm Animal Welfare), and FAIRR (Farm Animal Investment Risk & Return). We use other investor tools and benchmarks such as the Access to Medicines Index and Access to Nutrition Index, in order to conduct engagement.
We routinely engage with investee companies itself on a range of material ethical and ESG issues, which have recently included:
Responses are evaluated to determine whether further intervention is required, or whether the engagement may be deemed satisfactory and therefore closed. Where a company fails to respond after a reasonable period of time, a follow up approach is made, either to the same recipient or (wherever possible) to an alternative named individual.
Company preparedness in response to climate change and board diversity have been integrated into our corporate governance voting policy, which may result in oppose votes being registered against the re-election of individual directors, or against the adoption of the Annual Report & Accounts.
Engagement is normally targeted at senior management, specifically:
Meetings are typically held with sustainability or corporate responsibility professionals or with the senior leadership team.
From time to time we are invited to consult on corporate remuneration proposals, and it is our policy to respond constructively to these consultations.
We may respond to, or participate in, public policy consultations on either corporate governance, corporate reporting or wider stewardship reviews, where these are of material interest. We may also engage with other public bodies such as regulators, government or supra-national bodies such as the OECD or EU on specific matters pertinent to ethical investment stewardship.
Our engagement activity is published quarterly in our Responsible Investment Review for clients and online at http://www.epworthinvestment.co.uk. More information on engagement activity is published in the annual JACEI Report to Conference of the Methodist Church, which is also available online.
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.
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.
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.
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.
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.
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.
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.
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.