Annual report 2017

Fossil Fuels and Ethical Investment

Fossil Fuel Investment Ethics

Whilst climate change must be dealt with at government level, businesses and investors also have an important role to play

Climate change poses serious challenges to us all. The recent COP 21 summit in Paris recognised this challenge and made government level moves to transition to a low carbon economy. Whilst climate change must be dealt with at government level, businesses and investors also have an important role to play.

This is something Epworth Investment Management and the Central Finance Board of the Methodist Church (CFB), which manages investments on behalf of the Methodist Church in Great Britain, has long recognised. In 2015 Epworth extended its policy on climate change to address the complex challenges presented by different types of fuel. As a result two holdings were sold and four more excluded from potential investment on ethical grounds. This was because they all had business models based on the exploration for, and development of, new fossil fuel assets. A holding was also sold due to the company’s exposure to thermal coal and its ongoing commitment to the business.

The Methodist Church has responded to the challenge of climate change in a variety of ways. At the 2015 Methodist Conference there were three Memorials and a Notice of Motion on the subject as well as a debate on the report Fossil Fuels and Ethical Investment. This year the Joint Advisory Group on the Ethics of Investment (JACEI), convened a forum to examine the theology, economics and likely scenarios of climate change as well as the case for disinvestment. The Forum was held in London on 23 March. Recognised climate change specialists and concerned NGOs helped us evaluate what was said, with the aim being to assist JACEI in discerning the appropriate advice to offer Epworth and the CFB related to fossil fuels and climate change.

Epworth’s Climate Change Policy sets out how we encourage companies to reduce greenhouse gas emissions and improve their disclosure. This was the impetus behind our membership of Aiming for A, a coalition of institutional investors with £230bn assets, including other members of the Church Investors Group, the Local Authority Pension Fund Forum, and the Pensions Trust. Aiming for A was launched in 2012 to engage on climate and carbon risk with the 10 largest UK extractives and utilities companies. The aim is to drive carbon risk management and disclosure by encouraging companies to improve their rating to the top band as measured by CDP (formerly Carbon Disclosure Project). The Survey’s scoring methodology gives considerable weight to operational emissions management.

Fossil Fuels Ethical Investment

In 2015 the Coalition successfully co-filed shareholder resolutions for the BP and Shell AGMs

In 2015 the Coalition successfully co-filed shareholder resolutions for the BP and Shell AGMs, encouraging the companies to better manage their own carbon emissions. Both resolutions were backed by the companies and the votes were both over 98% in favour. The impact of the resolutions can already be seen with the companies beginning to integrate climate change into their business strategies.

Aiming for A is now calling for major mining companies to step up their disclosure and signal that they have taken on board the challenges posed to their businesses by the global drive to mitigate climate change. In December 2015 the Coalition submitted ‘supportive but stretching’ shareholder resolutions to Anglo American, Glencore, and Rio Tinto with the aim of encouraging them to accelerate their efforts to adapt to a low carbon economy. Those co-filing these resolutions now represent over $4 trillion of assets. The resolutions direct the miners to address five main areas including reducing operational carbon emissions as well as supporting research and development into low-carbon energy. Shareholders will vote on the resolutions at the companies’ AGMs in the spring.

Ethical Investment Review June 2017

Ethical issues in the food & beverage industry

We work extensively to encourage companies to take seriously the threat of climate change.

Climate change

We work extensively to encourage companies to take seriously the threat of climate change. We do this through engagement, including in partnership with other investors. and through shareholder resolutions. We apply our research capabilities to ensure our portfolios reflect our ethical stance, which can lead to disinvestment in some cases.

We co-signed a letter from the Institutional Investors Group on Climate Change to the G7 and G20 leaders urging them to meet their commitments under the Paris Agreement and to drive investment in low carbon technologies as part of a transition framework. We also wrote to Centrica about its 25% stake in the Bowland Shale Basin in Lancashire, noting the effect on climate change and emissions and the potential environmental and community impact associated with fracking. We asked Centrica to provide more information on how it plans to keep within the two degree limit whilst it invests in shale gas exploration.

Through our partners in Wespath, part of the United Methodist Church in the US, our main overseas portfolio was involved in filing a successful resolution at the Occidental Petroleum AGM, with 67% support from shareholders who voted. The resolution called on the company to provide a detailed report assessing the impact of climate change. We also supported a similar resolution at the ExxonMobil AGM, co-filed by the Church of England, which received 62% support. We abstained on a shareholder resolution at the Royal Dutch Shell AGM which called on the company to set targets for its Scope III emissions (the emissions of its customers). We believed the target was impractical but were disappointed with the company’s response. The resolution attracted little support.

We are founding members of the Transition Pathway Initiative (TPI) which aims to determine how companies are progressing towards full transition. In June the TPI launched a sector review on utility companies. We use the TPI as a research tool.
The Methodist Conference this year expressed concern at the low rate of progress from Oil and Gas companies responding to climate change. Conference called for a lower disinvestment threshold based on when companies will be acting consistently with a 2C or below target. Our ethical investment advisory committee will be returning to this issue in detail and we will also be extending our analysis and engagement.

Breast Milk Substitutes Reckitt Benckiser engagement

Through the Church Investors Group, we engaged with Reckitt Benckiser over its planned acquisition of US infant nutrition business Mead Johnson

Breast milk substitutes

Through the Church Investors Group, we engaged with Reckitt Benckiser over its planned acquisition of US infant nutrition business Mead Johnson. Mead Johnson achieved a disappointing bottom position in the latest Access to Nutrition Index breast milk substitutes (BMS) rankings, suggesting its approach to the marketing of BMS products is considerably below best practice. We will continue to monitor the situation.

Extractive industries

We engaged with Rio Tinto after allegations were made that the company had relaxed its biodiversity commitments in Madagascar. The company stated in reply that a new independent multi-disciplinary committee would be overseeing the implementation phase of the site’s biodiversity and natural resources programme. We wrote to Anglo American after local community representatives expressed concerns over the safety of tailings management at the Minas Rio project in Brazil. We await a response. We participated in a BP meeting for responsible investors in which its 2016 environmental, social and governance performance was presented. BP appears to be developing interests in renewable energy and biofuels, albeit from a low base.

Fair trade

The fair trade movement has been one of the great success stories in terms of raising standards and improving economic livelihoods. We were therefore disturbed to learn that J Sainsbury, among the most significant UK contributors to sourcing fair trade produce, may be considering withdrawing from the Fairtrade mark and replacing it with an alternative ‘fairly traded’ standard. The Methodist Conference expressed its deep anxiety at the move by passing a Notice of Motion calling on the Church to engage with supermarkets to continue to support the Fairtrade Foundation Fairtrade mark. We will be engaging with the companies as shareholders.

Church Investors Group

We participated in the annual CIG conference in June. Its sessions focused on executive remuneration, climate change and how members can work with fund managers to deliver responsible investment objectives. The conference included speakers from Barclays, the Taskforce on Climate Related Financial Disclosures and the London Business School.

Executive Remuneration and Ethical Investment

We will soon publish a revised and updated statement of our corporate governance voting policy

Corporate governance & executive remuneration

We exercise our votes at company general meetings in accordance with a template drawn up with fellow Church Investor Group (CIG) members. This year is for many UK companies a Remuneration Policy year, in which binding proposals are put to shareholders on pay policy for the period 2017-2019. We voted against many policy proposals as being either excessive or providing a poor link to performance.

The majority of UK AGMs take place during the June quarter, and we voted at 73 UK meetings, opposing or abstaining 13% of resolutions including 66 remuneration reports and policies (62%). In Europe we voted at 178 meetings, and opposed 22% of all resolutions.

We will soon publish a revised and updated statement of our corporate governance voting policy.

Ethical Investment Review March 2017

Climate change

As part of our commitment to managing portfolios consistent with a 2 °C world, we continually engage with companies about climate change. Companies are still responding to shareholder resolutions we have co-filed over the past couple of years. We use a number of tools to support our in-house research in evaluating responses.

As such we are founder supporters of the Transition Pathway Initiative, which aims to determine how companies are progressing towards full transition. A preliminary assessment of the oil and gas industry found climate risk was acknowledged as a business issue by almost all surveyed companies, but few were at a level where strategic assessment had begun. Utility companies were found to be more advanced than energy companies, but the most common factor hindering progress was found to be a lack of quantitative targets for reducing operational GHG emissions.

Ethical issues in the food & beverage industry

We have published a new Policy Statement on issues in the food industry relating to health, nutrition and wellbeing

Ethical issues in the food & beverage industry

We have published a new Policy Statement on issues in the food industry relating to health, nutrition and wellbeing. This recognises that diet related obesity and under-nutrition are key issues for the food and beverage sector. The Policy looks at the areas for engagement, principally product reformulation to remove salt, sugar and fat, or to add fortified nutrients. The Policy updates existing polices on Food and Nestlé.

Nestlé

We are committed to regular engagement with Nestlé. We attended a conference in London convened by Nestlé, bringing together many of the global agencies on infant nutrition to debate the First 1000 Days of Life. This considered nutrition from conception to two years, and the role infant formula manufacturers can play in the debate around improved ‘in-country’ regulation. This was a ground-breaking initiative and we were the only investment organisation represented.

Mining and Faith Reflections Initiative

The MFRI brings together church leaders and mining executives to discuss how mining can best promote the common good. We are involved because our relationships with both church and mining mean we have been able to help facilitate discussions. We took part in a visit to Colombia which was useful while also highlighting the challenges involved in organising engagement with communities. A Day of Reflection is planned for later this year. There is strong commitment by the Roman Catholic, Anglican and Methodist representatives to work closely together on the MFRI with a statement of ethical convergence between the three Churches being one specific outcome.

Carnival Corporation

Carnival Corporation was recently fined $40m for illegal dumping of oily waste at sea

Environment

Carnival Corporation is the world’s largest leisure travel company, specialising in ocean based tourism. The company was recently fined $40m for illegal dumping of oily waste at sea. The settlement with US authorities requires Carnival to retrofit 78 cruise ships to prevent reoccurrence. We wrote to Carnival regarding its environmental management to seek reassurance that it will in future adhere to the highest standards of waste management. We also challenged it on the approach to tackling climate change given shipping falls outside of the international climate agreement. A response is awaited.

Human rights

The French oil company Total has been excluded from investment since the 1990s stemming from its activities in Burma/Myanmar. Given changes in the country, we reviewed whether the exclusion remains warranted. In particular we needed to understand how Total protects human rights in the vicinity of its pipeline, and how it managed community relations in areas of conflict. An encouraging response was received from the CEO setting out some of the grievance mechanisms the company has established and inviting us to discuss these further at a meeting. We are due to meet the company in the near future.

The launch of the Corporate Human Rights Benchmark in March was the first attempt to rank companies across three sectors; agricultural products, apparel and extractives, according to their management of human rights risk. Very few companies scored well, suggesting it is difficult to respond to multiple human rights risks. BHP Billiton, M&S and Rio Tinto scored above average. We will use the Benchmark to help inform engagement.

M&S responded to our query about allegations of child labour in its supply chain in Turkey. The company assured us that child labour was not tolerated and investigations had been carried out within 24 hours of the allegations being made.

Farm animal welfare

The results of the 2017 Business Benchmark on Farm Animal Welfare saw several companies fall in terms of process or performance. We wrote to Compass Group, J Sainsbury and Whitbread seeking to understand why. Responses have been encouraging with both Whitbread and Compass setting out their plans for improving the way they communicate their approach to farm animal welfare.

Corporate Lobbying

Vodafone, WPP, RBS and HSBC have responded to our questions about their approach to lobbying transparency

Corporate lobbying

Vodafone, WPP, RBS and HSBC have responded to our questions about their approach to lobbying transparency. Vodafone in particular showed a strong commitment to full transparency, which was recognised in the Transparency International rankings.

Corporate governance & executive remuneration

We are part of the Church Investors Group (CIG) collaborative voting policy and we exercise our votes in accordance with a template drawn up by CIG. As a prelude to the 2017 proxy voting season, CIG wrote to all FTSE350 constituent companies setting out the new voting policy. This will take a strong and proactive stance on executive pay, gender diversity, climate change and wider corporate governance best practice. The Policy in particular targets excessive pay and whether incentives genuinely motivate superior performance.

The first quarter of the year is traditionally quiet. We voted at 10 UK meetings, and opposed or abstained 17% of resolutions. We opposed remuneration resolutions at Berkeley Group, Compass Group and WH Smith. In Europe we voted at 35 meetings, and opposed/abstained 16% of all resolutions.

Ethical Investment Review December 2016

Climate Change and Ethical Investment

The December 2015 Paris climate agreement came into force during the quarter

Climate change

The December 2015 Paris climate agreement came into force during the quarter. Signatories are committed to keep global warming within 2ºC of pre-industrialised levels and companies will need to develop transition strategies to meet these demanding targets. We attended a ‘fossil fuel transition scenarios’ seminar hosted by IIGCC that considered the resilience of oil majors and whether they are doing enough in response. Work by CDP indicated that the European oil majors rank much higher than their US peers in the transition to a low carbon economy.

A constructive meeting with John Wood gave reassurance that it was well positioned for the transition to a low carbon economy with a de minimus involvement in tar sands and exposure to oil services falling as it develops a clean energy focus including wind and battery storage capabilities.

The CFB is one of 13 founder asset owners of the Transition Pathways Initiative (TPI), which will assess how individual companies position themselves for the transition to a low carbon economy. An assessment of management quality and carbon performance of the oil and electric utility sectors has been issued as the first part of a phased roll out. The TPI tool will allow companies’ projected emissions to be profiled and compared to the 2ºC target and current public policy commitments.

Mining and Faith Reflections Initiative

We participated in a series of meetings in Rome where it was agreed that: the Anglican, Catholic and Methodist Churches should continue to work closely together on the Initiative; a statement of ethical convergence between the three Churches be set out; a site visit to Colombia in February; and senior church leaders and mining executives should meet in the spring prior to a Day of Reflection in the autumn.

Extractive Industries and Ethical Investment

Rio already has the best safety record in the sector, although a fatality free year remains elusive

Extractive industries

We were involved in the Rio Tinto investor sustainability day, where we heard about the impressive exercise to map accidents and injuries over 25 years to help understand the nature of fatality risk across its operations. Rio already has the best safety record in the sector, although a fatality free year remains elusive. A new strategy to assess biodiversity loss, which is now regarded as a critical risk, was also launched. On a more negative note we have been monitoring with concern allegations of bribery in Guinea.

We continue to monitor Samarco, BHP Billiton’s Brazilian joint venture with Vale. Additional concerns have arisen about the failed dam and ongoing environmental problems. Already BHP has set aside $1.2bn for compensation and ongoing remediation work. However, we were heartened by the decision of BHP to design a new global structure to strengthen joint venture safety and risk management where it is not the operator.

Access to Medicine Index

Once again GSK was ranked top in the Access to Medicine Index, and was particularly commended for its R&D targeted at urgently needed treatments in developing countries. It was pleasing to see that our engagement with AstraZeneca following its previous poor showing has been rewarded as it is now ranked 7 out of 20, up from 15 in the last survey.

Nestlé

We met with senior Nestlé UK managers as part of our ongoing engagement with the company. Sustainability initiatives in coffee, cocoa and commodity sourcing were discussed, as well as UK Modern Slavery Act reporting. Nestlé remains committed to the FTSE4Good process on Breast Milk Substitutes. Danone has become the second company to meet the stringent requirements for inclusion in the FTSE4Good Index.

Modern slavery

Modern slavery and human trafficking were the main themes of the Church Investors Group conference. Under the UK’s Modern Slavery Act companies with turnover in excess of £36m, any part of which is located in the UK, are now required to report actions to ensure that slavery and human trafficking have not occurred in their operations and supply chains. Alongside CIG colleagues we met with Next and British Land to understand their approaches in assessing the potential risk from trafficking and modern slavery.

Farm Animal Welfare and Ethical Investment

We became a signatory to a global investor initiative on anti-microbial resistance

Farm animal welfare

The widespread use of antibiotics in the food supply chain is believed to be in large part responsible for increased resistance in humans. We became a signatory to a global investor initiative on anti-microbial resistance in partnership with ICCR, As You Sow, and Farm Animal Investment Risk & Return. The initiative urges global food and hospitality companies to phase out the routine use of antibiotics in their operations. We are a Business Benchmark on Farm Animal Welfare Investor Statement signatory as we anticipate that farm animal welfare will become of increasing significance for responsible investors.

Corporate governance & executive remuneration

During the quiet fourth quarter we voted at 10 UK meetings, and opposed or abstained 24% of all resolutions. We opposed remuneration resolutions at Sky, Wolseley, BHP Billiton and AB Foods among others. In Europe we voted at 8 meetings, and opposed/abstained 11% of all resolutions.

We were invited to consult on remuneration policy by SThree, the specialist recruitment company. Our recommendations to reduce the threshold vesting level under the LTIP and increase the shareholding requirement threshold were implemented.

We welcomed the Government’s consultation on corporate governance which: addresses executive pay; strengthens employee, customer and supplier voices; and the toughens the governance regime for leading non-listed UK businesses.

UK Stewardship Code

We have been rated as a Tier I Signatory under the new Financial Reporting Council Stewardship Code rating system. This confirmed that our Statement is a good quality and transparent description of our approach, providing explanations of alternatives where necessary. Our Statement is available on our website.

Ethical Investment Review September 2016

Climate Change Investment

Government action on climate change has been slow but some progress has been made

Climate Change

Government action on climate change has been slow but some progress has been made. The Paris Climate Agreement has now acquired sufficient ratifying parties (55 countries and 55% of global GHG emissions) to be admitted into international law and will come into effect in November. During the quarter we signed a public letter with other members of the Institutional Investors Group on Climate Change to the G20 leaders, calling on them to ratify the Agreement and support a doubling of global investment in green energy by 2020.

As stated in our Climate Change Policy we target a below market carbon intensity in our portfolios. This has been achieved since we began measurement five years ago. Recently we became a signatory to the PRI Montréal Pledge, an initiative aimed at encouraging transparent reporting by investors of portfolio carbon impacts. Our full disclosure under the Pledge (renewed annually) can be seen on our website.

We met with energy supplier SSE during the quarter as part of the Aiming for A coalition. The company is making good progress in preparing future energy scenarios which it intends to make public. Our detailed discussion also covered SSE’s public policy role in lobbying for clean energy incentives.

We participated in the Royal Dutch Shell Sustainability Day, which included presentations by the Chief Executive and other senior personnel. Much of the additional transparency requested by the Aiming for A shareholder resolution has now been implemented, and the presentations focused on Shell’s progress in reducing emissions impact. Whilst Shell continues to progress thinking around carbon, capture & storage technology, it was disappointing to note that considerable challenges remain, particularly in relation to cost.

Extractives Investment

The remediation and restitution work appears to be progressing well following the dam collapse

Extractive industries

We continue to monitor the situation at Samarco, BHP Billiton’s Brazilian joint venture with Vale. The remediation and restitution work appears to be progressing well following the dam collapse. Whilst the company acted swiftly, the ongoing challenge is to ensure the response is clearly seen to be fair. It is noteworthy that the management has foregone their bonus payments given the loss of life and devastation caused by the accident.

Corporate lobbying

Our engagement on corporate lobbying with companies has delivered interesting results. We used information from a Transparency International (TI) survey when contacting companies. Strong and supportive responses were received from Sky, GSK and Vodafone. The response from Standard Chartered noted that it was working closely with TI to improve disclosure. Although the bank has strong overall governance procedures for lobbying, it is seeking to improve public scrutiny through enhanced disclosure. BT Group emphasised its existing public disclosures and improving transparency. However, we were disappointed with other responses. RELX is now working with TI, but provided little information about its approach. Associated British Foods rejected the TI survey approach on the grounds that it does ‘not have the same business model as most other companies’. We have asked both companies for more information.

Annual report

In July we published our Responsible Investment Annual Report, which covers the range of initiatives and engagements that we have participated in over the past year. Itis available on the website and hard copies can be obtained on request.

Diversity

We promote gender diversity in the boardroom and reflect this in our voting at company AGMs. The Davies Committee set a target of 25% women on FTSE100 Boards by the end of 2015, which was exceeded by the year end. A new target set by its successor body will seek 33% women on FTSE350 Boards by 2020.

For many companies this will be a challenging target, given the lack of progress so far. We co-signed an investor letter in the Financial Times in August calling on companies to escalate progress on diversity after evidence showed it to have slowed. The letter commended companies such as Halfords which has made strenuous efforts to balance its Board equally. We vote against Nomination Committee Chairs of those companies where meaningful progress has not been made.

Corporate governance & executive remuneration

The third quarter marks the end of the main UK proxy voting season. This year we have seen a modest increase in shareholder activism, but on the whole shareholders continue to approve remuneration schemes that we believe are excessive. During the quarter we voted at 26 meetings and opposed or abstained on 12% of all resolutions but 64% related to remuneration.

Water Shortage and Ethical Investment

Seven companies that had not previously participated in the CDP Water Survey request told us that they would do so next year

CDP water engagement

We have completed the Church Investors Group 2016 CDP Water Engagement project, which we led. The programme targeted companies for which water use and water stress is viewed as a material risk. We contacted 37 companies and while responses have been mixed, seven companies that had not previously participated in the CDP Water Survey request told us that they would do so next year. These included Burberry Group, IHG Group, John Wood Group, KAZ Minerals and M&S. CIG expects to continue this engagement initiative in 2017.

UK Stewardship Code

We have worked closely with the Financial Reporting Council, which oversees the operation of the UK Stewardship Code following its decision to ‘police’ responses more closely by introducing a system that rates managers as either Tier I (fully meeting expectations) or Tier II (not meeting expectations). As a result of our discussions, we believe our revised Code submission qualifies as Tier I. Our revised Code Statement is available on our website.

Ethical Investment Review June 2016

unpri-a-plus-rating

The scores reflect the benefits to clients of our integrated approach and commitment to ethical investment

Principles of Responsible Investment (PRI)

The PRI survey of our environmental, social and governance approach (ESG) has once again resulted in the highest score of A+ for strategy and governance as well as for incorporating ESG issues into our listed equities investment process. The scores reflect the benefits to clients of our integrated approach and commitment to ethical investment.

Climate change

This year, the Aiming for A shareholder resolutions at Rio Tinto and Anglo American, which we co-filed, and Glencore, which we do not hold, were approved by over 95% of votes cast. The resolutions called for reports on portfolio resilience to climate change. We proposed the resolution on behalf of Aiming for A at the Anglo American AGM. The process has been influential in Europe with energy and resource companies committing to more detailed reporting. However, the picture in the US is less positive where similar resolutions were opposed by the Exxon and Chevron Boards yet won support of 38% and 41% respectively.

Our UK equity portfolios continue to show a downward trend in carbon intensity and a lower carbon footprint than the FTSE All Share Index, according to Trucost. Full details of the results are available on our website in our Montreal Pledge declaration.

Extractive industries

We conducted a further round of engagement with the Chief Executive of Randgold Resources. The company operates in some challenging territories, such as Mali and the DRC. It was reassuring to see the company made strong progress last year in reducing safety incidents, with two mines achieving zero lost time injuries, and in reducing significant environmental incidents.

In advance of the Rio Tinto AGM we met with activists brought together by London Mining Network to understand community concerns and issues related to Rio’s operations. This helps us to understand grievances and where appropriate raise them directly with the company as part of a regular dialogue

We commended Rio Tinto for launching a ground-breaking document on how it integrates agreements into community and social performance, with over 40 now in place globally. It also disclosed a complete list of the tax jurisdictions in which it operates and has committed to supporting measures to eradicate aggressive tax avoidance. We continue to review updates from BHP Billiton as it responds to the Samarco tragedy. An independent foundation has been approved that will respond to the area’s social, economic and environmental challenges, informed by science and reflecting the needs of the community.

Transparency International

Based on the TI findings we wrote to 14 companies about their corporate lobbying policies and activities

Corporate lobbying

It is not always clear how and why companies are involved in corporate lobbying. Transparency International (TI) recently reported that although some good practice exists better disclosure is required overall. Based on the TI findings we wrote to 14 companies about their corporate lobbying policies and activities, commending GSK and Centrica for market leading practice and querying the poor performance of ARM, Experian, HSBC, Prudential, Standard Chartered, RBS, Vodafone, WPP and RBS. We also wrote to AB Foods, BT Group, RELX Group and Sky, urging improved transparency and accountability as they had all failed to respond to TI.

Funeral poverty

We received a reassuring response from Co-operative Funeral Care regarding funeral poverty, in response to our letter seeking to understand their approach. The company complies with the Fair Funerals Pledge and is developing its services further to help those in financial difficulty.

Access to Nutrition Index

We are reviewing our policy on the ethical issues related to the food and beverages industry

Food & beverages policy

We are reviewing our policy on the ethical issues related to the food and beverages industry. Since adoption in 2005, there have been significant changes in public attitudes towards nutrition, wellness and obesity. The review will therefore focus mainly on nutrition and health to align with the Access to Nutrition Index to which we are a signatory. The new policy will also integrate our current approach to Nestlé and breast milk substitutes.

Farm animal welfare

As leading supporters of the Business Benchmark on Farm Animal Welfare (BBFAW) we have encouraged and advised on the development of a Global Investor Statement in order to catalyse investor collaboration on the issue. The Statement, backed by 18 investors controlling £1.5 trillion of assets, was launched during the quarter. It calls on companies to assess the risks arising from farm animal welfare and highlights their responsibility to help raise standards. We are also part of an investor coalition led by BBFAW engaging with companies to improve their ranking in the benchmark. In addition, we supported a Share Action initiative targeting antibiotic use in the animal supply chain and received a reassuring reply from Restaurant Group stating that “it is a requirement of our supplier contracts that antibiotics are only used for the treatment of diseases and not for other purposes”.

Corporate governance & executive remuneration

The second quarter marks the height of the proxy voting season. Shareholder revolts occurred at BP and Smith & Nephew where advisory votes on remuneration were defeated. Under the CIG voting template, we continued to oppose excessive executive pay where it was not linked to strong performance. During the quarter we voted at 70 UK meetings and opposed or abstained on 13% of resolutions. In Europe we voted at 188 meetings, opposing or abstaining on 23% of resolutions.

Church Investors Group

The Church Investors Group held its annual conference during the quarter, bringing global church investment institutions together. We debated long term investing with Sir Vince Cable and heard about how Centrica is tackling sustainability challenges from CEO Iain Conn. We also discussed cooperation on climate change and ethical issues concerning banks and food companies.

Ethical Investment Review March 2016

Climate change

Fossil Fuel Forum

Our Fossil Fuel Forum, held in March, brought together people who were interested in climate change investment policy

The economic and ethical context relating to climate change is constantly developing. That means our approach must also be dynamic if our investment policy is to remain relevant.

Our Fossil Fuel Forum, held in March, brought together people who were interested in climate change investment policy. The aim was to help the Methodist advisory committee on the ethics of investment develop its thinking on the subject. The participants discussed presentations delivered by a theologian, an economist, Carbon Tracker on the stranded assets argument and Operation Noah, which advocates disinvestment from fossil fuel companies. The prevailing view was that whilst our current approach is appropriate, if there is insufficient progress in the slowing of global warming, it will need to be revised.

We continued to implement our policy relating to different types of fuel. None of the 6 oil companies held in our European equity portfolio was in breach of the policy, but engagement with Statoil and Repsol may be necessary given their rising exploration expenditure and exposure to oil sands. In the Oil Services sector, two additional exclusions, Hunting and Lamprell, were agreed as their business models are based mainly on discovering and developing new fossil fuel assets. We will also engage with John Wood Group, which is involved in decommissioning existing fossil fuel assets and providing services to the renewables industry, whilst being less exposed to exploration and development.

As a member of the Aiming for A coalition, we co-filed shareholder resolutions with Rio Tinto and Anglo American, calling for more disclosure on portfolio resilience to climate change impacts. We will also represent the coalition at the forthcoming Anglo AGM.

Extractive industries

Extractives and Mining

We have closely followed developments relating to the disaster caused by the Brazilian dam collapse at Samarco Mineração

We have closely followed developments relating to the disaster caused by the Brazilian dam collapse at Samarco Mineração, a mining joint venture between BHP Billiton and Vale. We have also been in contact with Anglo American to discuss allegations of excessive force being used in the eviction of people from the Cerrejon Coal mine in Colombia. The company stated that some protesters attempted to block a judge’s access to negotiate with a householder, requiring action by riot police.

We participated in the Anglo American sustainability day with an opportunity to hear from both the Chairman and Chief Executive on 2015 environmental, community and safety performance.

We continue to be very active in the Mining Reflections process, which brings together mining CEOs and church leaders to seek ways of assisting mining to become both sustainable and a clear contributor to the ‘common good’. A regional day of reflection took place in South Africa and others will take place this year, whilst a global Day of Reflection is planned for 2017.

Water

Water risk is viewed as a material issue for many businesses. As the lead in the related CIG engagement project we have written to 37 laggards in reporting on water management strategies. Their responses have ranged from the in-depth and informed to the inadequate and complacent. Of 26 responses so far, 7 have said they will improve disclosure through completing the CDP Water survey, with a further 3 considering taking part.

Funeral poverty

We wrote to the issuer of one of our bond holdings, the Co-op, which owns the UK’s second largest funeral provider

We wrote to the issuer of one of our bond holdings, the Co-op, which owns the UK’s second largest funeral provider, asking it to sign the Fair Funerals Pledge. Social welfare provision is no longer adequate and the reality of pauper funerals brought about by the increasing cost of even a modest ceremony was brought home when it was raised by a select committee of MPs.

Corporate lobbying

Some aspects of business accountability continue to be poorly understood. One such area is corporate lobbying. Whilst some lobbying may be legitimate, Transparency International (TI) suggests that lobbying may disproportionately influence public policy and erode trust in business. A TI survey shows that some good practice exists but demonstrates that companies need to go much further in disclosing how and why they lobby. We are reviewing the findings and may engage with the laggards.

Access to Medicines & Access to Nutrition Index

We are investor supporters and signatories to the Access to Medicines Index (ATMI) and the Access to Nutrition Index (ATNI). We signed an investor letter facilitated by ATMI calling on specific pharmaceutical companies to participate in the 2016 survey. The results of the 2016 ATNI survey identified Nestlé, Unilever and Danone as among the best in class for helping to tackle undernourishment and diet related chronic diseases. Nestlé also scored well in the breast milk substitute sub-section.

Farm animal welfare

As investor supporters of the Business Benchmark on farm Animal Welfare (BBFAW) we encouraged the development of an Investor Statement that could catalyse investor collaboration on the issue. In addition, we supported a Share Action initiative targeting antibiotic use in the animal supply chain, co-signing an investor letter to Restaurant Group calling on it to develop supply chain protocols that monitor the use of antibiotics in meat sourced for their businesses.

UK Stewardship Code

Our 2016 UK Stewardship Code statement is available on our website. This is a voluntary code in which supporting asset managers and asset owners subscribe to seven principles relating to voting, engagement and stewardship.

Corporate governance & executive remuneration

Working with our CIG partners, a corporate governance policy and voting template was agreed for 2016. This will be applied and executed by our voting partner, ISS. During the quarter under review, we voted at 15 UK company meetings, opposing or abstaining on 8% of resolutions. These included 13 remuneration reports where pay was excessive or poorly structured. In Europe ex UK we voted at 35 meetings, opposing or abstaining on 17% of resolutions. Our summary voting report is available online, and a more detailed report on request.

Ethical Investment Review December 2015

Climate Change

climate-change

The world took further steps towards tackling climate change at the COP21 Paris talks in December

The world took further steps towards tackling climate change at the COP21 Paris talks in December. However, much remains to be done if the average global temperature rise is to be limited to no more than 2C. Investors have an important role in encouraging companies to take the threat of climate change seriously. It is an example of how investment and ethics need to be integrated, which is at the core of our approach.

We have been implementing our new climate change policy relating to different fuel types. This resulted in the sale of two oil holdings, Tullow Oil and Premier Oil, with a further six excluded, on ethical grounds as their main business was the exploration for and development of new sources of fossil fuel. We also sold a holding in the mining company Glencore because of its high exposure to coal, one of the worst emitters of greenhouse gases. We have since been in dialogue with Glencore about our decision. No further disinvestments have been required from our European portfolios.

We signed the Paris Pledge in the wake of the COP21 talks. The Pledge, an initiative of the French Government, harnesses the combined resources of non-state actors such as cities, regions, investors, business and NGOs to commit to achieving or exceeding the outcomes agreed in Paris.

We continue to be an active member of the successful ‘Aiming for A’ coalition. Once again, we are putting shareholder resolutions to company AGMs on climate change resilience, calling for detailed reporting on asset portfolio resilience, emissions management and low carbon alternatives. We are the lead investor engaging with Anglo American on behalf of the Coalition. Resolutions will also be put to the AGMs of Glencore and Rio Tinto.

Direct greenhouse gas emissions from buildings account for 17% of total such emissions in the UK, with housing responsible for 76% of that total. Government policy has shifted from a ‘zero carbon’ directive, to one where planned emissions reduction falls voluntarily to housebuilders. We found performance amongst housebuilders to be variable and in many cases unavailable. Amongst reporting companies, Berkeley Group had the highest proportion (54%) of homes built to ‘sustainable’ standards.

Extractive Industries

Extractive Industries

BP is pursuing energy efficiency as the main way it is addressing climate change

BP provided performance updates on process safety, operational risk and strategic planning at a recent SRI day. BP is not developing carbon capture and storage technology and is pursuing energy efficiency as the main way it is addressing climate change. The tailings dam catastrophe in Brazil at the Vale-BHP Billiton Samarco mine resulted in multiple fatalities and considerable environmental destruction. We met with BHP Billiton for a detailed briefing. While we welcome the prompt response, focused on helping the community recover, we want to see evidence of lessons learned.

Living Wage

Since 2011, we have engaged with 19 companies about the adoption of the Living Wage, none of which had adopted or endorsed it at the time. Five are now fully accredited Living Wage employers, and one other is committed to achieving full accreditation. Other companies are very close to complying, with the proportion either accredited or very close amounting to almost half (47%) of the target group. The Chancellor’s announcement of a new ‘National Living Wage’ may complicate the picture, but we will continue to work with ShareAction to engage with companies on adoption of the Living Wage, and particularly in urging companies not to age-restrict application of the new National Living Wage only to the over 25s as prescribed by Government.

Water

The World Economic Forum has named water as the number one challenge facing global economic development

The World Economic Forum has named water as the number one challenge facing global economic development, and in 2016 we will be leading Church Investor Group engagement on water risk. We have written to 37 large UK companies assessed as being materially affected by potential water risk, either directly or through their supply chains, encouraging them to take part in the CDP water survey which presents a consistent methodology for assessing impact and risk. We have already had responses from SSE and M&S, which with all others received, will be analysed to assess what further work may be required.

Funeral Poverty

The cost of a funeral has risen dramatically over the past decade, and people on low incomes are finding it difficult to pay for the funeral of a loved one. The Church is increasingly becoming involved with funeral poverty given its central role in providing pastoral care during bereavement. The Church of England, Roman Catholic, and Methodist churches combined account for nearly half of all funerals carried out in England. We support the ‘Fair Funerals Pledge’ and asked Dignity, which arranges funerals and funeral plans, for its perspective. It assured us that it operates in a manner completely consistent with the ‘Fair Funerals Pledge’, training staff to ensure that fees and other costs are clearly explained.

Nestlé

We had our regular meeting with key personnel from Nestlé UK during the quarter. They provided updates on health & safety and on Nestlé’s responsible cocoa and coffee plans. Nestlé has been at the forefront of companies refreshing products to support healthier lifestyles and we were given an update on progress, particularly regarding sugar reduction. Our meetings routinely cover Breast Milk Substitutes (BMS) and Nestlé due diligence. The company is still the only manufacturer to have been included in the Index as meeting the FTSE4Good BMS criteria and remains committed to the FTSE4Good BMS process.

Corporate Governance & Executive Remuneration

We voted at 15 UK company meetings in the quarter to 31 December, opposing or abstaining on 13% of all resolutions. This included 22 remuneration reports where pay was excessive or poorly structured. In Europe ex UK we voted at 17 meetings, opposing or abstaining 11% of resolutions. Our summary voting report is available online, and a more detailed report on request.

Ethical Investment Review September 2015

Climate Change

climate-change

The forthcoming Paris climate change summit has begun to focus minds

The forthcoming Paris climate change summit has begun to focus minds. The Bank of England Governor warned of the risk that the use of some carbon assets could, in time, be constrained, leading to their values being hurt. In contrast, resource companies are keen to stress that they see strong demand for carbon assets well into the future. Even if the industry proves correct, the ethical issue remain.

Consequently, we work hard to ensure we have a comprehensive climate change policy that can be applied to the investments we manage. This involves continually refreshing our approach, taking into account new evidence and arguments. For example, next year we are planning an in-depth forum devoted to the subject. In the past quarter we have been examining our portfolios for exposure to thermal coal, tar sands and the exploration for new carbon assets, which is likely to result in the exclusion of several additional companies from our ethically acceptable list.

The CFB will be the lead investor in engaging with Anglo American on behalf of the Aiming for A coalition. Aiming for A is hoping to build on its shareholder resolution successes at the BP and Shell AGMs this year, by focussing on the mining sector. It is also seeking European partners to extend the programme to European companies in the energy and extractives sectors.

Mining Ecumenical Reflections

We visited a copper mine in Peru run by Glencore

We took part in a further series of visits to mining facilities during the summer as part of the Ecumenical Reflections process. This had begun with recognition within the industry that change is required in the way mining companies operate, and that such a transformation can only happen when communities, including church and other faith groups, take an active role in the process.

We visited a copper mine in Peru run by Glencore and a diamond mine in South Africa run by De Beers. On both occasions we spoke to local people and visited community projects. A meeting between church and mining leaders in South Africa will take place later this year. We will be taking part in a review of the whole Ecumenical Reflections initiative during the coming quarter.

Israel/Palestine

We received a detailed response from Heidelberg Cement in response to our request for information on the company’s operations in Israel/Palestine. We welcome the company’s explicit support for international human rights law, and its commitment to operate without discrimination against any parties in the region.

Living Wage

Living Wage

The Living Wage which has been an important part of our company engagement in recent years

We noted the Chancellor of the Exchequer’s announcement of a new ‘National Living Wage’ together with complaints from business that the increase in costs may result in job losses or price rises. However, this higher minimum wage will remain below the genuine Living Wage which has been an important part of our company engagement in recent years. We are now working with Share Action to determine the best way of re-shaping our work to help achieve improved pay justice for low-paid workers. We welcome announcements by some companies (Morrison and Whitbread) that they are moving to enhanced rates before April.

Water

Next year we will lead engagement by the Church Investors Group around water resource. In an increasingly water constrained world, the way business extracts and shares water with neighbouring communities is an important ethical and human rights issue. We will run a programme of engagement with companies, for whom water is a major manufacturing requirement, to understand how they are seeking to reduce their water footprint and how this finite resource is being used and shared.

Sunday Trading

Churches, unions, and others are opposing UK government plans to further deregulate Sunday trading laws and delegate their implementation to local authorities. The Methodist Church responded to the government consultation by stating the case for no change, focusing on the need to support families. Retailers are divided on the merits with some supporting change and others recognising current regulation provides an appropriate balance between the desires of consumers and the wider interests of society. If legislation is passed company policy on the issue will increase in importance.

Access to Medicines Index (ATMI)

We are a signatory-supporter to the Access to Medicines Index which independently ranks the world’s 20 largest pharmaceutical companies’ efforts to improve access to medicine in developing countries. The Index publicly ranks company efforts to improve access to medicines, providing them with a transparent means by which they can assess, monitor, and improve their own performance. GSK topped the Index for the fourth successive time, but we noted that AstraZeneca, whilst improving its ranking since 2012, was still only ranked 15 out of the 20 companies surveyed. We have asked the company how it expects to improve performance. A response is awaited.

Church Investors Group international conference

Church Investors Group Conference 2015

We hosted a conference for representatives of church investment organisations around the world

We hosted a conference for representatives of church investment organisations around the world. Our various approaches to climate change and developments in church investment practice were the main focus of discussion. Building on these international links is important as they can help leverage church engagement with global companies on ethical issues. The meeting preceded the PRI in Person conference, organised by the Principles for Responsible Investment, which we also attended.

Corporate Governance & Executive Remuneration

We voted at 26 UK company meetings in the quarter to 30 September, opposing or abstaining on 9% of all resolutions. This included 12 remuneration reports where pay was excessive or poorly structured. In Europe ex UK we voted at 11 meetings, opposing or abstaining 37% of resolutions. The main issue related to board balance which resulted in our opposing the appointment of 21 out of 49 directors.