We have been engaging in considerable work to evaluate the extent to which the operations of fossil fuel producers are consistent with the Paris accord. This involves five pieces of analysis: companies’ current asset mix, capital expenditure plans, climate strategy & governance, transition plan and direct emissions. JACEI reviewed the first fruits of this work in December when it considered papers on Asset Mix Methodology and assessments of companies’ asset mix. Further work will be presented to JACEI in the spring.
The IPCC produced a report on limiting climate change to 1.5 °C and this will feed into our work, as will our involvement with IIGCC, TPI, Carbon Tracker and the CA100+ initiative during the quarter. Our Montréal Pledge disclosure for 2018 has been published online.
We signed a collaborative investor statement to support a Just Transition on Climate Change.
We wrote to the large Canadian banks to which we lend through our Deposit Fund: Bank of Montréal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and Toronto Dominion. The engagement was as a result of analysis which showed that these banks lent substantial amounts to the tar sands industry. We have asked each company to join the TCFD initiative, and to explain how their tar sands finances is consistent with their climate change policies.
We attended a sustainability day hosted by BHP Billiton led by senior personnel. The company is progressing compensation and resettlement following the Samarco disaster, and updates on climate change emissions targets and health & safety were discussed.
We wrote to Nutrien which sources phosphate from disputed Western Sahara, and has thus been excluded from investment. The company was able to provide assurances that following a review, the company would be self-sufficient in North American phosphate from early 2019, thereby ceasing to source from Western Sahara.
We contacted AB Foods, Tesco and Ted Baker regarding the presence of micro-fibres in clothing ranges. Tesco replied encouragingly, stating they are working with suppliers to understand the science and have part-funded a pan-industry initiative ‘Industry Action on Micro-fibres’ to drive a coordinated response. As part of our ongoing engagement with a range of companies on plastics, we are now focussing on the risks arising from micro-fibres and their long-term impact on the marine environment.
We engaged with Vodafone Group to encourage them to become an accredited Living Wage employer. We were disappointed that they declined, despite stating they are committed to paying all employees the Living Wage. Accreditation requires full time employees and third party contractors to be paid the voluntary enhanced rate, and Vodafone expressed an inability to ‘track’ third party reward structures. We are now working with Share Action and the Living Wage Foundation to re-engage Vodafone in discussion.
Ted Baker, a clothing retailer, faced allegations of inappropriate behaviour in the workplace. The company has appointed a committee of non-executive directors to review the allegations as well as an external law firm to lead an inquiry. We wrote to the Chairman to express our concern, ask when the inquiry was expected to be concluded, and to call for a commitment to implement any recommendations promptly.
We are signatory supporters to the Business Benchmark on Farm Animal Welfare (BBFAW) which ranks food manufacturing and processing companies for welfare risk. Cranswick has been ranked as a Tier I leader, and we wrote to the company welcoming its strong stance on animal welfare and asking the company to support a new Global Coalition for Animal Welfare spearheaded by Nestlé and Unilever. A response is awaited.
We divested our shares in Danske Bank following the allegations that it allowed €200bn of potentially laundered money flow through its Estonian branch, and removed the bank from the list of banks to which we will lend through our Deposit Fund. The scandal resulted in both the Chair and Chief Executive being dismissed. We reviewed the currently available information about the scandal, its systemic nature and the alleged culpability of senior executives and decided to divest from the Bank as a shareholder and to cease its suitability as an approved lender.
The December quarter was very quiet. During the quarter we voted at four UK meetings opposing five resolutions; three against the re-election of directors and two against executive pay: MJ Gleeson and AB Foods. We wrote to Eco Animal Health regarding the company’s irregular governance arrangements and were pleased to learn at a subsequent meeting with the Executive Chair, that the Board had agreed moves to improve governance practice.
In Europe, we voted at seven meetings, and took action in 14% of cases. Re-election of directors and opposing the Financial Report & Accounts on climate change grounds were the main issues of contention.
In 2018 as a whole, we voted in total at 93 meetings in the UK comprising 1,537 resolutions, opposing or abstaining 17% of proposals. Remuneration accounted for 30% of all action taken in the UK and the re-election of directors 56%. Of 96 remuneration proposals (reports and policies) in 2018, we opposed or abstained 86%. In Europe we voted at 234 meetings comprising 3,785 resolutions. We opposed or abstained 21% of all proposals, with the re-election of directors accounting for 37% of action, and executive pay 42%. Just under 60% of all remuneration proposals in Europe were opposed.
Our full voting reports are available on request, whilst a summary is published online.
We once again asked Trucost to provide a carbon footprint assessment of our UK portfolio, which we first commissioned in 2009. According to their analysis, the UK Equity Fund’s carbon footprint amounted to 288 tonnes of CO2 per million pounds of market capitalisation. The carbon intensity of the Fund has fallen by 3.4% pa since 2009. The gap between the Fund and the Index (FTSE All Share) has narrowed since 2009, which indicates the level of improvement in the market overall towards greater decarbonisation.
We are members of IIGCC (Institutional Investors Group on Climate Change) and actively participate in public policy initiatives in a collaborative way. During the quarter we supported an IIGCC led campaign lobbying MEPs to adopt an ambitious approach to reducing car and van engine emissions including a target of at least 40% CO2 emissions reduction by 2030.
We attended and took part in a series of meetings on climate change including the TPI (Transition Pathway Initiative) and a conference call with Royal Dutch Shell. We co-signed a letter that appeared in the Financial Times encouraging the corporate sector to accelerate the transition towards a low-carbon economy.
We are continuing our considerable work preparing a detailed reassessment of fossil fuel companies in the light of the Paris Agreement. Scoping such a systematic approach is taking time, but our detailed work will ultimately provide a robust means of looking at fossil fuel companies from the perspective of the transition to a low carbon economy.
We have devoted some time over the summer to researching the issue of plastics and our investments’ exposure in greater depth. We will be engaging with companies over the winter months, and are considering to joining As You Sow, an investor coalition focussed on plastics.
Principles of Responsible Investment conducts an annual assessment of how asset managers consider issues relating to responsible investment. We have once again achieved top ratings cross the major modules including receiving A+ in the overarching Strategy & Governance section and in how we incorporate our ethical approach into our equity portfolios.
We contacted Compass Group following reports that one of its subsidiary companies contracted to the All England Lawn Tennis Championships had allegedly been paying employees insufficiently, including not being paid an agreed night shift rate. The company has robustly denied the allegations and provided a response asserting that all rates were agreed and were at levels above the National Living Wage. Some of these roles subsequently attracted further wage uplifts.
We contacted the UK arm of French hotels group Accor owing to the absence of a Modern Slavery Statement on its UK website. All companies with revenues greater than £36m and operating in the UK are required to publish a Statement. Correspondence with the company produced a comprehensive Statement, however we have continued in dialogue as this was not signed by a director and has not been uploaded to the Accor UK website.
Working once again with Share Action, we have led a further round of engagement with seven companies pressuring them to seek accreditation to the Living Wage. The response from Berkeley Group was encouraging as the company is a Living Wage employer across its own directly employed staff. BT Group has taken steps to ensure reward is targeted at or above Living Wage levels, but does not wish to be ‘constrained’ by accreditation. Reckitt Benckiser Group also provided an encouraging response, suggesting it pays all UK employees the Living Wage with this extending to contractors.
We also challenged IHG Group, which as part of being made a preferred partner to the London Olympics in 2012, had agreed to accredit to the Living Wage. The company has reneged on this commitment, but justified this to us as due to the ‘rapidly changing environment’ including introduction of the National Living Wage. This was disappointing and we continue in dialogue with the company around its commitments.
We supported a collaborative FAIRR (Farm Animal Investment Risk & Return) initiative focused on reducing antibiotic use in the food chain. An investor letter was sent to Whitbread seeking more information from the company on how it manages antibiotic use in respect of its supply chain.
The September quarter traditionally marks the end of the voting season in the UK and Europe. During the quarter we voted at 17 UK meetings opposing or abstaining 17% of resolutions. Action was taken in the main against executive remuneration and the re-election of Board directors. Remuneration was opposed at BT Group, Burberry, Experian, Vodafone and National Grid Group among others.
Diversity has been fully integrated into our UK voting policy. Since 2017 the percentage of women on FTSE Boards has increased from 27.7% to just over 30%, however at executive level progress remains slow. We oppose the re-election of Nomination Committee Chairs where progress to improve Board diversity remains poor. During the quarter, directors were opposed at BT Group (four directors), SSE (four directors), Experian, Cranswick and DS Smith.
In Europe, we voted at eight meetings, and took action in 35% of cases, where re-election of directors and executive pay were the main issues of contention.
Our proxy voting partner, ISS, votes our shares in accordance with an agreed CIG policy, which is reviewed and approved by the members annually. Our full voting reports are available on request, whilst a summary is published online.
We are working on applying our recently agreed climate change methodology to our fossil fuel company shareholdings. Our first task is to critically examine the data and analysis available for each of the five criteria we are using to assess companies. Our intention is to complete preliminary assessments of four companies (BP, Equinor, Royal Dutch Shell, Total) by the turn of the year. These will be subjected to a lengthy review process and we will also engage with the companies. At the same time, we expect further climate change scenarios to be published, which we will need to factor into our work.
Climate change remains at the forefront of our work and we are active in several initiatives, including attending an IIGCC meeting where we heard from Patricia Espinosa, the Executive Secretary to the UNFCCC (UN Framework Convention on Climate Change) ; We have signed an IIGCC Investor Statement to the G7 and a supporting letter published in the Financial Times. We continue to play an active part in the Transition Pathway Initiative (TPI).
We voted to support the shareholder resolution at Royal Dutch Shell brought by ‘Follow This’, a Dutch NGO. The resolution called on Shell to set and publish targets for reducing GHG emissions aligned with the Paris Agreement, with such targets including Scope I, II & III emissions. The resolution attracted around 5.5% support, with Shell arguing its published Scope III emissions ambitions represented sufficient progress.
Concern about the impact of plastic waste on the environment and in the oceans is concentrating investor attention. We have joined a collaborative initiative called the ‘Plastic Solutions Investor Alliance’ which intends to engage actively on plastic pollution and on the design and sustainability of plastic packaging. The Alliance is planning focused engagement in the UK with food retailers and consumer staples groups on reducing exposure to plastic waste and making waste streams more environmentally sustainable. It is encouraging that over 40 companies, including Tesco, Unilever and Nestlé have signed up to the UK Plastic Pact initiated by WRAP (Waste & Resources Action Programme) which has four ambitious targets including 100% plastic packaging to be reusable, recyclable or compostable by 2025.
On behalf of the Church Investors Group (CIG) we have now completed our initial engagement work on water stewardship. Using the CDP water survey, we engaged with nineteen UK and European companies to encourage greater governance, disclosure and oversight of systemic water risk. Sixteen companies responded with positive outcomes, four expect to contribute to the CDP survey in future, and a further four are actively reviewing participation. Five companies provided detailed responses on their own water management programmes. We will now review the results with CIG.
We received responses from Unilever and Associated British Foods to our concerns around labour conditions on tea plantations. These remain an acutely complex socio-cultural challenge, and one in which we have engaged in the past. Unilever’s priorities are housing and sanitation in Assam and it assured us that it is ‘driving the industry to make time-bound improvements’. AB Foods (via its subsidiary Twinings) is also leading a step-change by ‘introducing a new framework to evaluate human rights risk’. We are encouraged that parts of the industry is showing commitment to improving the lives of estate workers, and we will continue to engage pro-actively for change, albeit this remains one of the more intractable challenges for investors.
We remain actively committed to the ecumenical process known as the Mining and Faith Reflections Initiative. The churches have led fruitful conversations with mining executives over time, and are now reflecting on potential next steps that support mutually beneficial dialogue between the churches and the mining sector, and which will include shared theological principles for engagement.
During the quarter we formally joined a new partnership with FAIRR (Farm Animal Investment Risk & Return). FAIRR has led investor efforts that draw attention to the overuse of antibiotics in the farm animal supply chain, and which we have supported. FAIRR is also leading new research and engagement into the effects of protein and animal husbandry on climate change. We expect to work with FAIRR as they develop collaborative efforts around other relevant farm animal issues.
The June quarter traditionally marks the peak of the voting season in the UK and Europe. 2018 has been relatively quiet with few major pay revolts. However, the Investment Association has noted a sharp increase in shareholder protest more generally and in particular against the re-election of directors incurring 20% or more opposition. In the second quarter we opposed the re-election of 228 UK directors or 19% of the total.
We remain focused on opposing excessive executive pay but we have also strengthened our approach towards workplace fairness, boardroom diversity and climate change. Where boards have insufficient gender diversity we routinely vote against Nomination Committee chairs. Instances this quarter included Rio Tinto, BP, Smith & Nephew, WPP, Anglo American, Standard Chartered, Centrica and London Stock Exchange Group.
During the quarter we voted at 62 UK meetings, opposing or abstaining 16% of resolutions. We opposed over 60% of votes on remuneration policies and reports. In Europe, we voted at 187 meetings, and took action in 21% of cases, where re-election of directors and executive pay were the main issues of contention.