Voting Report – June 2018

Ethical Investment Review June 2018

Climate change

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.

Plastics

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.

Water

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.

Human and labour rights

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.

Mining and Faith Reflections Initiative

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.

Farm animal welfare

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.

Executive remuneration

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.

Voting Report – March 2018

Ethical Investment Review March 2018

Climate change

We have been focused this quarter on our climate change project. We are focussed on determining the extent to which fossil fuel company business investment plans comply with the Paris Agreement to keep the average rise in temperature to “well below 2C”. We already exclude a number of companies on climate change grounds under our three existing climate change policies. We have now developed a methodology for analysing companies.

For temperature rises to be limited, levels of coal, oil and gas consumption will have to be considerably lower than today, even though some fossil fuel use will continue up to and beyond 2050.

Our methodology, recently agreed, will include examining:

  • The current asset mix of extractives
  • Capital expenditure on exploration and production
  • Climate strategy and governance
  • Positive steps taken towards transition, and
  • Decreasing direct emissions

It will take some time to evaluate our existing holdings using this approach to our direct holdings and we will conduct an extensive round of engagement as we do so. We will assess new climate change scenarios and company data as they are published. Royal Dutch Shell has recently published data on its Scope 3 emissions (emissions from use of its products) and ‘ambitions’ for reducing them.

As founding members of the Transition Pathway Initiative we have welcomed the TPI’s developing thinking and planned updates on sector analysis for oil, gas, and electric utilities.

The financial sector has an important role to play in terms of business commitment to financing the transition to a low carbon economy. We have therefore begun to consider the role banks play in their lending decisions and to what extent these are consistent with the transition to a well below 2C world.

Fixed interest policy

We apply our Christian approach to ethical investment to all asset classes. However, bonds and equities differ with respect to the types of instruments in which we might invest and their issuance. We now have a policy for this area to guide us through the nuances of applying our overall approach to this asset class. The Policy sets out how we address ethical challenges when investing in Gilts (government debt), supranational, sub sovereign, agency, and corporate bonds. The new Policy is available on our website.

Human and labour rights

Supply chain risks dominate in terms of the potential for complicity in human rights violations. We contacted Berkeley Group following reports of child labour in the Indian granite market. The company confirmed it sources no granite from the regions at risk in India, and has comprehensive supply chain mapping in place to manage potential risks arising from child, forced or bonded labour. We have also written to Associated British Foods and Unilever to ask how they assess labour and human rights conditions on Assam tea estates. Labour conditions in particular appear to have deteriorated since our last round of engagement with wages among the lowest in India and allegedly falling below the State minimum. This remains a complex socio-cultural challenge.

Tax justice

The payment of tax is an important corporate responsibility. It is important therefore that companies are transparent about how they pay tax and how they arrange their affairs to minimise tax payments. We have been working alongside the wider Methodist Church on this issue and have now published a policy on tax justice. We have focused on Biblical principles, current issues around fair tax, recent activity and the approach to engagement with companies. We have published our thinking on tax in a Position Paper, and the new Policy, on our website.

Plastics

Plastic waste can substantially damage the environment and urgent action is required across different sectors. We are looking at how companies tackle the issues around plastic waste. Our focus is on single-use plastic (bottles, cups, straws etc.) where these are seldom recycled, and micro-plastics (used in cosmetics and cleaning products). Further analysis will focus on key companies, looking at their policies and processes for reducing plastic use and how they work with packaging companies in terms of innovation and design.

Nestlé

Our annual in-depth meeting with Nestlé UK took place during the quarter. We received updates on BMS (breast milk substitutes) issues, human rights in the cocoa and coffee supply chains, Nestlé’s response to the debate on single use disposable plastic, Modern Slavery, and health & safety across its global operations.

Extractive industries

We continue to be active participants in the Mining and Faith Reflections Initiative and attended two half-day meetings facilitated by Anglo American. These debated the role of mining in development and also heard a NGO perspective on the role mining can play in local communities. We continue to work ecumenically with church denominations on developing common ground in our approach to mining.

Executive remuneration

Prior to the beginning of the peak voting season in the UK we published our 2018 UK Stewardship Code Statement. We have been rated ‘Tier I’ by the FRC (Financial Reporting Council) in recognition of our commitment to transparency. The Statement is available on the website.

Our new voting policy, developed with the Church Investors Group, was launched during the quarter. We remain focused on executive pay but have ratcheted up our approach towards workplace fairness, boardroom gender diversity, and climate change. Where boards are less than 25% female, we will vote against the chairs of the Nomination Committee.

We wrote to the Chairman of housebuilder Persimmon which has been heavily criticised for an executive incentive scheme that has delivered excessively. The Chairman had resigned over the scandal, recognising the Scheme had been poorly designed. We sought assurances that the scale of awards would be reduced and that a moratorium on future pay-outs be imposed pending a review.

Tax Justice

Introduction

The payment of tax is a contribution to the common good that enables a state to provide a range of public services for the benefit of all. It is the position of the Church that individuals and corporate bodies have an ethical obligation to obey the spirit, as well as the letter of the law on tax.

Tax justice has become a significant political and ethical issue in recent years. Scandals highlighting tax avoidance on the part of some large multinational companies in particular have raised the profile of tax justice, not least during years of restricted growth in public spending. This has contributed to growing pressure on Government and international agencies, such as the G7, G20 and OECD to improve legislation and enforcement, and on companies to organise their tax arrangements in a responsible manner that is within both the spirit and the letter of the law.

Tax is a complex, technical issue; it is not for the individual investor necessarily to engage with the detail, but on general principles of transparency and disclosure. This Position Paper sets out the biblical background, the position of the Methodist and other Churches, and scopes how the CFB may seek to engage with companies on tax justice.

Biblical background

Tax and an obligation to pay are mentioned in the Old and New Testaments. Biblical tradition points to the important role tax plays in creating a more just society and in establishing correct relationships. Deuteronomy 26:12-13 has a clear expectation that a tithe (one tenth of annual produce or earnings), should be used to support “the Levite, the foreigner, the fatherless and the widow, so that they may eat in your towns and be satisfied”. When, in the New Testament, Jesus is asked whether it is lawful to pay taxes to an (oppressive) emperor his reply, “give back to Caesar what is Caesar’s and to God what is God’s” (Mark 12: 13-17), highlights that the Roman Empire has a legitimate demand on people’s incomes, but reminds us that God’s demands are even more important.

Tax facilitates complex beneficial economic relationships within society. Not all of these relationships can be reconciled through a simple contract. Income or profit is generated using labour, skills, services and infrastructure, some of which it does not directly pay for. Tax provides for the payment of security, education, welfare and healthcare, as well as the legal framework to ensure fair transactions and property rights. Tax is therefore part of the complex and interconnected web of human relationships. In Romans, Paul writes “pay to all what is due to them – taxes to whom taxes are due, revenue to whom revenue is due… honour to whom honour is due… Love does no wrong to a neighbour; therefore, love is the fulfilling of the law” (Romans 13:7).

The Bible also makes clear that the payment of tax, when rightfully due, is legitimate; “therefore, it is necessary to submit to the authorities, not only because of possible punishment, but also as a matter of conscience. This is also why you pay taxes, for the authorities are God’s servants, who give their full time to governing. Give to everyone what you owe them: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honour, then honour” (Romans 13:6).

The position of the Methodist Church

Biblical tradition highlights the importance of taxation, and the legitimate demands the State may make. This interdependent relationship suggests that tax must be demanded in a way that is fair and proportionate. In return, tax that is legitimately demanded should be paid. Methodist Conference in its reply to Memorial 30 at the 2015 Conference also recognised that in seeking to build a just society, institutions and individuals have a responsibility to respond not just to the letter, but to the spirit of the law on tax. This responsibility applies with particular gravity to the Church itself, given its role in building a more just society.

The Methodist Conference has received reports of particular relevance to the question of tax justice, including “The Ethics of Wealth Creation” 1 (1990), and “Of Equal Value: Poverty and Inequality in the UK” 2 (2011).

Conference also received a Memorial in 2012 (M32)3 on Tax Justice from the Birmingham District Synod, welcoming the 2011 report (above) and asked Conference (inter-alia) to:

  • Urge all relevant sections of the Connexional Team to give active support to the issues being raised by the Methodist Tax Justice Network (MTJN) as and when they are able.

In reply, it was noted that ‘The Joint Public Issues Team (JPIT) is already working with Christian Aid, Church Action on Poverty and the embryonic Methodist Tax Justice Network to explore how these issues might be further promoted. The Conference therefore accepts the Memorial, asks the Methodist Council to ensure that these issues are included within the work-plans of the Connexional Team as resources allow, and recommends that churches and individuals use the study resource material from both the ‘Trace the Tax’ and the ‘Close the Gap’ campaigns 4 to aid understanding of the issues raised in the Memorial.

In “Of Equal Value: Poverty and Inequality in the UK” (2011), the Methodist Church acknowledged the importance of tax in creating a just society by stating that “money paid in fair taxation is a gift freely given; a contribution to the common good. When a proportion of this money is fairly paid in benefits to the least well off, it contributes to creating the just and compassionate society that the Church would wish to see. Those who would abuse these systems by not abiding by either their letter or their spirit push the goal of a just society further from our grasp.”

In the “Ethics of Wealth Creation” (1990) the importance of structuring capitalism so as to achieve international as well as national justice was highlighted. “Christians must struggle with the fact that we have a clear idea of a global common good, but no structure that embodies our common citizenship. Capitalism must be shaped to address this problem and so must the Church.” In 2014, Christian Aid estimated that $160bn a-year is lost to the developing world as a result of tax evasion/avoidance by multinational companies. 5 Thus, tax justice forms an essential part of the Church’s strong commitment to international justice.

In “Of Equal Value”, the Methodist Church recognised the importance integrity has in its own financial affairs when responding to government cuts. “Many of the new difficulties facing the poorest and most vulnerable are due to decreases in government expenditure. In order to speak about these cuts with integrity we must ensure that we corporately and individually contribute to government funds by paying all the taxes owed. These contributions are both a moral and legal duty; therefore it is not sufficient to obey merely the letter of the law, but also the spirit.” This point can be seen to apply more broadly to questions of social justice and inequality. If the Church fails to fulfil its moral and legal duty to pay tax then its ability to speak out in support of the poorest in society will be compromised.

The 2015 Conference received a further Memorial (M30) 6 from the Birmingham District which has led directly to the preparation of further work by JACEI and the CFB. This Memorial welcomed the “progress that has been made on communicating the issue of tax justice throughout the Methodist Church by the Methodist Tax Justice Network (MTJN) especially in association with the Joint Public Issues Team (JPIT). The Memorial then asked Conference (inter alia) to call upon:

  • JACEI in conjunction with the Central Finance Board urgently to develop a Position Paper leading towards a Policy Statement on tax justice in order to address companies in which the Church invests on this issue…and to keep the Church informed on progress.

The Memorial response also stated that

  • Conference directs the Methodist Council to ensure that the Connexional team work with JACEI and the Central Finance Board to identify when further work on these [tax justice] issues can be completed and further directs Council to review progress by January 2017.

At a fringe event at the 2016 Conference, the then Chief Executive of the CFB, Bill Seddon, contributed to an event on tax, the transcript of which has been published on the CFB website 7.

Summary of Methodist Church position on tax

The Methodist Church’s position on tax might thus be summarised as follows:

  • The state has a legitimate expectation that people will pay the taxes they owe;
  • Such tax, fairly paid, can contribute to a more just and relational society;
  • The payment of tax is therefore legitimate and bears both a legal and a moral duty;
  • It is correct to abide not only by the letter of the law, but also within its spirit;
  • As such, the Church expects people to pay the taxes they legitimately owe;
  • There is an expectation that companies should be transparent about their corporate tax affairs and pay what they owe.

Current issues around taxation

One of the primary difficulties arising from any discussion around tax is definitions.

According to the OECD glossary of tax terms:8

  • Tax avoidance is “a term generally used to describe the arrangement that is intended to reduce…tax liability and that although the arrangement could be strictly legal it is usually in contradiction with the intent of the law it purports to follow” (emphasis added). Thus avoidance is understood in terms of intention as opposed to legal structures.
  • Tax evasion is “is generally used to mean illegal arrangements where liability to tax is hidden or ignored, i.e. the taxpayer pays less tax than….is legally obligated…by hiding income or information from the tax authorities.”

For the purposes of this Position Paper the term “tax avoidance” will mean actions which reduce tax liability using tax planning mechanisms that are legal but outside the spirit or intent of the law.

The emergence of technology and e-commerce has undoubtedly added complexity and allowed the flow of capital for tax planning purposes to be pursued with increased aggression. In 2012, a series of scandals emerged involving major multinational companies avoiding tax from the UK Government. Amazon, Starbucks and Google came in for particular criticism from the House of Commons Public Accounts Committee. 9 More recently, data leaks (such as the Paradise and Panama Papers exposé’s) have thrown light on the methods used for tax avoidance and the identities of individuals and companies involved in such practices.

Concerns have been raised about the implication such practices have, both for the tax revenues of the exchequer, and the reputation of businesses that benefit from their license to operate under the Rule of Law, but where they contribute very little to that society. One obvious example is Amazon booking UK revenues and profits in Luxembourg so as to benefit from a much lower rate of marginal tax.

The Institute of Business Ethics (IBE) argues that the behaviour of a business in tax planning ‘falls into the realm of ethics because businesses have a choice about their approach to interpreting the law and hence paying taxes. Whilst remaining legal in all it does, where a business draws its ethical line regarding how to interpret the tax laws and arrange its affairs is subject to a good deal of discretion.’10 This can extend to where it pays its taxes.

Public opinion has become increasingly intolerant of tax avoidance on the part of companies and has generally been ahead of national and international authorities, such as the OECD, in wanting it addressed.

One issue that raises concern is the use of ‘tax havens’. A haven may typically be a jurisdiction which exerts a small, nominal or nil tax rates as part of its regime. Historically, tax havens have been associated with secrecy. Tax has become something of a ‘competitive sport’ for some companies, moving domicile to benefit from a lower overall tax rate (Shire’s move to Ireland, and Ferguson’s move to Switzerland are just two examples). Other companies may have subsidiary ‘shell’ or holding’ companies through which monies may be channelled, and whose purpose is, at least in part, obscure (e.g. subsidiaries registered in Grand Cayman, Luxembourg or other well-known havens such as Gibraltar and the Channel Islands). In both cases these arrangements may be legitimate, but transparency remains key in order to retain confidence that corporate policies are fair, appropriate and just. In recent times, there have been international efforts to bring greater transparency to the use of havens and by jurisdictions themselves. The OECD has identified three factors as part of any assessment in identifying whether a jurisdiction is a ‘tax haven’ 11:

  • Nil or only nominal taxes – Tax havens impose nil or only nominal taxes (generally or in special circumstances) and offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high taxes in their country of residence.
  • Protection of personal financial information – Tax havens typically have laws or administrative practices under which businesses and individuals can benefit from strict rules and other protections against scrutiny by foreign tax authorities. This prevents the transmittance of information about taxpayers who are benefiting from the low tax jurisdiction.
  • Lack of transparency – A lack of transparency in the operation of the legislative, legal or administrative provisions is another factor used to identify tax havens.

CFB and JACEI activity

The CFB and JACEI have been engaged with the subject of tax justice for sometime and have received frequent notes and updates. This activity has included:

  • JACEI receiving a briefing on tax and ethical investment from the CFB in 2013
  • JACEI receiving a tax justice paper in March 2013 prepared by JPIT, and in turn responding to correspondence the CFB had had with the Methodist Tax Justice Network
  • CFB participating in the ‘Tax Dialogue: on responsible tax for sustainable development’ in 2015
  • CFB participating in and delivered a speech at a fringe event at 2016 Conference entitled ‘The Joy of Tax’
  • CFB noting the adoption of the fair tax mark by SSE and engaging with the company on tax
  • CFB participating in the roundtable on tax convened by JPIT in the autumn of 2017

Other Church, charity and NGO positions on tax

It is in the context of increased reputational risk and a greater understanding of the issues around tax justice, that a number of organisations, including the Church of England, the Quakers and the Church Investors Group have begun to scope how they might engage with companies on tax. Other organisations such as charities and non-governmental organisations, including Christian Aid, ActionAid and Oxfam have well-established public campaigns on tax. They have been engaging with companies that have suffered significant reputational damage as a result of their tax affairs and are helpfully constructing frameworks for what a ‘good tax policy’ might look like.

Tax remains a novel and under-reported issue for faith investors.

The Church of England Ethical Investment Advisory Group (EIAG) outlined some thinking on tax and investment in July 2013 in which the EIAG recommended ‘that tax ethics should be a subject for investor engagement where it appears that a company’s approach is blatantly aggressive or abusive’ 12. The note set out some background, the business and ethical dimensions (‘the way in which a company approaches tax is part of its relationship with the societies in which it operates’), and rejected the view that corporate tax planning is only a matter of legal compliance.

The Church of England’s policy recommendations included:

  • Noting that significantly lower levels of tax than peers may indicate that a company is an outlier and should be the subject of engagement;
  • The EIAG outlined specific concerns around tax justice in developing economies;
  • The propensity for promoting tax avoidance and transparency
  • The objective of engagement should be to encourage the development of and alignment with good documented tax policy and voluntary public disclosure of tax paid

The Church Investors Group has also been engaged in the subject of tax justice and tax transparency with presentations at its 2015 Conference by Christian Aid (‘Corporate Tax and Morality: Lessons for Responsible Investors’ and the Tax Justice Network (‘Responsible Investment and Corporate tax’).

The CIG commissioned collaborative investor engagement on tax in 2017, led by the Church of England, will be focused on the global IT and pharmaceutical sectors.

Both Christian Aid and ActionAid have been vocal in the debate on corporate tax avoidance and have published briefings and primers for investors on how to engage with companies.13

The Joseph Rowntree Charitable Trust 14 has produced ‘a Statement of Expectations’ in respect of its Fund Managers. The Statement acknowledges that ‘most companies face a competitive and uneven tax playing field, and calculating what the ‘right’ amount of tax they should be paying is not always clear cut’. Whilst JCRT recognises the importance of inter-governmental agency in reforming the tax regime, it notes that ‘we as investors…should not remain passive about this issue’. To that end, its Statement provides a series of actions expected of Fund Managers including:

  • Monitoring the level of corporate tax payments as an indicator of ‘good’ behaviour
  • Divesting from those companies that are clearly exploiting the tax regime and where engagement is likely to be ineffectual
  • Engaging with companies that are clearly exploiting the tax regime and where investor pressure may effect change, and
  • Supporting collaborative effort on tax reform at a policy and corporate level and encourage use of the Fair Tax Mark.

Fair Tax Mark

The Fair Tax Mark 15 was launched in 2014 and is an independent not-for-profit community benefit society (an industrial and provident society supported by the Joseph Rowntree Charitable Trust). Its rationale is to accredit companies with a kite-mark by seeking “to encourage and recognise organisation that pay the right amount of corporation tax at the right time and in the right place”.

Take up has been predominately among smaller, co-operative or private businesses. Just one FTSE100 company (energy utility SSE) and two FTSE250 companies (Go Ahead Group and Marshalls) have become ‘fair tax compliant’.

Engagement strategy

Informed and meaningful engagement on tax policy with different companies requires a high level of technical expertise owing to the complexity of tax law and the multi- jurisdictional nature in which it is paid.

It would generally be neither feasible nor desirable for investor engagement to make technical determinations around the intentions (or otherwise) of individual financial structures by companies. Fruitful engagement should be centred on encouraging tax transparency and on how companies manage and disclose their tax arrangements.

Transparency and disclosure is viewed as the most beneficial avenue for engagement as many of the financial structures that often determine tax liabilities are occluded. Secrecy and complexity obfuscate understanding. While such structures may have legitimate use (including entirely appropriate tax planning and some use of havens), secrecy raises concerns about the appetite and desire ultimately to avoid tax.

A transparent tax policy leads to greater confidence that financial engineering has a legitimate purpose and is acceptable from a societal standpoint.

JACEI contends that a Policy Statement on tax would enable CFB to engage effectively with companies on tax, and that such a Policy would primarily be used in routine discussions with companies where clarity or greater understanding of approaches to tax planning is required.

Primers published and developed by Christian Aid and ActionAid, and in turn built around tax policy and transparency are helpful guides in developing a tax engagement policy for the CFB. Extracts from key guidance is provided at Appendix I.

Hallmarks of best practice in this area might therefore include:

  • A meaningful published tax policy;
  • A statement that tax compliance is understood as more than legal compliance;
  • A statement on how tax planning is arranged and managed;
  • How much tax is paid and in which jurisdictions, and;
  • A view of the progress the company is making towards adoption of the Fair Tax Mark.

JACEI also supports CFB efforts to work collaboratively with others, such as the CIG on tax by engaging with companies of concern: Tax represents a challenging issue for engagement and lends itself well to more active collaboration.

Appendex I

Towards a Responsible Investment Policy on Tax

  1. The basis of guidance in this Appendix is sourced from Responsible Tax Practices by Companies published by ActionAid in 2013 16.
  2. Both Christian Aid and ActionAid have published significant literature on tax over time, and have become the leading developmental advocates for reform and change. Significant literature referenced for this paper incudes:
    • Responsible Tax Policy by Companies: A Mapping and Review of Current Proposals (2015)17
    • Getting to Good: Towards Responsible Corporate tax Behaviour (2015)18
    • Tax Responsibility: The Business Case for Making Tax a Corporate Responsibility Issue (2013)19
    • Tax Responsibility: An Investor Guide (2013)20
    • Tax Responsibility (2011)21
    • The Pocket Guide to Tax Justice (2013)22
  3. A responsible investment policy on tax and focused on engagement recognises that:
    • Aggressive tax practices are a reputational, regulatory and financial risk
    • Tax responsibility is about transparency and disclosure, principally:
      • Disclosing a responsible tax policy
      • Managing compliance with the policy
      • Reporting on tax responsibly
  4. A responsible approach to tax justice will incorporate disclosure of policy, how tax planning is measured and reporting to stakeholders.

Notes

  1. http://www.methodist.org.uk/downloads/pi_ethicsofwealthcreation_90.pdf
  2. https://www.ifs.org.uk/comms/comm118.pdf
  3. http://www.methodist.org.uk/about-us/the-methodist-conference/conference-reports/conference-reports-2012/
  4. www.christianaoid.org.uk; www.church-poverty.org.uk
  5. http://www.christianaid.org.uk/pressoffice/pressreleases/comment/the-price-of-tax-dodging-in-the-developing-world.aspx
  6. http://www.methodist.org.uk/about-us/the-methodist-conference/conference-reports/conference-reports-2015/
  7. http://www.cfbmethodistchurch.org.uk/ethics/the-joy-of-tax.html
  8. http://www.oecd.org/ctp/glossaryoftaxterms.html
  9. http://www.bbc.co.uk/news/business-20288077
  10. https://www.ibe.org.uk/userassets/briefings/ibe_briefing_31_tax_avoidance_as_an_ethical_issue_for_business.pdf
  11. www.oecd.org – originally published in 2008
  12. https://www.churchofengland.org/sites/default/files/2018-01/Corporate%20tax%20ethics%202013.pdf
  13. See Christian Aid and ActionAid for resources on tax www.christianaid.org.uk; www.actionaid.org.uk
  14. https://www.jrct.org.uk/userfiles/documents/Statement%20of%20expectations%20on%20corporate%20tax.pdf
  15. https://fairtaxmark.net/
  16. https://www.actionaid.org.uk/sites/default/files/publications/responsible_tax_practice.pdf
  17. https://www.actionaid.org.uk/sites/default/files/publications/responsible_tax_practice.pdf
  18. https://www.actionaid.org.uk/sites/default/files/publications/getting_to_good_towards_responsible_corporate_tax_behaviour.pdf
  19. https://www.actionaid.org.uk/sites/default/files/doc_lib/tax_responsibility.pdf
  20. https://www.actionaid.org.uk/sites/default/files/publications/tax_guide_for_investors_final.pdf
  21. https://www.actionaid.org.uk/sites/default/files/doc_lib/tax_responsibility.pdf
  22. https://www.christianaid.org.uk/sites/default/files/2017-02/Tax-pocket-guide-September-2013.pdf

Tax Justice

Preamble

The payment of tax is a contribution to the common good that enables a state to provide a range of public services for the benefit of all. It is the position of the Church that individuals and corporate bodies have an ethical obligation to obey the spirit, as well as the letter of the law on tax.

Tax justice has become a significant political and ethical issue in recent years. Scandals highlighting tax avoidance on the part of some large multinational companies in particular have raised the profile of tax justice, not least during years of restricted growth in public spending. This has contributed to growing pressure on Government and international agencies, such as the G7, G20 and OECD to improve legislation and enforcement, and on companies to organise their tax arrangements in a responsible manner that is within both the spirit and the letter of the law.

Biblical background

Tax and an obligation to pay are mentioned in the Old and New Testaments. Biblical tradition points to the important role tax plays in creating a more just society and in establishing correct relationships. When, in the New Testament, Jesus is asked whether it is lawful to pay taxes to an (oppressive) emperor his reply, “give back to Caesar what is Caesar’s and to God what is God’s” (Mark 12: 13-17), highlights that the Roman Empire has a legitimate demand on people’s incomes, but that God’s demands are even more important.

Tax facilitates complex beneficial economic relationships within society. Not all of these relationships can be reconciled through a simple contract. Tax provides for the payment of security, education, welfare and healthcare, as well as sustaining the legal framework to ensure fair transactions and property rights. In Romans, Paul writes “pay to all what is due to them – taxes to whom taxes are due, revenue to whom revenue is due… honour to whom honour is due… Love does no wrong to a neighbour; therefore, love is the fulfilling of the law” (Romans 13:7).

The Bible also makes clear that the payment of tax, when rightfully due, is legitimate; “therefore, it is necessary to submit to the authorities, not only because of possible punishment, but also as a matter of conscience” (Romans 13:6).

The position of the Methodist Church

The Methodist Conference has received reports of particular relevance to the question of tax justice, including “The Ethics of Wealth Creation” 1 (1990), and “Of Equal Value: Poverty and Inequality in the UK” 2 (2011).

In the “Ethics of Wealth Creation” (1990) the importance of structuring capitalism so as to achieve international as well as national justice was highlighted. “Christians must struggle with the fact that we have a clear idea of a global common good, but no structure that embodies our common citizenship. Capitalism must be shaped to address this problem and so must the Church.”. Thus, tax justice forms an essential part of the Church’s strong commitment to international justice.

In “Of Equal Value: Poverty and Inequality in the UK” (2011), the Methodist Church acknowledged the importance of tax in creating a just society by stating that “money paid in fair taxation is a gift freely given; a contribution to the common good. When a proportion of this money is fairly paid in benefits to the least well off, it contributes to creating the just and compassionate society that the Church would wish to see. Those who would abuse these systems by not abiding by either their letter or their spirit push the goal of a just society further from our grasp.”

Conference received a Memorial in 2012 (M32)3 on Tax Justice from the Birmingham District Synod, welcoming the 2011 report (above) and asked Conference (inter-alia) to:

  • Urge all relevant sections of the Connexional Team to give active support to the issues being raised by the Methodist Tax Justice Network (MTJN) as and when they are able.

Conference accepted the Memorial and called for tax justice to be included in relevant work-plans as resources allowed.

The 2015 Conference received a further Memorial (M30)5 from the Birmingham District. This Memorial welcomed the “progress that has been made on communicating the issue of tax justice throughout the Methodist Church by the Methodist Tax Justice Network (MTJN) especially in association with the Joint Public Issues Team (JPIT). The Memorial then asked Conference (inter alia) to call upon:

  • JACEI in conjunction with the Central Finance Board urgently to develop a Position Paper leading towards a Policy Statement on tax justice in order to address companies in which the Church invests on this issue…and to keep the Church informed on progress.

Conference accepted the Memorial and its reply also “directs the Methodist Council to ensure that the Connexional team work with JACEI and the CFB to identify when further work on these [tax justice] issues can be completed and further directs Council to review progress by January 2017.”

The Methodist Church’s position on tax can be summarised as follows:

  • The state has a legitimate expectation that people will pay the taxes they owe;
  • Such tax, fairly paid, can contribute to a more just and relational society;
  • The payment of tax is therefore legitimate and bears both a legal and a moral duty;
  • It is correct to abide not only by the letter of the law, but also within its spirit;
  • As such, the Church expects people to pay the taxes they legitimately owe;
  • There is an expectation that companies should be transparent about their corporate tax affairs and pay what they owe.

CFB and JACEI activity

The CFB and JACEI have been engaged with the subject of tax justice for sometime. This activity has included:

  • JACEI receiving a briefing on tax and ethical investment from the CFB in 2013
  • JACEI receiving a tax justice paper in March 2013 prepared by JPIT, and in turn responding to correspondence the CFB had had with the Methodist Tax Justice Network
  • CFB participating in the ‘Tax Dialogue: on responsible tax for sustainable development’ in 2015
  • CFB participating in and delivered a speech at a fringe event at 2016 Conference entitled ‘The Joy of Tax’
  • CFB noting the adoption of the fair tax mark by SSE and engaging with the company on tax
  • CFB participating in the roundtable on tax convened by JPIT in the autumn of 2017

Current Issues around Taxation

The emergence of technology and e-commerce has undoubtedly added complexity and allowed the flow of capital for tax planning purposes to be pursued with increased aggression. In 2012, a series of scandals emerged involving major multinational companies avoiding tax from the UK Government. Amazon, Starbucks and Google came in for particular criticism from the House of Commons Public Accounts Committee6.

Concerns have been raised about the implication such practices have, both for the tax revenues of the exchequer, and the reputation of businesses that benefit from their license to operate under the Rule of Law, but where they contribute very little to that society.

The Institute of Business Ethics (IBE) argues that the behaviour of a business in tax planning ‘falls into the realm of ethics because businesses have a choice about their approach to interpreting the law and hence paying taxes. Whilst remaining legal in all it does, where a business draws its ethical line regarding how to interpret the tax laws and arrange its affairs is subject to a good deal of discretion.’7 This can extend to where it pays its taxes.

Policy

Informed and meaningful engagement on tax with different companies requires a high level of technical expertise owing to the complexity of tax law and the multi-jurisdictional nature in which it is paid.

It would generally be neither feasible nor desirable for investor engagement to make technical determinations around the intentions (or otherwise) of individual financial structures by companies. Fruitful engagement should be centred on encouraging tax transparency and on how companies manage and disclose their tax arrangements.

Transparency and disclosure is viewed as the most beneficial avenue for engagement as many of the financial structures that often determine tax liabilities are occluded. Secrecy and complexity obfuscate understanding. While such structures may have legitimate use (including entirely appropriate tax planning and some use of low tax jurisdictions), secrecy raises concerns about the appetite and desire to avoid tax.

A transparent tax policy leads to greater confidence that financial engineering has a legitimate purpose and is acceptable from a societal standpoint.

Hallmarks of company best practice in this area include:

  • A meaningful published tax policy;
  • A statement that tax compliance is understood as being more than legal compliance;
  • A statement on how tax planning is arranged and managed;
  • Disclosure on how much tax is paid and in which jurisdictions, and;
  • A view of the progress the company is making towards adoption of the Fair Tax Mark.

In seeking to engage with companies this Policy recommends an approach focused on transparency and openness. For instance we note the elements of best practice thinking developed by the PRI (Principles of Responsible Investment) and also by ActionAid in its primer, “Tax Responsibility – an Investor Guide”8 around the primary areas of:

  • Tax Policy
  • Tax Management
  • Tax Reporting

A responsible tax policy would be a clearly communicated tax policy, publicly available, which aligns the company with accepted best practice, sets out the company’s approach to its tax arrangements and rules out aggressive tax planning practices.

Tax management would ensure that the responsible tax policy is implemented throughout the Group and that it is communicated effectively, accompanied by appropriate training and details relevant compliance functions. Mechanisms for identifying non-compliance should be clearly highlighted.

Reporting on tax policy and its management would include detailed information of where and how a company pays tax by jurisdiction, sufficient to ensure that practice mirrors policy. Investors should be able, clearly, to assess and gauge risks associated with the company’s practices and where they depart from policy.

Questions to enable effective CFB engagement on tax

Relevant questions to be asked as part of any engagement would include:

Tax Policy

  • Who sets the Policy and who provides input (internal and external)?
  • Who has responsibility for the Policy within the business, and how often is it reviewed?
  • Does the Policy address risk and the appropriate level of risk appetite?
  • Does the Policy specifically rule out the use of aggressive tax planning schemes?
  • What role does the Board have in overseeing the Policy as fair, appropriate and just?

Tax Management

  • What systems are in place to implement the Policy?
  • How is it communicated throughout the business
  • What formal process is there for reviewing the purpose and use of tax havens?

Tax Reporting

  • Is the full tax Policy disclosed and available
  • Does reporting include country by country reporting of how much is paid and where?

Notes

  1. http://www.methodist.org.uk/downloads/pi_ethicsofwealthcreation_90.pdf
  2. https://www.ifs.org.uk/comms/comm118.pdf
  3. http://www.methodist.org.uk/about-us/the-methodist-conference/conference-reports/conference-reports-2012/
  4. http://www.christianaid.org.uk/pressoffice/pressreleases/comment/the-price-of-tax-dodging-in-the-developing-world.aspx
  5. http://www.methodist.org.uk/about-us/the-methodist-conference/conference-reports/conference-reports-2015/
  6. http://www.bbc.co.uk/news/business-20288077
  7. https://www.ibe.org.uk/userassets/briefings/ibe_briefing_31_tax_avoidance_as_an_ethical_issue_for_business.pdf
  8. https://www.actionaid.org.uk/sites/default/files/publications/tax_guide_for_investors_final.pdf

Fixed Income

Preamble

We apply our Christian approach to investing across all asset classes. This includes fixed income securities. Although ethical issues of concern apply to all asset classes, there are some differences in application to fixed income securities compared to equities.

Bonds and ethics

The holding of debt raises some ethical questions. Some maintain that interest-bearing debt itself is unethical since it is a form of usury, as originally defined. The lender receives an income that has not been earned but is merely the compensation for not using the money elsewhere.
There is an extensive literature on the ethics of interest rates and their role in a market economy. However, the Church has taken a stance against excessively high interest rates (e.g. charged by payday lenders) whilst accepting that debt has a role to play.

While share ownership implies shared responsibility and shareholders share in the profits a company makes from its activities, bond owners have no say in how a company is run, unless it is in administration when they may have a voice in any restructuring. Bond holders receive on maturity the repayment of the loan plus the cost to the company of borrowing.

Nevertheless, bonds issued by a company – or government – around which there were significant ethical concerns would not sit well in an ethical portfolio. It follows that the approach to the exclusion of potential investments on ethical grounds should be consistent across equity and corporate bond markets.

The potential level of engagement may differ from that experienced by a shareholder but the attempt should be made when an ethical issue arises. Our past engagement with bond issuers has been productive. Government bonds require a different approach, especially where the issuer is democratically elected, and worthwhile engagement may not always be possible.

Our ethical approach to holding fixed income securities

Our fixed income securities are managed in a number of funds and portfolios. At present, all holdings are sterling denominated.

Gilts
Some of our fixed income portfolios may hold UK government bonds, both conventional and index (inflation) linked, known as gilts. Holdings in gilts link portfolios with the UK government in the sense that gilts are tradeable loans to the government. Such public sector debt enables government to function and provide the range of services that its citizens require.
It is not normal for responsible investment institutions to engage with governments on ethical issues and few can do so meaningfully. However, we benefit from engagement by the Methodist Church Joint Public Issues Team on a range of issues of concern.

Supranational and corporate bonds
Some of our fixed income portfolios may hold supranational or corporate bonds. The bonds are sterling denominated but can be issued by organisations or companies from other jurisdictions.
Corporate bonds (including Floating Rate Notes) are typically issued by:

  • Supranational bodies e.g. the World Bank. These are backed by governments in the international community.
  • Sub sovereign, or agency, entities e.g. Network Rail, Transport for London, KfW (German national investment bank). These are backed by their governments.
  • Financial and non financial companies

All our ethical investment policies and ethical exclusions apply to corporate bonds as well as to equities. We will also engage with issuers not held in equity portfolios. For example, in the past we have engaged with Network Rail on concerns about health and safety and executive pay.
In the case of corporate bonds, there is relatively little impact of ethical exclusions upon investment returns in practice since alternative bonds can usually be found with the same or very similar characteristics to excluded names and exclusions in total will form a relatively small portion of the relevant benchmark.
While the application of ethics to financial and non financial companies which issue bonds should be straightforward, holding supranational and sub sovereign bonds links portfolios with non-UK governments. This raises some particular issues.
When considering bonds issued by sovereign, sub sovereign, or agency entities, we will consider the reputation of the relevant country, including assessments of: human rights; corruption; involvement in conflict; development. We will also be mindful of our policies and previous stances where reference is made of specific countries. However it is extremely unlikely we would be exposed to government issuers which have raised ethical concerns in the past, except via supranational issuers such as the World Bank.

Green bonds
Green bonds are bonds which are used to raise funds to undertake activities which meet certain environmental criteria. Mainstream companies issue green bonds. We will generally favour purchasing green bonds where we can and where the terms are attractive.

Conclusion

We apply our Christian approach to investing across all asset classes

There are differences between owning a share and owning a bond. Exclusions from investment on ethical grounds apply across all asset classes but the level of engagement possible as a bond holder may be different, since a bond holder owns debt rather than a share of a company. However, we will endeavour to engage where issues of ethical concern arise.

Supranational, sub sovereign, and agency bonds present potentially unique challenges since they could be backed by non-UK governments. However, we will also be aware of ethical concerns that might arise.

Screening and Engagement

Mission

The Central Finance Board of the Methodist Church (CFB) has defined its mission, alongside the Church, as: seeking practical solutions which combine Christian ethics and investment returns. The CFB’s aim is to:

  • provide a high quality investment service seeking above average returns
  • follow a discipline in which the ethical dimension is an integral part of all investment decisions
  • construct investment portfolios consistent with the moral stance and teachings of the Christian faith
  • encourage strategic thinking on the ethics of investment
  • be a Christian witness in the investment community

Screening

The CFB integrates ethical considerations into its investment process, evaluating environmental, social and governance (ESG) risks in the businesses in which it invests. Screening is applied both to stock exchange and fixed interest securities.

The CFB applies ethical exclusions by way of screening that seeks to avoid investment in companies with material or significant exposure to the following areas of business activity:

  • Alcohol and tobacco production
  • Military products and services (including defensive systems and components, platforms and weapons)
  • Gambling and gaming
  • Pornographic and violent material
  • High-interest ‘door step’ lending

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 high emitting sectors such as coal and oil sands, or where they are ‘wholly or mainly’ committed to fossil fuel exploration.

Other ad-hoc exclusions may be applied from time to time, for instance where there may be human rights concerns. This would normally follow a period of close engagement and dialogue.

Engagement

The principal means by which the CFB exercises 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.

The CFB encourages high standards of ethical business practice and will seek to engage where we:

  • require information or seek understanding of a company’s approach to specific ethical issues
  • identify material risks where disclosure is absent or inadequate
  • seek to respond to an ethical controversy that has impacted the company

Engagement is carried out by all members of the CFB investment team, including senior management via written correspondence (letters and e-mail), telephone conference calls, or face to face meetings.

The CFB may choose to engage with investee companies collaboratively. The CFB is 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 our membership of the ecumenical Church Investors Group (CIG), https://churchinvestorsgroup.org.uk where we lead or support various engagement strands. One of the core strategic goals of the CIG has been defined as:

  • to increase the emphasis on engagement and the scale of the engagement work we [the CIG] undertake

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). The CFRB uses other investor tools and benchmarks such as the Access to Medicines Index and Access to Nutrition Index, in order to conduct engagement.

The CFB routinely engages with investee companies itself on a range of material ESG issues, which have recently included:

  • The Living Wage
  • Executive remuneration
  • Funeral poverty
  • Corporate lobbying
  • Modern Slavery and Human Trafficking
  • Health & safety incidents in the extractives sector
  • Reported human rights violations
  • Conflict minerals (telecommunication companies)
  • Fairtrade
  • Farm animal welfare and antibiotic use
  • Breast milk substitutes

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:

  • Corporate Governance: Chairman, Senior Independent NED or Company Secretary
  • All other ethical and corporate responsibility issues: Chief Executive, Head of Sustainability or Corporate Social Responsibility or Head of Investor Relations.

Meetings are typically held with sustainability or corporate responsibility professionals or with the senior leadership team.

From time to time the CFB is invited to consult on corporate remuneration proposals, and it is our policy to respond constructively to these consultations.

The CFB 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. The CFB 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.

Reporting & Communication

CFB engagement activity is published quarterly in our Responsible Investment Review for clients and online at http://www.cfbmethodistchurch.org.uk/ethics/. More information on engagement activity is published in the annual JACEI Report to Conference, which is also available online.

March 2018

Voting Report – December 2017

Voting Report – September 2017