Embed Size (px)
Citation preview
MERIAN GLOBAL INVESTORS RESPONSIBLE INVESTMENT AND STEWARDSHIP REPORT 2018
Merian Global Investors
1
DEVELOPING AN INVESTMENT-LED, VALUE BASED APPROACH TO BEST SERVE OUR CLIENTS’ INTERESTS
OUR COMMITMENT TO RESPONSIBLE INVESTMENTAt the end of June 2018 the single strategy business of what was previously Old Mutual Global Investors was sold to our management team and funds managed by TA Associates, and our company became Merian Global Investors (MGI). On the first day as an independent business we signed the Principles for Responsible Investment (PRI), highlighting our firm commitment to developing a meaningful responsible investment platform that best serves our clients’ interests from day one.
As we reported last year, at the end of 2017 our management team decided to increase the resources applied to responsible investment to best ensure that our approach is aligned with current and future client requirements. As part of this commitment, we added two permanent members of staff, one on the investment team and one in investment risk, to design and put into operation a strategy for responsible investment and stewardship. As well as being MGI’s first responsible investment and stewardship report as an independent business, this is also our first annual report as a new team.
FUNDAMENTAL PRINCIPLES UNDERLYING OUR APPROACHAs we continue to build and develop our approach, we have set out four key principles that all our activities must adhere to in order to focus our approach and keep our strategy in line with our ambition to develop an investment-led, value-based approach to be best serve our clients’ interests. These are:
1. ADD VALUE FOR CLIENTS: Responsible investment must help us make better investment decisions on behalf of our clients, address particular client needs, or ideally both.
2. QUALITY OVER QUANTITY: We will focus on the areas where we can have the most impact and that we deem to be most material to our investments and client interests.
3. AUTHENTICITY: We will be honest and genuine about our activities, including any successes and challenges faced whilst implementing our responsible investment strategy.
4. PRACTICE WHAT WE PREACH: In line with our wider commitment to be a responsible business we will endeavour to embody the behaviours that we expect of companies where practicable.
KEY DEVELOPMENTS IN 2018Over the year we made some important developments in our responsible investment and stewardship resources and competencies, which have already enabled significant enhancements to our capabilities and on which we will continue to build in 2019.
As already mentioned, we are proud to have been signatories to the PRI from day one as an independent business. This not only cements our commitment to responsible investment but also provides us with an important network, information resource and collaboration tool on key responsible investment topics. We are also very pleased to have joined a number of other important investment industry bodies that address responsible investment issues, such as IIGCC on climate change and ICGN on corporate governance. We are also members of a number of more focused initiatives such as the 30 percent club, which aims to broaden the pipeline of women in business, and FAIRR which looks at the health and climate issues in factory farming.
Over the year we signed a new data and research contract that gives us access to industry-leading responsible investment research and related data on a large number of companies globally. This is helping us significantly in developing integration tools and internal reporting, as well as an independent monitoring tool to be incorporated into our standard risk challenge processes. The data is also providing the initial step in our engagement prioritisation activity so as to be able to focus on engagements on a small number of companies where we believe we can make real differences on issues that are important for the investment and our clients. While 2018 saw an increase in global engagement activity on responsible investment topics, prioritisation and focus is a key area of emphasis for 2019.
We have updated several responsible investment policies, and published our Accountability Expectations which contains both our new voting policy and also broader comments on how we expect boards and companies to behave. Our voting coverage has been significantly broadened, with the intention now that we should vote at every meeting globally where practicable. Importantly we have carried across our controversial weapons policy to MGI in order to make clear that we will not knowingly invest in companies that produce anti-personnel mines or cluster munitions.
THE EXTERNAL ENVIRONMENTThe market drivers behind responsible investment continue apace, with both the level of client interest and the regulatory landscape expanding. The related risks and opportunities for the companies in which we invest are also rising up the agenda.
Responsible Investment and Stewardship Report 2018
2
On the demand pull side, Schroders found in its Global Investor Study that 76% of those surveyed say sustainable investing has become more important to them over the last five years, with Morgan Stanley suggesting that in the US the millennial generation is two times more likely than the overall investor group to invest with social and environmental goals. Given that UBS estimates this generation will be worth US$24 trillion by 2020, this is a major signal of increasing interest in responsible investment from clients that investors simply cannot ignore. However, the demand pull is not only coming from the retail sector; 84% of asset owners already pursue or are considering the pursuit of responsible investment integration into their processes, with 60% having started doing so in just the last four years according to Morgan Stanley.
On the regulatory push side, we have seen a number of important developments over the year. Locally, this includes the announcement of plans to clarify pension fund trustees’ duties that UK trust-based schemes should have a policy on how they consider material sustainability issues as well as the report of the Green Finance Taskforce on proposals to unlock investment towards the low carbon transition and climate resilience. The European Union also released its wide-ranging proposals on a framework to encourage sustainable investment, investor disclosures on responsible investment integration and low and positive-carbon benchmarks.
It is clear that the regulatory landscape is only getting firmer; as an example from the middle of 2019, member states are required to implement the EU Shareholder Rights Directive II. This adds a range of requirements on asset managers around voting and engagement policies and implementation.
2018 also saw the release of the special report from the Intergovernmental Panel on Climate Change (IPCC) on the impacts of keeping global warming at just 1.5°C above pre-industrial levels, in line with the ambition of the Paris Agreement, instead of the widely quoted 2°C target. The report highlighted the significant extent of the benefits of aiming for 1.5°C over 2°C (we are currently on track for over 3°C), but also the extent of the changes required to achieve it. Following the report, COP24 was held in Poland to progress global climate talks, which finalised a single rulebook for the implementation of the Paris Agreement, including how governments will measure and report on their carbon emissions. Some aspects proved more challenging, and discussions on carbon markets had to be pushed to this year’s summit. What is clear, however, is that the need to tackle climate change continues to grow, and the longer it takes to implement the necessary rules to reach the Paris Agreement, the greater and more severe the risks for companies, investors and society at large. The imperative for investors to consider how climate change will impact their portfolios has never been stronger.
All of these factors only strengthen our resolve to implement a meaningful, value-adding responsible investment strategy that contributes positively to our investment processes.
FEEDBACKAs you might imagine, it has been a busy year for us as we started to develop and put into operation our responsible investment strategy. The next year will be no less busy, with a focus on further implementation, and we look forward to telling you more about it in next year’s report.
Some clients have very kindly given their time over the last few months to participate in a project we have been undertaking to better understand their current and future requirements in responsible investment, which continues to help inform the development of our strategy. Please do get in touch should you have any questions or thoughts for us; we are always keen to hear any feedback you might have. You can contact us at [email protected].
FREDDIE WOOLFEHEAD OF RESPONSIBLE INVESTMENT AND STEWARDSHIP
LYDIA HARVEY ESG RISK MANAGER
Merian Global Investors
3
For responsible investment to be most effective it must contribute positively to our investment processes and outcomes for clients. We are therefore building our capabilities to be best aligned with our various investment strategies, recognising that they will each have their own requirements according to how and where they invest.
We split our approach to responsible investment into five core pillars. Some of these are common across all our strategies, such as our approach to voting. Others will naturally need to be flexible depending on the investment style; for example, our approach to engagement prioritisation will naturally differ between our systematic strategies and our lower-turnover, long-only desks.
The five pillars:
OUR OVERALL APPROACH
ENGAGEMENT
INTEGRATION
RISK OVERSIGHT
PUBLIC POLICY
VOTING
We recognise our responsibility as investors to promote and protect long-term value creation, and to hold the boards of the companies in which we invest accountable for performance. This extends beyond governance to all aspects of a company’s strategy and operations, including its environmental and social performance.
A key aspect to our approach is developing independent oversight of the sustainability and governance characteristics of our portfolios through the investment risk function. This ensures that while the investment desks are responsible for the construction of their portfolios, we have a formal governance process in place to monitor and query exposure to environmental, social and governance risks.
We exercise our voting rights at every opportunity where practicable to reinforce our engagement with companies, protect shareholder rights and promote good corporate governance.
Where we identify systemic issues that affect the sustainability of the markets in which we invest we will, either directly or through membership associations, seek to influence policy to address those challenges.
In the following pages we set out what we have been doing over the last year against each of these pillars and offer some thoughts for what is to come in 2019.
Through the development of proprietary tools and research we aim to gain value-adding information and perspectives on the material environmental, social and governance topics for companies and sectors. This will help us better assess risks and identify opportunities, and should provide us with an investment edge over the market.
Responsible Investment and Stewardship Report 2018
4
ENGAGEMENT
Our fundamental equities teams meet hundreds of companies a year to discuss a wide range of issues, including those related to responsible investment related topics such as corporate governance, health and safety performance and labour relations. Additionally our dedicated responsible investment resource meets with companies where particular subject matter expertise is required for engagement.
Improved access to data allows us to be more incisive about the issues at specific companies in our portfolios. We describe how we are starting to think about using this data and interpreting it in the section on Integration. For engagement a key priority in late 2018 and for 2019 is to use this data in order to help us prioritise a small number of companies by each fundamental equities desk for intensive engagement, where we see specific issues that we believe we can address through interactions with these companies. This allows us to be more specific about the strategy to achieve our goals, as well as what we might need to do should we not see the progress we expect. Importantly the prioritisation process and subsequent engagement must be undertaken in conjunction with the portfolio managers and analysts to ensure that our investment views and engagement messaging are consistent. It also means that any consequences of the engagement not going to plan can be fully considered in the totality of the investment outlook and valuation.
Below we have included some examples of the engagements we have had with companies over 2018 across our fundamental equities desks. We hope these give you a flavour of the types of topics we take up with companies, as well as the various levels at companies that we seek to interact in order to push for change.
UK LARGE CAPTRANSPORT SECTORWe have spoken to the company on a number of occasions, including in a meeting with the chair, on general governance topics, as well as board effectiveness, labour relations and cyber security.
The company has faced a number of issues over recent years related to industrial relations; while the labour situation is clearly complex, the company’s decentralised model means it has no common way of managing labour relations across its operating businesses, which would seem to make it more challenging to apply best practices. There is a delicate balance: labour is a large portion of total costs but also can cause significant disruption through strikes.
We have also been concerned by seemingly poor customer relations statistics at its largest subsidiary in particular, and are keen to understand the effectiveness of the company’s response. While the company has recently implemented a customer satisfaction score target, we need to explore its approach further to understand the changes being implemented as getting customer feedback is challenging and Trustpilot scores are not positive.
While not much information is available about the cyber-attack that compromised the financial details of a number of passengers at one of its subsidiary companies over the year, we began engagement on the company’s broader approach.
We retain outstanding questions on all these topics which we will continue to take up with the chair when we next meet.
MATERIALS SECTORWe began engagement with this company in advance of its 2018 shareholder meeting as we were surprised to note that in a year where the company had experienced a significant increase in fatalities this had no impact on executive compensation. This led us to a discussion with the chair who explained the extent of the work being undertaken by the company on health and safety and some of the major challenges it faces. Indeed, just recently, the company has implemented a specific board committee to look at the issue. This feels positive, although a large challenge will be in managing contractors and sub-contractors where the reach of related policies will be less clear.
We subsequently spoke to the company following the release of its sustainability report. We provided feedback on a number of areas where improved disclosure would be helpful to get a greater understanding of the company’s approach, including on health and safety and business ethics. We also discussed the company’s management of carbon embedded in its product and how it considers the risk of carbon pricing and low carbon transition in its operations. The company is reviewing its targets to set longer-term ambitions. It was also keen to point out its involvement in sustainable solutions, and how its approach to sustainability can be part of its competitive advantage and help it to win contracts.
UK SMALL AND MID CAPENTERTAINMENT SECTORWe met the chair and the senior independent director to discuss a range of strategic and governance topics.
As the business has grown rapidly, we were eager to explore the cultural aspects of what is clearly a fast-moving business. While the company’s entrepreneurial culture is key to its continued growth, it is important that the governance evolves to match the company’s size and value. This is particularly so in the face of seemingly declining employee engagement statistics. We discussed how the company’s culture has responded to a recent significant increase in employee numbers due to an acquisition as well as the key governance enhancements the board has made in response to the increased valuation. We would expect to see employee engagement numbers to improve over time, and will continue to discuss governance developments.
The sector continues to be under increasing regulatory scrutiny, exposing it to risks in changing rules that can impact sales. Helpfully the board’s view is that pushing for high-quality regulation contributes to competitive advantage by excluding less rigorous peers. This means the company’s approach is to get ahead of regulation and push for positive change, as
ENG
AGEM
ENT
VOTI
NG
RISK
OVE
RSIG
HT
INTE
GRA
TIO
NPU
BLIC
PO
LIC
Y
Merian Global Investors
5
has been demonstrated recently by its lobbying in the UK for the exclusion of gaming advertising before the watershed.
On other key topics, we discussed how the board thinks about capital allocation, in particular the balance between paying down debt, the dividend and future M&A, succession planning and tax. We also heard helpful comments regarding its approach to cyber security and the quality of standards it implements given the potentially critical reputational damage should an issue occur.
Finally we discussed executive compensation, following two shareholder meetings with large votes against related resolutions. We discussed some of the related topics and agreed to engage further on this issue.
INDUSTRIAL SECTORWe spoke to the company secretary and subsequently met a board member to discuss compensation structures given the scope for large pay-outs from the incentive schemes.
We are keenly aware of the ongoing debate about excessive executive compensation and want to ensure that pay can be clearly related to performance, which we believe for this business has been the case in the past. We are also keen to ensure that the compensation structures recognise the particular business model, which is unlikely to be best captured with standard performance conditions. We therefore discussed ways in which the scheme can be adapted to show that only exceptional performance is highly rewarded, and continue to debate with the company ways in which it can balance the needs to adapt pay to its business model while also being careful of the external perceptions of large executive pay.
EUROPETRANSPORT SECTORWe met the senior independent director and a number of senior executives to discuss topics related to board effectiveness and labour relations.
The company has been under particular pressure recently from labour unions and strikes which have caused cancellations and contributed to a profit warning. It is clear that the extent of the labour relations issues had taken the company by surprise, causing it eventually to acknowledge a union. There is an inherent tension between the cost leadership strategy and related expenses, however it appears that there are a number of levers the company can pull that could help improve relations while not threatening the business model. The process has also allowed management to be clearer on where its own red lines are, as well as establish where it offers industry-leading benefits. There is clearly a period of negotiation to allow both sides to define their boundaries; however, we must expect to see a reduction in labour issues and an end to disruptive strikes in the future if the company’s endeavours are successful as the company moves from fighting fires to implementing better practices.
On board effectiveness, we pushed on a number of aspects related to succession planning and board composition to help the board transition as certain long-standing key members rotate off in the future and ensure that the interests of minority investors
are protected. Governance has long been our major concern at this company which as an investment has driven high returns and growth. The labour crisis that has enveloped the group seems to be a catalyst for improvement while not impairing the profitability of the company.
CONSUMER GOODS SECTORAs a result of our in-house AIM (see section on integration) screen, two issues at the company were flagged: one in regards to the use of conflict minerals and the other about labour relations.
We were unable to find any explicit policy on conflict minerals and so we raised the issue with the company at a subsequent meeting. The initial reaction was of surprise that the company was being flagged for this issue but we were able to share the assessment and to flag that competitors in the same industry have clearly defined and publicly disclosed policies in this area.
On labour relations, the company has followed a similar path to other European manufacturers in shifting the balance of their manufacturing footprint to low cost locations. The company questioned whether their facilities in mainland China might be causing the flag but was unable to confirm that this is the case. The company has promised to look into the issue and to provide us with answers. This issue is clearly important as an investment criteria as potential brand damage is immeasurable if the company were to be seen to be involved in conflict minerals or poor labour practices. We suspect that it is an issue of documentation rather than breaching rules and if that is the case there is a simple and inexpensive solution to bring it in line with industry best practice.
GLOBAL EMERGING MARKETS RETAIL SECTORThis company is Indonesia’s leading department store operator. We believe the share price does not reflect the true intrinsic value of the business, and a large contributory factor has been a market perception of weak governance and influence by the company’s largest shareholder, given current weakness in some of their other businesses. The main shareholder owns around 16% of the company yet their current or previous employees occupy nearly all the board seats. In addition, the Board of Commissioners responsible for overseeing the board has members that are labelled independent but
Responsible Investment and Stewardship Report 2018
6
have previous ties with the major shareholder.
We met management and suggested several measures such as a more diversified board, enhanced by-laws for limiting related party transactions and commitments that surplus cash generated by the business is used to reinvest in the business, buy back shares or pay dividends.
FINANCIAL SERVICES SECTOROne of China’s leading financial services providers, the company has impressed us over the last two years with greater transparency in releasing and reporting on its operating metrics and its efforts to integrate technology into its core business lines. During 2018 we actively engaged with company management as we feel that transparency on governance is lagging the improved operational disclosure. As the company aspires to be measured against global peers, rather than its domestic peer group, we believe improvement here is warranted. Specifically, we believe issues such as disclosure of executive remuneration and ownership can be improved and would further help in creating value for shareholders.
GOLD AND SILVERMINING SECTORWe have met with the management team of this Latin American mining company at least once a year since the fund was launched. At the time of launch, the shares constituted a core portfolio holding.
However, in early 2017 we became aware of allegations that simmering tensions with the local community around the mine were escalating. The main issue was the quantity of water used by the mine, which was having a detrimental impact on local agriculture. In spite of engagement on this, management tried to
play down the importance of the water issue, its impact on the local community, and the subsequent
protests that led to a blockade of the mine. Implementing best practices was not only
necessary for the ongoing reputation of the company and indeed its
valuation, but also for our participation as shareholders; these concerns were not met
with due consideration by management.
The market’s increasing reliance on material information about the mine protests from blog sites, instead of company reporting, compounded by the CEO’s resignation two months after our
2017 meeting, showed that management did not
have an effective strategy to engage and work with the
local community. The situation
continued to escalate until the company’s licence to operate the mine was suspended by the national government. Our analysis suggested that the market was not correctly pricing the risks of the mine being suspended indefinitely, so we sold our position for more than twice the current market value. Production at the mine continues to be suspended and the shares have structurally underperformed the peer group since.
MINING SECTORWe engaged with the vice president of environment and sustainability of this Latin American mining company, following our expression of interest during a meeting with the CEO in London two months earlier.
Under discussion was how significant environmental incidents (SEIs) and lost time injuries (LTIs) are classified and linked to executive pay. We were keen to understand why an environmental incident at one of the company’s mines in Peru was deemed not ‘significant’, despite the incident making the local press. The company has been SEI free for the past five years, which supported our concern that there was a reluctance to classify incident as an SEI, due to the risk of it impacting executive pay. We also pressed that any single SEI should have the impact of reducing executive pay, rather than having to wait for the previous threshold of three SEIs to be breached, which the company has now implemented.
The engagement also identified a need for the company to improve its sustainability reporting. The company was grateful for this feedback and additional disclosures have subsequently been made.
On the company’s environmental management system, we questioned why it does not obtain International Organization for Standardization (ISO) certification. The company explained that most Canadian-based mining companies are members of the Mining Association of Canada, an industry body which offers its own standards. However we countered that adherence is voluntary and is not as widely recognised and accepted as the ISO standard; the company is planning to move towards ISO 14001 certification in future.
ENG
AGEM
ENT
VOTI
NG
RISK
OVE
RSIG
HT
INTE
GRA
TIO
NPU
BLIC
PO
LIC
Y
Merian Global Investors
7
Region Total With mgmt rec Against mgmt rec
Global 1,609 856 53% 753 47%
Australia & New Zealand 97 58 60% 39 40%
Europe ex-UK 289 180 62% 109 38%
Latin America 88 25 28% 63 72%
North America 401 192 48% 209 52%
Asia ex-Japan 381 135 35% 246 65%
Japan 91 47 52% 44 48%
Africa 5 3 60% 2 40%
UK 249 212 85% 37 15%
Rest of the world 8 4 50% 4 50%
VOTING
Voting plays an important part in our responsible investment and stewardship activities, as it provides us with an annual governance touchpoint with our investee companies. It also allows us more formally to hold management and boards to account should we not be successful in achieving our intentions through engagement.
Our intention is that we should vote at every shareholder meeting where practicable. There are, however, occasionally issues that prevent us from doing so such as power of attorney requirements and share blocking. Where share blocking is present we refrain from voting in order not to potentially obstruct our other investment activities.
Our voting is informed by our voting policy, which can be found within our broader Accountability Expectations document. This sets out our views on certain standards of corporate governance
and behaviours that we believe to be particularly pertinent to engendering credibility and trust in boards and management. However, we are keenly aware that there is no one-size-fits-all approach to running a company, and so are always willing to listen to companies’ explanations as to why their arrangements are right in the context of their own strategies and situations. We will therefore apply pragmatism and vote against our policy if we feel this to be the correct course of action, which we record separately for audit purposes. We pay particular attention to those meetings of companies in which we are large investors, have invested a large amount of our clients’ assets or with whom we have an active engagement. The policy is also sufficiently broad that in many instances it cannot be applied without additional judgement, meaning that in reality we look at a significant number of meetings each year.
During 2018 we voted at 1,609 meetings, voting against management’s recommendations at 47% of them. Full details of our votes by resolution can be found at our responsible investment web page.
MEETINGS VOTED WITH AND AGAINST MANAGEMENT’S RECOMMENDATION BY GEOGRAPHY
By resolution this breaks down to voting against 10% of the 20,221 resolutions we voted over the period.
Of the total resolutions we voted against, the greatest number was against director re-elections and board structure for issues such as lack of sufficient independence. In certain instances we have sought to hold directors specifically accountable for their performance.
The next largest category is management compensation which we continue to find often inappropriately structured and misaligned with long-term investors’ interests. We have long been calling for a wholesale simplification of executive pay, and continue to be dismayed by how much time is required to be spent discussing
compensation practices in meetings between investors and directors when we suspect there are significantly better uses of those opportunities. We also paid close attention to issues related to capital structure, predominantly to prevent excessive dilution of minority investors resulting from selective share placements.
7% of the resolutions we voted against related to issues in companies’ audits and their accounts, primarily due to excessive auditor tenure and fees, as well as unaudited financial statements. Audit quality is a specific area of interest for us, and we are looking to identify ways of taking a more nuanced and informed view so as to better hold auditors and audit committees accountable generally and also through the vote.
Responsible Investment and Stewardship Report 2018
8
ENG
AGEM
ENT
VOTI
NG
RISK
OVE
RSIG
HT
INTE
GRA
TIO
NPU
BLIC
PO
LIC
Y
RESOLUTIONS VOTED WITH AND AGAINST MANAGEMENT’S RECOMMENDATION BY GEOGRAPHY
RESOLUTIONS VOTED AGAINST MANAGEMENT’S RECOMMENDATION BY TYPE
As we look towards the 2019 AGM season we expect remuneration issues to continue to lead the headlines following a year which saw a doubling of the number of companies receiving over 20% votes against remuneration resolutions compared against the previous year in the UK1. Investors continue to grapple with the issue of “how much is too much?”; we believe it is reasonable to expect that excellent performance should be well rewarded, however, it is also striking that by 1pm on 4th January 2019, the average FTSE 100 CEO had already earned
the same as a typical full-time worker in the UK2. Additionally, we anticipate an increased focus on board diversity as investor views continue to firm up around holding boards accountable for poor gender and other diversity. We also expect an increased interest in shareholder proposals particularly with regard to climate change, both in companies’ lobbying activities against climate regulation and how carbon intensive and fossil fuel industries are setting strategies to navigate the transition to a low carbon future.
7%
47%15%
1%
21%
6%3%
Audit and accounts (7%) Board structure (47%)
Capital structure (15%) Corporate transactions (1%)
Remuneration (21%) Shareholder rights/company articles (6%)
Other business (3%)
0%
28%
3%
11%5%
39%
12%2%
Audit and accounts (-%) Board related (28%)
Corporate transactions (3%) Environmental matters (11%)
Remuneration (5%) Shareholder rights/company articles (39%)
Social and ethical matters (12%) Other business (2%)
1 For details of companies with votes over 20% against resolutions in the UK see https://www.theinvestmentassociation.org/publicregister.html2 http://highpaycentre.org/blog/its-fatcat-friday-ceo-pay-for-2019-surpasses-the-amount-the-average-uk-work
Region Total With mgmt rec Against mgmt rec
Global 20,221 18,190 90% 2,031 10%
Australia & New Zealand 520 457 88% 63 12%
Europe ex-UK 4,409 4,007 91% 402 9%
Latin America 923 701 76% 222 24%
North America 4,867 4,440 91% 427 9%
Asia ex-Japan 3,817 3,171 83% 646 17%
Japan 1,772 1,643 93% 129 7%
Africa 67 61 91% 6 9%
UK 3,776 3,706 98% 70 2%
Rest of the world 70 4 6% 66 94%
MANAGEMENT RESOLUTIONS SHAREHOLDER PROPOSALS
Merian Global Investors
9
INTEGRATION
Integration describes the endeavour to take into account responsible investment and stewardship topics as part of the investment process. This is the aspect that requires the most adaptation and flexibility according to our various investment approaches in order to best identify which issues will be material and over which timeframes, as well how they should best be considered to add the most value.
Many of these topics do not require specialist knowledge to trigger an understanding of why they could be important for investment. It is, for example, self-evident that a company with a happy and motivated workforce is likely to be more productive than one whose unions are calling regular strikes. A reputation for poor data privacy policies and cyber-attacks risks losing customers and incurring large fines. A carbon-intensive business not thinking about its future in a low carbon world is more likely to face the blunt end of emerging environmental regulation than those proactively planning for decarbonisation.
There are plenty of examples of where we have considered these topics in our regular discussions on companies previously; that this isn’t always described as responsible investment is an indication of how integral these activities can be to our investment decisions. However, we can improve our ability to answer questions around the extent to which each of these topics could be important to a company, how well the company is addressing them and what should we do about it if the approach is deemed to be lacking.
Now with dedicated internal headcount as well as improved data and research provision we have a significant opportunity to better inform and systematise our approach to incorporating these topics into our investment activities. Over the last year we have started developing internal, proprietary processes designed to help us better assess risks and identify opportunities. Our experienced subject matter experts provide additional context to the data and help our investment teams understand the full implications of them and debate the most appropriate response. This area is a key focus for continued development and roll-out in 2019 and beyond.
ACCOUNTABILITY AND INTEGRATION METHODOLOGY (AIM)While we are in the initial stages of putting into operation more systematic integration tools and processes, we have laid out the backbone for our internal research and integration processes which we set out below. We call this process AIM.
In order to categorise the main topics, our approach looks at five key aspects of how these issues could become material for a company. The relevance of each topic for a company will depend on a number of variables, including the industry and the geographies in which it operates, as well as international laws and conventions.
ENVIRONMENTAL IMPACT:The company’s environmental externalities such as carbon emissions, and environmental resource usage such as water extraction.
STAKEHOLDER RELATIONS: How the company manages its relationships with its key stakeholders, such as employees and customers.
BUSINESS CONTINUITY: Issues that could have a direct impact on a company’s ability to operate, such as cyber resilience or business ethics issues. This also includes the future opportunities in certain sectors particularly challenged by sustainability issues, in particular revenues from low carbon/clean products and services.
LICENCE TO OPERATE:Topics related to a company’s relationship with wider society which if negative would reduce its customer base or resulting in regulation and fines. For example, this would include supply chain oversight issues and aggressive tax planning. On the positive side it looks at revenues from business models that extend access to important products to the world’s poorest, such as medicines.
ACCOUNTABILITY: Topics that assess how likely it is that management runs the company in the interests of shareholders, such as accounting, board composition and executive compensation.
Responsible Investment and Stewardship Report 2018
10
ENG
AGEM
ENT
VOTI
NG
RISK
OVE
RSIG
HT
INTE
GRA
TIO
NPU
BLIC
PO
LIC
Y
1 - What does the data tell us?
Where does the comapny lie on the spectrum from leader to extreme risk?
4 - Internalisation pathway
How might these issues impact the business?
2 - Issue analysis
Assessment of data and subjective analysis, incorporating investment knowledge of the company
5 - Ability to influence
Do we need to engage and, if so, could we be successful?
3 - What does our analysis tell us?
Where does the comapny lie on the spectrum from leader to extreme risk?
6 - Investment impact
How should we consider these issues in valuation? Can they be reconciled?
This process helps us form a complete picture of the materiality of the issues, how and whether we can engage to promote change and how and whether to account for the issues in the valuation. As described in the section on engagement, we have begun to put these processes in place for our engagement prioritisation which has already given us a number of additional insights to pursue.
With an understanding of which issues are most material for companies in different sectors and different geographies, the methodology takes a six-step process to identify the most appropriate response to the data.
Merian Global Investors
11
RISK OVERSIGHT
At the core of our responsible investment strategy is independent and robust risk oversight of environmental, social and governance (ESG) factors provided by the investment risk team. This ensures that while the investment desks are responsible for the construction of their portfolios, we have a formal governance process in place to monitor and query exposure to these issues.
Developing ESG capabilities within the risk team with the addition of full-time expertise allows us to leverage our existing risk management tools and processes to deliver tailored analysis to our investment teams and fully integrate the consideration and monitoring of the related risks within the investment process. This is another area of key focus for development for us in 2019 and beyond.
PORTFOLIO MONITORING AND INTEGRATIONThird-party ESG scores, data and research are consumed and analysed within the team, and distributed to the business through the development of proprietary analytics. In order to increase the relevance of standardised ESG data to our business, it will first be transformed using our proprietary AIM methodology. AIM has been developed as a value add framework, based on key priorities identified for our business and materiality for companies. Scores and data are adjusted using bottom-up materiality analysis at an industry level and mapped to our AIM categories.
The portfolio monitoring processes are intimately connected with our integration efforts; as we continue to develop and systematise our monitoring tools so too will our AIM processes and engagement prioritisation be enhanced.
INDEPENDENT CHALLENGEIn addition to developing bespoke ESG research and analytics, the investment risk team provides regular challenges through daily interactions with the investment teams. Crucially, we have enhanced our ability to respond to requests for information, through the integration of ESG data into our existing risk reporting platform.
Additionally, our quarterly investment committee (QIC) provides independent oversight of portfolio management activities for all Merian Global Investors funds and strategies through a formalised governance structure. This committee is co-chaired by our chief risk officer along with our head of investment governance, and includes other members of senior management from investment risk, investment performance, compliance and product. With the integration of ESG challenge through this governance structure we are able to plug in to established challenge and escalation processes.
Responsible Investment and Stewardship Report 2018
12
PUBLIC POLICY
As members of the UK Investment Association (IA), we will often seek to influence governance and investment policy consultations by contributing to their responses. In this light we are members of the IA’s company reporting and auditing group and also its sustainability and responsible investment committee, both of which have been very active over the year on both audit and accounting as well as wider sustainability consultations. In other instances we will respond directly, and meet with regulators to discuss current and emerging topics.
2018 has been a big year for governance policy in the UK, with reviews of the UK Corporate Governance Code and UK Stewardship Code being undertaken, as well as investigations into the audit profession and the function and effectiveness of the Financial Reporting Council.
UK CORPORATE GOVERNANCE CODEWe responded to the Financial Reporting Council’s (FRC’s) consultation on revisions to the UK Corporate Governance Code, and were very pleased to see many forward-thinking aspects subsequently introduced. In particular we are highly supportive of the additional focus on corporate purpose and culture and their alignment with the company’s strategy, as well as the recognition of a wider range of stakeholders as essential to a company’s success. While some aspects will be challenging for companies to do well, the new code is a huge opportunity to help rebuild trust in business by demonstrating that it is not only desirable but entirely possible to create value for both investors and society.
UK STEWARDSHIP CODEWe replied to the initial consultation on the UK Stewardship Code. We see no reason why the duties of the directors should be any different to the aims of investors that undertake stewardship activities in the pursuit of the long-term sustainable success of the company. We therefore believe it would be helpful to include references to purpose, culture and values, as well as wider society, reflected in the code as important aspects of stewardship in the interests of promoting long-term, sustainable business success. We also agree with many of the more public comments that the stewardship code should move on from just policy disclosures to more of a discussion of activity and effectiveness. From all we have heard so far, we are very encouraged by the proposals being developed.
REVIEW INTO THE FINANCIAL REPORTING COUNCILWe provided input into the Kingman review of the effectiveness of the FRC. Our comments centred on topics related to the FRC’s accountability, mission, leadership and structure, resourcing and powers and funding. We believe many of the subsequent recommendations to be very positive, giving the new regulator more teeth which in turn should result in enhanced oversight of audit, reporting and governance.
AUDITAudit quality continues to be an issue, with the International Forum of Independent Audit Regulators (IFIAR) reporting3 that of the global audits its members inspected, 40% had at least one issue. However, a key challenge for investors is that getting insights into audit quality is extremely difficult; often issues are only discovered when it is too late. We therefore have spent significant time meeting all of the largest audit firms and some of their smaller peers to discuss a range of topics related to quality and oversight. In the first instance we are aware of, an audit firm also approached us in order to receive our views on accounting topics in general as well as specific feedback related to the companies they audit and whose shares we own.
There are also a range of open consultations on the audit market in the UK, including recommendations from the Competition and Markets Authority on how to improve competition and quality in the audit market, the Brydon review into UK audit standards and the gap between what investors and society expect an audit to deliver and the reality, and a governmental enquiry into the future of audit. This will likely be a key policy focus for us in 2019.
3https://www.ifiar.org/?wpdmdl=7970
PUBL
IC P
OLI
CY
ENG
AGEM
ENT
VOTI
NG
RISK
OVE
RSIG
HT
INTE
GRA
TIO
N
Merian Global Investors
13
PRACTICING WHAT WE PREACH
As part of our wider commitment to being a responsible business, we want to make sure that we behave in the same spirit as the expectations we hold companies to. Below we list a few of our related initiatives.
THE OFFICE ENVIRONMENT AND SOURCINGOur facilities team has been working hard on a number of initiatives to improve the sustainability of our office environment. We have removed all single-use plastic and plastic coated cups from water, tea and coffee vending areas and issued all staff with a reusable water bottle. We have also stopped purchasing glass water bottles and installed our own filtered water machine using reusable bottles for our meeting rooms.
On recycling, the team has changed the way we dispose of paper which has contributed to an increase in the volume of paper
being shredded and recycled by nearly 25% over the year. We also recycle all the aluminium waste from our coffee capsules via their manufacturer. Additionally, we have made a conscious effort to utilise redundant office furniture from our previous owner in order to extend its useful life.
Our marketing materials are printed on FSC mix paper and use cellulose acetate sheets instead of plastic. These sheets are made from wood pulp or cotton, or a combination of the two. When composted they break down like other organic material, and can be recycled alongside paper. We do not find that these different input materials add extra cost over their less-sustainable counterparts.
Over 2019 the facilities team has a number of additional sustainability priorities, including working with our stationery suppler to ensure that our most used products are from a sustainable source and substantially increasing the recycling of different materials in our office. More generally we are keen
Responsible Investment and Stewardship Report 2018
14
to make sure that we work with like-minded suppliers and consultants, and want to ensure that sustainability of procurement and services are at the forefront of our decision making.
HUMAN RESOURCESWe are proud to be part of Investment 2020 which is driven by a mission to bring more diverse talent into all aspects of investment management. Investment 2020 is part of the IA and gives school leavers and graduates access to trainee programmes and opportunities across the industry. Unlike a traditional rotational graduate programme, trainees are placed in one of our teams for the duration of their 12-month contract which enables them to appreciate and understand the team’s function in detail. It is a fantastic opportunity to develop skills from a mixture of both ‘on the job’ and formal training. Following the one-year trainee contract, a permanent role may be offered, if a suitable vacancy arises and the trainees’ skills match those of the vacancy. We are very pleased to have offered all our trainees under this scheme permanent roles so far.
We place considerable emphasis on the importance of maintaining and encouraging a diverse workforce, with employees from a wide variety of backgrounds. As part of our commitment to enhance our diversity, we require our recruitment partners to provide a gender balanced shortlist for all vacant roles for employees. Additionally, we ensure that all CVs provided to us by recruitment partners exclude the candidate’s name and gender as well as omitting names of schools and universities to counter any unconscious bias.
We have also encouraged more flexible working at Merian Global Investors and all job profiles demonstrate that we are willing to offer flexibility upon joining the company. The high uptake of our enhanced shared parental policy is also an indication of a workplace culture that supports the idea of men taking longer periods out of the workplace for childcare.
[email protected]@MerianGlobalMerian Global Investors
CONTACT US
UK/rest of world: +44 (0)207 332 7500
@
This communication is issued by Merian Global Investors (UK) Limited, Millennium Bridge House, 2 Lambeth Hill, London, EC4VP 4WR, United Kingdom. Merian Global Investors is authorised and regulated by the Financial Conduct Authority. This communication is for information purposes only. Nothing in this communication constitutes financial, professional or investment advice or a personal recommendation. This communication should not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the document.
Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas as a result of using different assumptions and criteria.
In Hong Kong this communication is issued by Merian Global Investors (Asia Pacific) Limited. Merian Global Investors (Asia Pacific) Limited is licensed to carry out Type 1 and Type 4 regulated activities in Hong Kong. This communication has not been reviewed by the Securities and Futures Commission in Hong Kong.
In Singapore this document is issued by Merian Global Investors (Singapore) Pte Limited, which is not licensed or regulated by the Monetary Authority of Singapore (“MAS”) in Singapore. Merian Global Investors (Singapore) Pte Limited is affiliated with Merian Global Investors. Merian Global Investors is not licensed or regulated by the MAS. This document has not been reviewed by the MAS.
In Switzerland this communication is issued by Merian Global Investors (Schweiz) GmbH, Schützengasse 4, 8001 Zürich, Switzerland.
Shares of Merian Global Investors funds are not available for purchase by “US Persons” as that term is defined under Regulation S of the Securities Act. The information provided in this document is not intended for distribution to, or use by, any person or entity in the United States, or in any jurisdiction or country where such distribution or use would be contrary to law or regulation, or which would subject any of the funds described herein, any member of the Merian Global Investors Group or any of their products or services to any registration, licensing or other authorisation requirement within such jurisdiction or country. This communication is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations. In particular, the shares are not for distribution in the US or to US persons. This communication is for investment professionals only and should not be relied upon by private investors. MGI 01_19_0125
Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The performance data does not take account of the commissions and costs incurred on the issue and redemption of shares. The value of investments and the income from them may go down as well as up and investors may not get back any of the amount originally invested. The value of investments and the income from them may go down as well as up and investors may not get back any of the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall.
