September 2022
Route to better governance
Governance can make the success or failure of a business, so what is important for investment managers to be on top of now and what does best practice look like?
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A blueprint for best-practice governance and stewardship
Last year, Bonhill titles including ESG Clarity launched the Campaign for Better Governance, encouraging firms to practice what they preach; review internal frameworks and analyse whether they themselves are operating in a way they ask of their investee companies. Since then – and we are not taking all the credit here! – groups have taken a real step up in terms of stewardship and governance, by taking a close look at how they run their businesses, and the foundations and frameworks upon which the rest of the business can be built. Certified B Corp companies came together to launch the Investment Coalition UK at COP26, calling on finance companies globally to commit themselves to higher levels of stakeholder accountability, as detailed in Daniela Barone Soares’ piece. The UK Stewardship Code was revamped and recommitted to by asset managers, and many investor collaborations have been formed to put pressure on companies, as outlined in our interview with ShareAction’s Simon Rawson. In this magazine, we are also delighted to showcase best practice governance, expert opinion from City Hive and the Principles for Responsible Investment, and engagement examples from the ESG Clarity award-winning group in this area, AllianceBernstein. As Morningstar’s Lindsey Stewart says, “governance is the glue that holds ESG together” and, on the back of such fast-paced developments, we look forward to seeing how this evolves within the investment industry over the next few years.
Spotlight
COVER feature
Governance can make the success or failure of a business, so what is important for investment managers to be on top of now and what does best practice look like? Natalie Kenway investigates
How AllianceBernstein’s asset managers are balancing a bold approach with building trust in engagement. Interview by Christine Dawson
Courage to contradict
Identifying good governance as a fund selector and collaborating with other B Corp companies is the key to unlocking powerful change
A force to ‘B’ reckoned with
Also in this issue ...
ShareAction’s director of corporate engagement Simon Rawson on how challenging conversations will drive responsible business practices
Escalation strategies
Head of stewardship at PRI explains how firms can up their engagement efforts, making the financial industry a better steward of capital
Sophisticated stewardship
For passive investors, it is active engagement and stewardship practices that will ultimately make or break sustainability efforts
Sleeping giants?
Bev Shah of City Hive asks if the four-day working week could be the next frontier the investment industry will cross
Next level flexible working
Asset managers are increasingly prepared to hold directors to account who fail to act on ESG resolutions, particularly when it comes to climate
Director dissent
Committing to net zero is the first step but it is effective engagement with companies that will be the deciding factor
Critical engagement
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Natalie Kenway Global head of ESG insight, ESG Clarity
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AllianceBernstein: courage to contradict
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There appears to be a juxtaposition in the perceptions of governance in the investment industry. Some say the G of ESG is ‘overlooked’, while many groups claim ‘ESG is in their DNA’, referring largely to the fact governance has been a key part of stock selection for decades – who would want to have badly governed organisation in their portfolio after all? However, more recently, there seems to be an increased focus on governance and all the factors it encompasses when it comes to managing a business: accountability, oversight, reporting and disclosure, remuneration and internal culture. Here, we take a look at the areas groups are concentrating on during their transitions to sustainable business models (click boxes below).
Best practice Boards have a tricky balance of overseeing an organisation and making sure nothing is ‘falling through the cracks’, but without micromanaging teams. So what does best practice governance look like? “Make sure you are executing your governance model in an effective way and keep thinking about whether it is fit for purpose. It is very important to put sufficient thought into it.” Vanessa Havard-Williams, global head of environment and climate change at LinkLaters, explains this is a good starting point. She also points to governance being a key part of the UK Stewardship Code and, from a sustainability perspective, a focus for the UK government’s UK Transition Plan Taskforce. This has been set up to help corporates navigate ESG reporting and disclosure, and aims to develop transition plan templates and support companies through metrics and targets. Education and training are also key. “The right skillset and resources must be allocated to climate-related risks and opportunities,” says Havard-Williams. “How are these integrated into the strategy and are all the tools there for this to be managed across the business?” Castlefield’s Overd adds that having the board oversight is also “incredibly important” as it demonstrates to employees that sustainability is a business risk and not “esoteric and isolated”. What it boils down to is the company delivering what it said it would – and why and how – and this is particularly important in our industry (and a reason why Bonhill created the Campaign for Better Governance.) “It is important to bring back to why we do this. How does it benefit stakeholders? Doing the right thing by them is fundamental to building consumer trust in financial institutions,” says Overd. The investment sector should be leading by example, particularly at the crossroads we are now at with sustainable finance demand and regulation, and the urgent need to tackle climate change. Getting governance right, especially from a sustainability perspective, should be the cornerstone of every business.
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How AllianceBernstein’s asset managers are balancing a bold approach with building trust in engagement
Engagement with issuers as an ESG strategy is not immune to being used as a cover-up for inaction and business as usual. Engagement-washing is becoming another established notion in ESG rhetoric. So it was extra salient this year that one of the ESG Clarity Awards should go to a group showcasing the best in high-quality engagement practices. AllianceBernstein picked up this accolade after the judging panel was impressed with the “clear and evidenced positive outcomes of their engagement”. Speaking to ESG Clarity in September, president and CEO Seth Bernstein, and chief responsibility officer Michelle Dunstan, say engagement success for the group has been down to the fine line an asset manager must walk of remaining consistently supportive of the company’s goals, while being bold enough to call out poor practice. Not all investors display the courage to contradict management at a company’s AGM, for example, but Dunstan says this is not something that worries her team. “We’ve always seen engagement as a two-way street in a productive relationship, we’re not particularly concerned about being shut out,” she says. “If a company shuts you out because you are asking it to address difficult issues, that can be a red flag for whether that management is actually willing to deal with these difficult issues.”
By Christine Dawson
‘If a company shuts you out because you are asking them to address difficult issues, that can be a red flag’
Michelle Dunstan, chief responsibility officer, AllianceBernstein
‘We advocate because we genuinely believe it will enhance shareholder value and the share price’
Seth Bernstein, president and CEO, AllianceBernstein
Value creation vs ESG Whether the investee company can see it or not, the AllianceBernstein teams are confident they always vote in the best interest of long-term shareholder value creation, Dunstan says. Bernstein adds it is rare value creation does not line up with ESG. “The reason we advocate is because we genuinely believe it will enhance shareholder value [and] enhance the share price, which usually conforms to the interests of senior management, not always, sadly, but often.” Despite this strong correlation, it is important companies understand that link if the investor is going to successfully build a good relationship through engagement. “We do frame it in the context of why we think it improves their cash flow generation ability and improves their revenue opportunity,” Bernstein explains. He notes this is particularly important in light of the reputation activist investors have with investees. “We come from a research background, which allows us, and in fact arms us, to be equipped to engage with them toe-to-toe on issues that are relevant and germane to their future. “And for the most part, companies tend to be receptive to that if they see you as engagement-oriented rather than as somebody who’s trying to extort from them – which is the rap activist investors get, at least here in the US.” Saskia Kort-Chick, director of ESG research and engagement – responsible investing at AllianceBernstein, focuses on engaging companies on social issues and reiterates the need to build trust and make the business case when talking about addressing a company’s exposure to particularly sensitive issues such as modern slavery in the supply chain, for example. Whereas every company has a carbon footprint, she notes businesses get nervous about the reputational and regulatory risk of being associated with modern slavery. “There might be a perceived idea that investors want to name and shame, or they might see a risk they end up with a headline that company ‘XYZ’ uses forced labour or has supply chain issues,” she says. For Bernstein, it is not ideal to be framing the methodology as one of sanctions that lead up to and include selling the stock. Instead, the engagement must be consensual in promoting change. But that is not to say the group avoids a structured approach.
Watch the video with Bernstein and Dunstan for more on engagement issues.
Click to read Seth Bernstein and Michelle Dunstan’s biographies
Seth Bernstein and Michelle Dunstan’s biographies
Seth Bernstein was appointed president and chief executive officer of AllianceBernstein (AB) in 2017. In 2018 he became senior executive vice-president of AB owner Equitable Holdings. Before joining AB, Bernstein spent 32 years at JPMorgan Chase, most recently as managing director and global head of managed solutions and strategy at JP Morgan Asset Management. In this role, he was responsible for the management of all discretionary assets within the private banking client segment. He was also managing director and global head of fixed income and currency for 10 years, concluding in 2012. Michelle Dunstan is AB’s chief responsibility officer and a member of the firm’s operating committee, overseeing AB’s corporate responsibility practices and responsible investing strategy. Dunstan also oversees the firm’s ESG thought leadership and product development. She was global head of responsible investing from 2020 to 2021 and a portfolio manager for the Global Commodity Equity Fund from 2012 to 2020. Before Dunstan joined AB in 2004 as a research analyst she was an engagement manager at the Monitor Group (now Monitor Deloitte).
More structured engagement In fact, this year AllianceBernstein has introduced a framework to track and conduct what it calls outcome-oriented engagements. “While we’ve always engaged for action, the escalation path, the milestones, have always been set by the investment teams conducting the engagement,” says Dunstan. “This year, what we’ve done is developed a more robust framework for that. We’ve trained all our analysts in conducting time-bound escalation for effective engagements – that is the serious ESG engagement camp.” The framework means setting in advance what the investment team is looking for from the issuer company, the milestones it is hoping to see along the way and what the timeframe is. This could be from six months to two years, depending on difficulty. Finally, the framework includes the escalation strategy they will carry out if progress is not seen along the way. “If you think about the past 10 years, [AllianceBernstein] started engagement for insight, moving to action-oriented engagements, but not with necessarily clear dates, targets and objectives,” Dunstan continues. “Now it’s a lot more concrete. And with our [engagement tracking] ESight system, we’re able to document all this and report on it to clients, too.” As well as anecdotes, the fund group’s engagement reports will now include milestones, objectives and if the investee company is being asked for disclosure, metrics, targets or progress against targets, for example. Collaboration and future gains ESight, launched earlier this year, contains in its functionality the scope to gather data on engagement outcomes. Kort-Chick says in a couple of years when more data from ESight is available, the group can start showing how often it has been successful in achieving what it asked a company to do, albeit with the caveat that other fund groups may share in the credit if they happened to be making the same request at the same time. If after escalations – like a letter to the board of directors, public letters or voting against a particular director – AllianceBernstein has not seen progress in line with its expectations, divestment is still on the table, according to Dunstan. To avoid that outcome, the group also uses collaboration with other investors to ramp up the efficacy of engagement. For example, AllianceBernstein joined Climate Action 100+ in 2017 and now co-leads four collaborative engagements as part of the initiative: Eskom, Sasol, Petrobras and PLL Corp. “Where we find it more difficult to engage – for example emerging markets, state-owned enterprises and quasi state-owned enterprises – the multi-party approach works,” says Dunstan. “In a lot of situations, we feel we can do it on our own. We can pull those levers ourselves. However, at times and in certain circumstances having multiple parties engaged on the same issue is very effective.” Bernstein reflects on the future of engaging companies and where the biggest gains are to be made and says there is huge potential in the traditionally “dirtier” industries such as mining energy and resources. He adds it is highly valuable to the firm that Dunstan should have a background as a research analyst and portfolio manager in this area. “She had considerable practical experience and understands the challenges of the sector. It isn’t one that features prominently in the list of top holdings of ESG funds, but it may be the sector that holds the most promise for real improvement over time because who is actually doing the research on changing emissions, changing the way we actually utilise minerals? It’s exactly these companies,” says Bernstein. “Having somebody who has worked with management on that journey was to me very valuable.”
2021 engagements by ESG pillar
2021 engagements on critical issues
Many investors use governance structures as a risk-mitigation measure, but it is important to go beyond this to assess impact governance. It is key to look for effective impact governance both internally and externally, which means assessing factors including: • whether accountability for impact is clearly embedded at board and senior levels; • if financial incentives are tied to impact (where relevant); • if there is oversight of impact with a cross section of appropriate backgrounds (eg an advisory board); and • if there is an independent impact verification process (eg through the IFC Operating Principles). It is important to consider this assessment of impact governance in the context of the size and nature of the organisation. For instance, we will have different expectations for an experienced and well-resourced manager, compared with a first-time fund. A B Corporation certification is a useful indication that effective impact governance is in place. B Corps are businesses that commit to ongoing measurement of how they balance purpose and profit. By amending their company documentation, they are legally required to consider the impact of their decisions on workers, customers, suppliers, community and the environment. To become a B Corp, organisations first undertake the B Assessment, which scores them against a range of social and environmental criteria. They are certified if they score 80 or above out of 200, and then if they haven’t already, are required to change their constitutional documents. In the UK, this means amending their company articles of association. Certified B Corps become part of a community that is focused on continual improvement and best practice – and are required to re-certify every two years. A B Corp certification signals to investors: • a strong indicator of a well-run business, with a strong proposition to attract talent; • protection against mission drift, with a high level of public accountability; and • benchmarking within a community of best practice leaders delivering impact and financial returns. Social impact property fund manager Resonance is a great example of a high-scoring certified B Corporation. Collaboration to drive up governance standards Like many of our peers, we are pioneering a better future of investment, and essential to this is collaborating with other certified B Corp investment firms to achieve the governance overhaul that is required in asset management to collectively safeguard long-lasting positive impact. Being B Corp certified means we are involved with (click for info): + B Corporate Finance and Investment Coalition UK + B Lab ‘Best for the World’ honorees act as a blueprint + Founding signatory of the Better Business Act At a time when investors are facing an overwhelming debate about how to determine who is delivering positive impact rather than impact washing, organisations that legally commit to the impact they say they will deliver are choosing the level of accountability we need to create a better future of investment. Good governance unlocks long lasting change.
‘A B Corp certification is a useful indication that effective impact governance is in place’
Daniela Barone Soares CEO, Snowball
Click to view ESG Clarity’s video series in collaboration with B Corp certified companies
B Corporate Finance and Investment Coalition UK
Together with EQ Investors, Montanaro Asset Management, Tribe Impact Capital, Coutts, Arisaig Partners, Bridges Fund Management, Habito, Mustard Seed, Triodos Bank and Wheb Asset Management, the B Corp Finance and Investment Coalition UK calls on finance companies globally to commit themselves to higher levels of stakeholder accountability. By engaging with CEOs over the benefits of B Corporation status – both for best practice and to support investment decision making – we ask finance firms to join us and amend their constitutional documents to align with broader stakeholder needs.
B Lab ‘Best for the World’ honorees act as a blueprint
Snowball is in the top 5% of all B Corporations globally for the governance structure that protects our mission. Our asset lock is a paragraph in our articles of association that enshrines our commitment to balance positive impact equally alongside risk and return the way we invest. ‘Best for the World’ is more than a badge or award. It allows us to connect and collaborate with other organisations who are also developing best practice in governance structures that support us to think more systemically about improving the way investment serves society and our planet.
Founding signatory of the Better Business Act
A UK public opinion poll conducted by B Corporation found that 76% of respondents believe businesses should be legally responsible for their impact, while businesses across the UK have proven that balancing impact and financial goals is a strong model for sustainable growth. We were one of the founding signatories in this lobby group of business leaders calling on the government to amend Section 172 of the Companies Act to ensure businesses are legally responsible for benefiting workers, customers, communities and the environment while delivering profit.
Natasha Turner speaks to ShareAction’s director of corporate engagement Simon Rawson about how challenging conversations are a necessary step to drive responsible business practices
What progress has ShareAction seen in asset management engagement this year? This year has seen record numbers of shareholder resolutions around environmental and social issues, but this isn’t a straightforward indication of progress. There has been growing investor scrutiny on banks for their role in climate change and fossil fuel financing, with resolutions filed at most of the large American, European and British banks. Workers’ rights have also gained greater recognition from shareholders. We co-ordinated the UK’s first-ever Living Wage resolution at Sainsbury’s, which led to a pay uplift for around 19,000 workers (see the video below for more). Unfortunately, it’s still a very small number of environmental and social resolutions that secure significant levels of voter support. We wait to see how asset managers have voted on critical ESG resolutions this year, but there are signs that some may be backtracking on earlier commitments. Arguments advanced to support this include the post-pandemic economic pressure and spiralling energy prices as a result of Russia’s invasion of Ukraine. The politicisation and polarisation of ESG in the US has seen asset managers trying to play both sides on sustainability. But the fundamental challenges, such as climate change and social inequality, remain significant systemic risks for investors.
‘Being a credible steward requires both managing a positive investment relationship and having courageous and challenging conversations’
Simon Rawson, director of corporate engagement, ShareAction
What can asset managers be doing to make their engagement processes more effective? It’s first a question of upping the ambition in terms of engagement with companies. It’s easier for asset managers to engage around governance and disclosure and there is a reluctance to go beyond this. There is also the question of having credible escalation strategies in place. Investors should set out where they are choosing to engage, set objectives for that engagement and define how to escalate if these objectives aren’t met. There are many ways to do this, whether it’s filing a proposal, turning up to an AGM or going public about an issue. From our conversations with investors, it’s clear that in most cases they are not encouraged to publish their escalation strategies. We encourage transparency around engagement as well as collaboration with other investors to pool influence. This helps to ensure engagement processes are as credible and robust as possible. What’s the biggest barrier to effective engagement from the industry? Investors want and benefit from access to top management and investor relations teams, but if they’re going to be robust stewards they need to be able to have courageous conversations with companies. It’s possible to have both a collaborative and a challenging relationship with a company at the same time. We’ve been working with Unilever on living wages, where it is one of the leading companies setting a standard for paying living wages across its supply chain. On the other hand, it is one of the largest manufacturers of unhealthy food, contributing to poor diets and health globally. This led to our Healthy Markets investor coalition filing a resolution, which is a more forceful form of engagement. At the same time, we maintained strong collaboration with it on living wages. It’s a shift in mindset that’s needed: being a credible steward requires both managing a positive investment relationship and having courageous and challenging conversations. How does ShareAction choose the focus of its campaigns? For example, why the emphasis on health this year? Health is largely a blind spot for investors, but there is huge potential for the investment system to help us build healthier societies. For example, stewarding food companies to ensure they develop robust strategies to improve the healthiness of their products can have a big impact on people’s diets and health. At the same time, ignoring health-related issues is exposing investors to financial risk. Around the world, poor health is estimated to cost 15% of global GDP. What has been the progress on, and response to, ShareAction’s Ethnicity Pay Gap campaign? We kicked off our campaign in February in partnership with a number of minority-led organisations including the Runnymede Trust and Reboot, with our current focus on the financial sector itself. We’re now in the process of developing a toolkit for investors to engage other sectors in the economy, and we will shift our focus to low-paid sectors in the next AGM season. What is the latest progress with the Workforce Disclosure Initiative? BlackRock, abrdn and M&S have all joined in the past year, with new signatories on the investor side including Aviva Investors, Schroders and BancoPosta Fondi. There is rising investor interest in workforce data, and we hope this leads to better responses to poor workforce practices across corporate holdings. Yet, the majority of listed firms are still neglecting our call to disclose workforce information. With the momentum building around the need for credible workforce data, we expect to see firms meaningfully engage with the initiative in even greater numbers next year.
Watch the video for Rawson’s insights into the challenges of running effective engagement.
Simon Rawson’s biography
Simon Rawson leads ShareAction’s work with companies to drive responsible business practices, across all the NGO’s campaign areas. Prior to joining ShareAction in early 2020, Rawson helped build the social responsibility function at McKinsey & Company, where he was director of social impact from 2015-2020 and head of client service risk from 2012-2015. He has also served as a diplomat for the British government from 2006-2012.
Read more: ‘Moral and economic imperative’ to report ethnicity pay gap
Click for Simon Rawson’s biography
The head of stewardship at PRI explains how firms can up their engagement efforts, making the financial industry a better steward of capital rather than just an efficient allocator
The sophistication of investor stewardship and engagement has grown significantly in recent years. However, more progress is needed. The goals of collaborative engagements have become more advanced, seeking to improve working conditions in corporate supply chains or drive policy change in Brazil and Indonesia. Stewardship teams have grown. The expectations under stewardship codes are rising. With this growth in sophistication, the potential avenues for investor engagement have multiplied. To name but a few, this includes: bilateral company engagement; collaborative engagements; value chain engagement; policymaker engagement for regulatory reform. While not forgetting asset owner engagement with investment managers and service providers; beneficiary engagement; and engagement with other systemically important actors such as index providers and standard-setters. With such an array of choices, investors may be hard-pressed in knowing where to begin, or wary about being stretched too thin. Two factors may help investors navigate these challenges: resourcing and prioritisation. Put your money where your mouth is While the attention given to engagement has grown, it is still dwarfed by the industry’s focus on capital allocation practices. Though it is widely acknowledged that you can’t divest yourself to a greener world, many investors with net-zero goals have opted to sell high-emitting assets without any meaningful attempt to change their practices beforehand. And even among investors that do advocate for the merits of engagement over divestment, in many cases this is a line not backed up by a strong engagement approach. How to shift the balance to make the financial industry better stewards of capital, rather than just efficient allocators? One important aspect is the resources investors allocate to stewardship activities. Currently, investors eagerly announce the high number of engagements their team has undertaken in the past year, or how their stewardship team has grown. And yet, to translate those figures into an engagements-per-analyst or an analyst-per-portfolio company ratio, a less rosy picture emerges. Any such quantitative figures cannot be definitive, but tend to indicate the underlying quality of an investor’s engagement or that the oversight leaves something to be desired. Investors must look at the resources they dedicate to stewardship activities and those they dedicate to allocation activities, and ask themselves if this the right balance to achieve the goals they’ve set. Does this split represent the best use of their influence? These are questions asset owners should also seek answers to when selecting investment managers. Good stewardship does not come for free; it is something investors have to be prepared to pay for. PRI will be sourcing research over the coming year on what adequate resourcing by the investment industry looks like in light of the systemic risks we face. Prioritise for additionality Even with a better-resourced stewardship function, the range of potential engagement opportunities open to investors will require some kind of prioritisation. Investors should not try to cover every sort of engagement, but focus on where they can add the most value.
‘Good stewardship does not come for free; it is something investors have to be prepared to pay for’
Emmet McNamee head of stewardship, Principles for Responsible Investment
Three key principles that should guide engagement prioritisation efforts
Impact Most investors already prioritise their corporate engagements according to which investees have outsized ESG impacts that should be addressed, in the interests of the long-term value of the company or their portfolio at large. But to take one step back, investors should consider the type of engagement with potential for the greatest impact. For highly diversified investors, for example, engaging policymakers or adding their weight to collaborative sector-wide engagements is more likely to generate a positive material impact on their overall portfolio than relying on purely bilateral engagements. Influence Where does an investor have the greatest influence? It may be at companies where they are a significant shareholding, or have both equity and debt holdings. It may be with stakeholders in their local market. It may be with an investment manager or service provider that has demonstrated an openness to learning Additionality Investors tend to gravitate to high-profile engagement targets. In the collaborative engagements that PRI has run, the best-known companies have had large numbers of investors competing to lead the engagement, while more unfamiliar names are neglected. Investors should consider avenues for engagement that have been overlooked by their peers, where their intervention could lead to progress that otherwise may not happen.
For passive investors, it is active engagement and stewardship practices that will ultimately make or break sustainability efforts. ESG Clarity asks if the sector’s two biggest players, BlackRock and Vanguard, are doing enough
Passives now make up more than a quarter of investment in sustainable funds globally, but with limited active stock selection, engagement and stewardship activities can be the clincher when it comes to justifying their ‘sustainability’. However, the giants of passive investing, BlackRock and Vanguard, are often pulled up on their opaque engagement efforts and proxy voting records on ESG issues. For instance, in 2021 they backed fewer shareholder proposals than their proxy advisers ISS and Glass Lewis recommended, according to research by ShareAction. That year, ISS recommended investors support 75% of assessed shareholder resolutions, and Glass Lewis recommended investors support 44%, but ShareAction found BlackRock and Vanguard had supported 40% and 26%, respectively. “Given the size of assets and degree of influence these managers have over corporate behaviour, their failure to adequately use their voting rights to tackle environmental and social issues should raise serious questions for their clients,” the campaign group said in its 2021 Voting Matters report. How BlackRock and Vanguard voted
‘Given the size of assets and degree of influence these managers have, their failure to adequately use their voting rights to tackle ESG issues raises serious questions’
By Natasha Turner and Emile Hallez
Here ESG Clarity delves into the engagement and stewardship practices of BlackRock and Vanguard. BlackRock Although BlackRock participates in various groups focused on sustainability, including Climate Action 100+ and the Net Zero Asset Managers initiative, it does not co-ordinate its voting activity or investing decisions. It has also allowed pensions to vote their own shares in shareholder resolutions. “Rather, we make such decisions independently and in the long-term economic interests of our clients,” BlackRock states. Further, its engagement with energy companies has focused on financial risk and return, which can include climate issues, it notes. The company hasn’t wavered on its stance that “climate risk is investment risk”, but it also points to its fiduciary duty to clients as a reason for continuing to invest in the fossil fuel business. In its 2030 net-zero statement, for example, it states: “Our role is to help [clients] navigate investment risks and opportunities, not to engineer a specific decarbonisation outcome in the real economy. The money we manage is not our own – it belongs to our clients, many of whom make their own asset allocation and portfolio construction decisions.” Ahead of the 2022 proxy season, the company announced it would allow institutional clients to vote their own shares in shareholder resolutions. It also explained it supported environmental and social resolutions on behalf of clients at a lower rate this year of 24%, compared with 43% in 2021. The company’s position on issues hasn’t changed, it says, but there was a dramatic increase in shareholder resolutions, some of which went further in their goals than those raised in prior years. “It’s totally clear they are acting solely from the perspective of shareholder primacy,” according to Dan Carreno, director of business development at Ethos ESG. Ethos ESG has encouraged BlackRock to support more ESG shareholder resolutions and has met with its investment stewardship team on that topic, says Carreno. That team is “very capable and very well intentioned”, he notes. Short-term financial results have prompted votes in favour of oil company management, he adds. However, not prodding fossil fuel businesses to invest more heavily in alternative energy technologies “is just setting these companies up to not do well in a world that’s less dependent on oil”.
As You Sow, for example, engaged with BlackRock after the asset manager signed a letter from the Business Roundtable on the “purpose of a corporation”. That statement identified the need to serve stakeholders ranging from employees, shareholders and customers to the communities in which businesses operate. As You Sow has taken issue with holdings in BlackRock’s funds that include private prison operators, fossil fuel companies and businesses linked with deforestation. “Saying one thing but doing another isn’t good for business,” As You Sow CEO Andrew Behar says. “They’re not doing enough on climate by any means.” Fossil Free Funds, a site operated by As You Sow, grades 11 BlackRock funds and iShares ETFs with an ‘A’. But it gives Ds and Fs to even more of the company’s funds that are specifically labelled as ESG or sustainable. Vanguard Having no agenda beyond returns means the firm will not take a blanket view on ESG shareholder proposals. Its principles are governance-based, and where these intersect with ESG concerns – such as board diversity, executive pay and board expertise to understand developing issues such as cybersecurity and climate change – it can be said to consider ESG. But it takes a case-by-case approach. Sometimes this means the firm can look like it’s ahead on ESG issues – when it’s identified something as a material risk before it becomes labelled as ‘ESG’. For example, John Galloway, global head of investment stewardship, tells ESG Clarity Vanguard was one of the first asset managers to send a clear signal in terms of its concerns regarding the lack of gender diversity on boards some seven years ago. “We’d seen the research, we’d done the engagements with our portfolio companies and we’d seen better-performing companies have more diversity on their boards. And we saw the risks from the failures or lack of diverse board composition,” he says. “Over time, as clarity around the risk grows and the data is increasing, the market expectations and the market norms make it a little self-reinforcing, because you start to see companies doing something. Then the risk goes up if there’s added reputational or regulatory risk, and so we ramp up our expectation accordingly.” But at other times, waiting for risks to be priced into the market can make the firm look behind the times. On climate, for example, it will not require emissions reductions targets from companies because it does not look to dictate company strategy. Although it is a member of the Net Zero Asset Managers’ initiative, this does not require the firm to set targets for all assets under management, just those “managed in line with the attainment of net-zero emissions”. “What we’re looking for is companies to provide us and other investors with an understanding of how they’re assessing the risks, how they’re mitigating them and how they’re disclosing their progress against those targets they’ve set, so the market can be priced in,” says Galloway. And if a company strategy that sets no reduction targets turns out not to be good? He says: “If they have a non-viable strategy, the market will judge that.”
Click here to read more detail about BlackRock and its ESG woes in this piece for our US audience
For more details on how Vanguard considers ESG risk check out this interview
It is great to see positive changes in workplace culture, particularly when that aligns with how we work. Nothing was more sudden than our industry’s collective shift to remote working in 2020. That’s what makes the discussion around the four-day week so interesting. From embracing flexible and hybrid working, to tackling diversity shortcomings, our industry is one that is steeped in tradition, and while change is clearly underway, it can often feel slow and hard fought for. Are we prepared to embrace the change that more widespread use of a four-day working week would bring? Although the five-day week forms the bedrock for how most people work, particularly in the corporate world, in fact it’s only been in place for a little more than a century. Initially it was introduced to protect the Sabbath for Jewish workers, and then more broadly adopted in the US to counter the effects of the Great Depression. Despite this, any suggested change to this structure is met with fierce resistance, even though it has never been formally assessed. In June, 70 UK firms and more than 3,000 workers signed up for a six-month trial of a four-day working week. Similar trials are set to begin in Scotland, Australia, Spain, New Zealand, the US and Canada this year, following in the footsteps of trials by companies including Microsoft Japan. Meanwhile, Belgium announced in February that employees will be offered the opportunity to request a four-day working week. In its purest form, this doesn’t mean compressing hours or cutting pay (although some companies opt for this), but paying staff to work the equivalent of four days at their previous salary level. The results have been highly encouraging. Staff were more engaged, took less sick leave and thoroughly appreciated the opportunity to pursue enriching hobbies. Inclusive working practices It’s reasonable to question the viability of this for investing, but if we cast our mind back just a few years would we have anticipated the shift in working practice we have seen? Amid concerns about compliance and regulation, widespread, regular flexible and/or hybrid working was far from the norm, and something most firms in the industry were not even willing to seriously consider. Despite some pressure to ‘get back to the office five days a week’, even firms that are lukewarm on hybrid working have had to adjust their offering to compete for talent. This is supporting inclusive working practices. The four-day week is another, significant, break from tradition and the predictability of a 9-5 working day. Yet the experiments that have been run demonstrate the benefits are significant for employee wellbeing, talent retention and attraction, and can reduce employee and office costs. And really, who is working 9-5? Many people look at the four-day week through the lens of the individual, thinking about a full day of productivity lost. But if we consider it from a firm’s perspective, we are already a global industry spanning time zones and market places. Our clients have come to expect that if markets are open, so are we. While that means firms will need to continue to ensure coverage, technical advances have made this even more possible. If anything, the emergence of productivity-tracking programmes pose a risk to employees being able to switch off at all. And there are additional challenges in such a highly regulated industry. We have previously highlighted the tech risks posed by hybrid working, and in this same vein the compliance and regulatory implications would need to be addressed. From a personnel perspective, the people who have struggled with the changes that lockdown wrought might also lament the loss of a structure they have always known. Those in highly people-focused and competitive roles might well struggle with switching off. Many women will already have dipped their toes in the water and found the four-day week to be efficient, but struggled to keep the boundaries sacrosanct because they didn’t want to block others. They may also have found they missed out on watercooler chat and a relaxed Friday lunchtime. But our approach to this shouldn’t be concessions for some people in order to make life harder for others; it’s about reframing our approach with the goal of balance that enables everyone to perform at their best. Next steps As we have argued in the past, the next step should be to assess the benefits and risks of the four-day working week and acknowledge we might need to look at a variety of approaches. Our industry’s competitiveness is inexorably linked to our ability to consistently attract and retain the best talent. And what does this talent want? Research has shown employees are increasingly prioritising wellbeing, support and work/life balance. The industry can also learn from other sectors such as tech to innovate working practices that keep it ahead of the game. As I write this, the City Hive team is returning from the summer slowdown, when we use our time and our brains differently. With many of us balancing work with childcare, the team was encouraged to put on out-of-office notices that let anyone contacting us know how we were prioritising work (including urgent business) and when to expect our response. It’s how we choose to work (and we make it successful through good communication). While time will tell what the outcomes of the trials will be, and if and how the UK government and businesses alike will take to the concept, I’d encourage our industry to consider what benefits could be on offer from taking a fresh look at how we work? For the individual, the benefits of having more balance and the choice; for companies, a competitive advantage.
‘Even firms that are lukewarm on hybrid working have had to adjust their offering to compete for talent’
Bev Shah CEO and founder, City Hive
Click to see City Hive’s Fearless Woman campaign celebrating 50 years of women investing
There is plenty of evidence that governance is the glue that holds ESG together. Asset managers are emphasising the key role governance plays in ESG as a means of holding company directors to account for their performance on sustainability outcomes as well as financial ones. Recent proxy voting results on director elections bear this out. Morningstar’s US proxy voting database tracked more than 71,000 director elections in the last three proxy voting years (that is, the last three 12-month periods ending in June). The absolute number of director elections increased 10% from 2020 to 2022 to almost 25,000. However, there was a 23% increase in the number of director election votes in which more than 5% of shareholders withheld their support. Director elections are seen as routine voting matters. Median levels of support withheld sit at around 2%, so 5% can be interpreted as noteworthy shareholder dissent. Overall, the proportion of director votes with more than 5% shareholder dissent increased from 30% to 34% from 2020 to 2022. US shareholder votes on director elections
‘The increase in dissent against board directors comes at a time when the number of shareholder resolutions on environmental and social issues at US companies has increased sharply’
Lindsey Stewart Director of investment stewardship research, Morningstar
Data dive
Escalation increase This increase in dissent against board directors comes at a time when the number of shareholder resolutions on environmental and social issues at US companies has increased sharply. Morningstar tracked 273 such resolutions in the 2022 proxy year, versus 171 in 2021 and 188 in 2020. Asset managers’ published vote rationales emphasise that shareholders are increasingly prepared to escalate their concerns by withholding support from directors who fail to respond to shareholder resolutions backed by a significant percentage of the shareholder base. The data contains evidence of this: 228 US companies in Morningstar’s database had well-supported shareholder resolutions in the 2021 proxy year – that is, resolutions with more than 20% shareholder support; 192 of those companies (84%) registered 5% support withheld from at least one director in the following 2022 proxy year.
Voting against directors at climate laggards On the key issue of climate change, there is further clear evidence that asset managers are voting more frequently against directors at perceived climate laggards. It was recently reported: “Investors have cited climate change as a reason for opposing the election of a management-backed director at 225 US companies, up from 157 in 2021 and 83 in 2020”. Proxy voting disclosures from BlackRock, the world’s largest asset manager, also reflect this increase. They state that it withheld support from 176 directors on climate grounds this proxy year – the asset manager registered a large step up in such actions in 2021 to 254, from only 55 in 2020. The clear message is that with asset managers increasingly seeking to invest in companies demonstrating positive environmental and social outcomes as well as financial ones, they are prepared to use their voting power to ensure accountability. This means companies will need to ensure their governance structures, leadership and processes meet shareholders expectations and those of their wider stakeholder base.
Increase in the number of director election votes in which more than 5% of shareholders withheld their support
US companies where investors cited climate change as a reason for opposing the election of a management-backed director
Proportion of director votes with more than 5% shareholder dissent in 2022, up from 30% in 2020
23%
34%
225
In the run-up to COP27 later this year, businesses are beginning to reflect on their commitments to net zero as part of efforts to limit global warming and support investing aligned with net-zero emissions by 2050 or sooner. However, commitment is merely the first step towards net zero and myriad challenges face companies in achieving this goal. A complex challenge therefore requires collaboration and shared insight. Delivering a net-zero target across a full portfolio is a complex process that involves quantifying disclosure, target setting, monitoring delivery of emissions reductions, as well as understanding different regional starting points. Regional reality Achieving net zero globally will require the whole world to pull in the same direction, but Asia may be the most important and difficult obstacle to overcome. One key challenge when engaging with companies is there is not a universal commitment towards net zero. Fossil fuels – particularly coal – have been instrumental in supplying the surge in electricity demand across emerging markets, including in the biggest countries China and India. Trying to restrict total energy demand is neither equitable nor inclusive. This creates a clear conflict between economic development and net-zero goals in the short term, one which is extremely tricky for governments to navigate. Engagements so far have clearly shown that most company plans inevitably tie in with government targets. Several of the most important countries including India and China are not currently committed to 2050, while many others do not have alternative energy sources or the necessary infrastructure to achieve net zero. This highlights the need for governments and corporates to work together. Our recent engagement with Samsung Electronics is a good example of just how early-stage Asia is, even for some of the largest and most well-resourced companies. Samsung has confirmed it wishes to align with the Korean national target of net zero by 2050. The initial focus will be mostly on Scope 1 and 2 emissions, where it can have the most influence – with the semiconductor division the obvious focus of attention. At its semiconductor fabrication plant, for example, Samsung is now using 100% renewable energy in China, US and Europe. However, this is a challenge in South Korea, where progress will need to be aligned with the government and local energy market. While this does not prevent it from having long-term aspirations to achieve net zero, it will inevitably need to involve the use of offset activities. The role of oil majors While emerging markets have an important role in the energy transition, high-emitting sectors such as oil and gas are also instrumental in the net-zero journey. The energy transition will require long-term commercial investment to become self-sustaining over time, and the scale and complexity of projects are something the oil majors can deliver. For example, Shell sells around 4.6% of final energy consumed in the world and produces around 1.4% of total primary energy. To reduce its Scope 3 emissions, it is imperative Shell changes the mix of energy its customers use to lower-carbon alternatives. Through initiatives such as the Clean Skies for Tomorrow Coalition, which Shell co-founded, and working with customers such as Rolls-Royce to test and show how aircraft engines can operate on 100% sustainable aviation fuel, Shell is using its expertise to create routes to net zero. Cosan is another interesting company as it is a significant producer of sustainable biofuels. But as this fuel is derived from sugar cane, the company’s agricultural activity is directly exposed to climate risk. It is encouraging that on the product side, Cosan is pioneering the development of second-generation ethanol, which further reduces the emission intensity of bioethanol. It is also introducing biomethane into its natural gas distribution network. Cosan already maintains an inventory of Scope 1, 2 and 3 greenhouse gas emissions for all its listed subsidiaries and reports these via CDP. It has also set numerous climate-related targets, including achieving net zero on a Scope 1 and 2 basis at its subsidiary Comgas by 2025. Engagement value Companies will most aggressively respond to goals and rules set by their national governments, as failure to do so most readily threatens their ‘licence to operate’. Companies operating internationally need to be aware of evolving international norms and also recognise that the court of public opinion matters too. Making the commitment to net zero is uncomfortable but perhaps the easiest part of the process. For investors, using engagement to encourage disclosures where these are not yet in place will be highly valuable.
‘Achieving net zero globally will require the whole world to pull in the same direction’
David Sheasby Head of stewardship and ESG, Martin Currie
ESG Clarity’s Christine Dawson on how the Responsible Ratings Index’s top fund houses voted on climate resolutions during the 2021 AGM season
For our deep dive into engagement this issue we have taken three of the asset managers from our top-ranking funds in the Responsible Ratings Index database and looked at their use of proxy votes on climate resolutions. Nordea Investment Management, Pictet Asset Management and Royal London Asset Management (RLAM) were the managers behind the top seven funds in June 2022. We used ShareAction data on shareholder resolutions for US companies last year to see how each fund group voted on climate during the 2021 AGM season. Click here for the results. Nordea had the highest rate of ‘for’ votes at 100% and the highest percentage of votes that went against the advice of the board – 91%. Pictet fell in the middle on both counts, with 92% and 85%, respectively. Meanwhile, RLAM had the lowest number of votes for the resolutions, with 78%, and the least votes against the board – 70%. Active choice to abstain Apart from smaller differences in the number of against and split votes, the largest divergence between how the groups voted was in the number of abstentions they used. RLAM abstained in six, or 16%, of the 37 resolutions it could vote on. Sophie Johnson, RLAM corporate governance manager, says this was linked to how complex climate resolutions can be. “Our decision to abstain is an active one, enabling us to communicate concerns or views to management without either supporting the status quo or wholly disregarding any progress made. This can and does lead to further engagement on these grey areas, often with more receptive companies.” She describes the decision to abstain as an “overlooked part of stewardship”. For Johnson, the important thing is to be able to further engagement on these grey areas and be able to escalate the vote in future years. The BP resolution on climate change targets is an example where abstain was used by RLAM. According to Johnson, this was to allow BP to concentrate on developing its own strategy. However, in 2022, she notes, RLAM decided the oil giant’s Climate Transition Plan fell short and abstained again. The group also voted against a shareholder proposal this year which opposed BP’s plans and would have had company start from scratch on targets. “The response we received was positive and allowed us to communicate in detail the indicators against which we assess them. Because of this interaction, we expect to see improvements on elements of [BP’s] climate plans for 2023,” says Johnson. Against the tide In 90% of the 40 shareholder resolutions on climate in 2021 the company in question advises voting against, and the majority of investor votes tend to follow the advice. There are eight exceptions to this where the board was overruled by shareholders, mostly on resolutions around lobbying. Eric Borremans, head of ESG at Pictet Asset Management, says he does not see it as problematic that most of the group’s votes were against the board while most of the outcomes were in the management’s favour. “We supported more than half of the shareholder resolutions we voted on in 2021, including many relating to ESG concerns. “Shareholder resolutions are an important mechanism in signalling to the board the urgency for action. Therefore, [voting against] makes sense regardless of the final outcome,” Borremans says. He explains corporate governance forms part of Pictet’s evaluation prior to investment so, for the most part, his team expects to support management of investee companies. But, he adds, the group will ultimately vote in line with shareholder interest. As an example, Barclays faced a shareholder resolution last year to establish and disclose improved targets for phasing out funding for fossil fuel projects, which Pictet saw as being beneficial to the bank’s goal to be net zero by 2050. Johnson echoes this view on the role of asset managers’ votes, stating support for shareholder climate resolutions is increasing – it used to sit at around 10%. “Where engagement is ineffective or impossible these votes are a way to signal the importance we place on a given issue, but the limited response from the companies in question can often be frustrating,” she says. “While we do understand the outcome of a proposal will likely lean in the board’s favour, there is something to be said for using our voice as stewards to raise concerns, which adds value.”
‘Shareholder resolutions are an important mechanism in signalling to the board the urgency for action’
RRI ratings providers and methodologies
• Responsible Ratings Index (RRI) combines the scores of ESG ratings agencies. ESG Clarity’s bespoke index provides a comprehensive analysis of the top ESG funds available to investors. • Square Mile’s Responsible ratings combine a fund’s positive impact on the investor’s financial wellbeing alongside the positive impact it has on the world around them. Three factors are considered before being awarded a rating: exclusion – excluding those that have a negative impact on society or the environment; sustainability – rewarding and encouraging positive change and leaders in sustainability; and impact: those that have positive impact on society or the environment. • Morningstar Sustainability rating provides an objective evaluation of how funds are meeting ESG challenges. Each fund is ranked within their peer group. MSCI ESG Fund ratings measure the resilience of funds to long-term risks and opportunities from ESG issues. Please note: the rebalance of the RRI took place in June and therefore does not yet reflect Morningstar’s changes to ratings. • Lipper/Refinitiv ESG scores are designed to objectively measure ESG performance, commitment and effectiveness based on publicly reported data across the three pillars – environmental, social and governance. • Overall Morningstar ratings award funds one to five stars based on past performance. These rankings are based on the performance over the past three years, with risk and costs also taken into consideration, and judged against funds in the same category. • FE Crown ratings are quantitative ratings of one to five crowns based on past performance, stockpicking, consistency and risk control. FE fundinfo provides these ratings to distinguish funds that are strongly outperforming their benchmark. Funds awarded five crowns are in the top 10%. • FE fundinfo Risk scores define ‘risk’ as a measure of volatility relative to the UK leading 100 shares, which have a risk rating of 100. More volatile funds have a score above 100, while those below 100 are more stable. This offers investors a reliable indication of relative risk. • Morningstar Analyst ratings provide forward-looking analysis of a fund based on five pillars: process, performance, people, parent and price. Top-scoring funds receive a ‘gold’ rating.
Click for the top 25 Responsible Ratings Index listings
Pictet Global Environmental Opportunites
Eric Borremans, head of ESG, Pictet Asset Management
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Hugh Gimber, global market strategist at J.P. Morgan Asset Management, discusses gas-related risk
The energy crisis facing Europe is intensifying as winter approaches. The region’s dependency on gas flows from Russia has created substantial economic vulnerabilities, and the prospect of supply disruptions are now looming large. Gauging vulnerabilities European countries’ vulnerability to reduced Russian gas flows varies widely across the region. Three key metrics are crucial to understanding the gas-related risks facing European countries: reliance on Russian imports, share of gas in the energy mix and storage capacity. If a country has low reliance on imports but a very high share of gas used in the energy mix, then risks are still acute despite the low Russian dependency. This year’s decline in gas imports from Russia is the result of several factors (Exhibit 1). The European Commission’s REPowerEU plan – first proposed in response to Russia’s invasion of Ukraine – included aims to reduce the bloc’s dependency on Russian gas by two-thirds this year, but stopped short of an outright ban. Supply disruptions began over the summer when several countries were cut off from Russian pipeline supply after refusing to make payments in Russian rubles. More recently, Russia has halted flows in the key Nord Stream 1 pipeline completely, while stating that supplies will not resume in full until western sanctions linked to the Ukraine invasion are lifted. Exhibit 1: EU natural gas imports from Russia Million cubic metres Above-average imports of LNG have helped to plug this supply gap over the summer, with flows from the US accelerating meaningfully. Fortunately for Europe, this has also coincided with a period of reduced LNG demand from China as its economic activity remains subdued. While we ultimately expect this crisis to turbocharge the rollout of renewables over the medium term, strengthened demand for fossil fuels is inevitable to bolster short-term energy security. For example, the International Energy Agency (IEA) estimates that EU coal consumption will rise by 7% in 2022. The EU appears well on track to meet its target of filling 85% of the total underground gas storage capacity ahead of the coming winter (Exhibit 2). Yet despite this progress, scenario analysis from the IEA highlights that even with gas storage hitting 90% later this year, storage levels could become dangerously low by February 2023 absent Russian gas flows, as non-Russian imports would be insufficient to cover the shortfall. The situation is further complicated by seasonality – despite the EU’s storage capacity providing roughly 27% of average annual consumption, over 55% of annual gas demand is consumed between November and March in a typical year – and limited infrastructure to transfer gas from west to east within the bloc. Looking forward, if storage capacity is run down to below average levels in order to survive the winter, restocking during the summer of 2023 could be particularly challenging, especially if Asian demand for LNG is rebounding. Exhibit 2: EU natural gas inventories % of capacity Policy response With soaring gas prices having sent electricity prices skyrocketing, government support to prevent the full passthrough of energy costs to both households and consumers is inevitable. Policy support will seek to blunt the impact to growth, but this responsibility will fall to governments, not central banks, as the latter grapple with surging inflation. With economic activity stronger than expected over the summer, our base case sees further rate hikes through the autumn in both the UK and the eurozone. Even faced with the high likelihood of recession in 2023, it will be difficult for either central bank to change course until they are much more confident that inflation is heading back towards target. For the ECB in particular, this determination will be complicated by the varied impact of government intervention across member states. Earnings implications We expect to see some softening in earnings expectations as analysts begin to reflect the deteriorating macroeconomic outlook. The European materials sector looks particularly vulnerable to gas disruption, as chemicals companies make up roughly half of the sector. Meanwhile, the impact on European utilities could vary significantly; those with high exposure to renewables should benefit over time from the strengthened tailwind behind the renewable rollout, while others will come under pressure from government price caps. On a more positive note, multiples suggest that a substantial part of the gas-related risks are now reflected in equity prices. Investors should stay vigilant to medium-term opportunities that arise amid this winter’s woes - particularly companies critical to the green transition, and global industry leaders based in Europe but with limited economic sensitivity to the region.
‘While we ultimately expect this crisis to turbocharge the rollout of renewables over the medium term, strengthened demand for fossil fuels is inevitable to bolster short-term energy security’
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This is a marketing communication and as such the views contained herein are not to be taken as advice or a recommendation to buy or sell any investment or interest thereto. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and investors may not get back the full amount invested. Past performance and yield are not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. Our EMEA Privacy Policy is available at www.jpmorgan.com/emea-privacy-policy. This communication is issued in Europe (excluding UK) by JPMorgan Asset Management (Europe) S.à r.l.and in the UK by JPMorgan Asset Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority.
Source: Bruegel, J.P. Morgan Asset Management. Data as of 31 August 2022.
Source: Bloomberg, Gas Infrastructure Europe, J.P. Morgan Asset Management. Data as of 31 August 2022.
George Crowdy, sustainable fund manager at Royal London Asset Management, on staying focused on long-term goals during a difficult year
For Professional Clients only, not suitable for Retail Clients. This is a financial promotion and is not investment advice. The views expressed are those of RLAM at the date of publication, which are subject to change, and is not investment advice. Telephone calls may be recorded. For further information please see the Privacy policy at www.rlam.com For more information on the funds or trusts or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.com Issued in September 2022 by Royal London Asset Management Limited, 55 Gracechurch Street, London, EC3V 0RL. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.
For professional clients only, not suitable for retail clients. So far, 2022 has been a difficult year for sustainable investors. Sustained high inflation – arising from the disruption caused by Covid-19 and, more recently, the Russian invasion of Ukraine – has put sharp upward pressure on interest rates, impacting the valuation ascribed to longer-duration growth stocks (ie companies expected to deliver a higher proportion of their cashflows further in the future). This has led to market conditions that are diametrically opposed to how sustainable funds invest and where we think long-term value will be created. Our sustainable funds embed a long-duration, low-carbon strategy. On carbon, the path to decarbonisation has been clear, given that the environmental consequences of climate change are becoming more apparent as each year passes. Recent events will probably distort this in the short term, as the social and economic consequences of energy shortages will take a higher priority in policy making. However, this could accelerate the longer-term trend of decarbonisation: energy from domestic renewables will be more attractive than energy that relies on pipelines or other countries’ foreign policies. Sustainable investing is ‘slow’ investing Looking at the long-duration or ‘growth’ bias in our sustainable strategies, the basic premise of our investment philosophy is that the world will look very different, both environmentally and socially, in the future. We believe that those companies on the right side of this transition will, over time, create value for investors, while those on the wrong side will destroy value. Time horizons are integral to this. Even compared to traditional investment horizons, typically three to five years, those for sustainable investment are longer as the challenges that sustainable investing seeks to address will take many years to resolve. Furthermore, even the most powerful trends have cycles within them. If we consider the adoption of technology, or progress made in improving healthcare through new medicines, it is usually a story of transformative change punctuated by some more challenging times. Ultimately, though, the benefit of investing in structural trends such as healthcare, rather than cyclical ones, such as commodity prices, is that the former are permanent, whereas the latter are temporary. What matters in the long term? We believe our core strength is identifying strong investment prospects at a microeconomic level, based on both financial and sustainable factors. We then aim to build diversified portfolios comprising stocks with the potential for growth and capital appreciation over the long term. An interesting aspect of the recent market weakness is that, for our holdings at least, there hasn’t been much negative news at a company level. Longer-term company- and industry-specific drivers – such as trading performance, management quality and business strategy – have been largely unaffected. In general, we are not seeing a deterioration in these areas for the companies we own, meaning share price falls are being driven by a broad de-rating. Sustainable funds can seem like thematic vehicles – investing in areas such as healthcare or renewables – but we believe this year validates our strategy of investing in companies, rather than themes. Prospective investments for our funds need to clear demanding sustainable and financial hurdles: this then gives us comfort that they can weather these more difficult periods. It is entirely normal that investors are feeling downbeat and concerned as they see central banks raising interest rates and asset prices come under pressure. At these times, we follow two key mantras. The first is not to panic – short-term market cycles can push investors to change their investment process or strategy in order to ‘do something’. We believe that for long-term investors, doing nothing is as likely to be successful as doing something. The second is to make sure that we recognise opportunities. Successful investors can sow the seeds of future returns in bear markets. Lower share prices are better entry points than higher ones as, over time, economies grow, and markets make new highs. It would have been wrong to sell when the global financial crisis or Covid-19 pandemic hit stock markets – indeed, the opposite turned out to be true. Only time will tell if now is a buying opportunity, but at least asking whether it could be is a very effective antidote to the pervasive negativity that we are currently seeing. Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested.
‘Those companies on the right side of transition will, over time, create value for investors, while those on the wrong side will destroy value’
George Crowdy, sustainable fund manager, Royal London Asset Management
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FOR PROFESSIONAL OR INSTITUTIONAL INVESTORS ONLY. CAPITAL AT RISK. The Wellington Global Stewards Fund, managed by Mark Mandel and Yolanda Courtines, aims to outperform broader equity markets (as represented by the fund’s benchmark the MSCI All-Country World Index) over the long term by investing in companies that are true stewardship leaders. We invest in a select group of global companies that we believe can deliver attractive returns on capital and can do so over the long term, thanks to superior ESG and stewardship practices. Our goal is to invest in companies across sectors that prioritise the business and shareholder returns over growth, particularly when we believe financial returns may be higher or last longer than the market anticipates. We hold a high bar for inclusion. If our research reveals that a company has, in our view, deficiencies in either its focus on return on capital or stewardship practices, it will not be considered for the portfolio. Conversely, the companies that are the most adept at balancing their impact on people and the planet with the pursuit of profit can, in our view, build a long-term advantage. Specifically, we think stewardship leaders: • Lower their employee turnover, build supplier and customer loyalty, enhance their culture and benefit from diversity when they invest in PEOPLE. • Positively impact the PLANET and build resilience when they shrink their environmental footprint, respect finite resources and engage proactively on climate change. • Boost PROFIT when they are disciplined and invest wisely – balancing shareholder returns today with investment in innovation, business and people tomorrow. Engagement plays a key role in our Global Stewards investment process because it enables us to hold management teams and boards accountable for their actions. We believe it’s our duty to engage actively and transparently with the companies in the portfolio. By engaging regularly with management teams and boards to identify ESG risks and opportunities, and to use the proxy votes we cast on our clients’ behalf, we can support or influence decisions that can maximise the long-term value of companies. Please refer to the sustainability-related disclosures for information on the commitments of the portfolio. Sustainable Finance Disclosure Regulation Many ‘ESG funds’ have meaningful style biases. In contrast, our value proposition is to offer clients a global, core allocation of 35-45 large-cap companies, diversified across sectors and countries. We seek to hold companies for 10+ years, resulting in a low-turnover portfolio that is aligned with our long-term engagement initiatives. By reducing country, sector and factor biases, the main drivers of risk and return are stock-specific. And our focus on high-quality businesses means the portfolio tends to be less volatile than the broad market as defined by MSCI All Country World, resulting in potentially more stable and consistent outperformance over time. Past performance does not predict future returns. • The Wellington Global Stewards Fund is co-managed by equity portfolio managers Mark Mandel and Yolanda Courtines. • Mark Mandel, CFA, equity portfolio manager, joined Wellington in 1994 as a global industry analyst and sector portfolio manager. His investment beliefs have been shaped through conducting industry and company analyses, managing concentrated research portfolios, and leading a diverse and tenured team as director of research. • Yolanda Courtines, CFA, equity portfolio manager, joined Wellington in 2006 as a global industry analyst covering European and Latin American banks. Given her sector and geographic coverage, a strong focus on governance and stewardship has always been a critical component of her investment approach. • With a focus exclusively on the portfolio management of the Global Stewards Fund, Mark is based in Boston and Yolanda in London. This provides the geographical reach to actively engage with and influence companies across the globe. • In managing the portfolio, Mark and Yolanda leverage the insights of Wellington’s global industry analysts, ESG research analysts, other portfolio management teams and Wellington’s macroeconomists. Wellington Global Stewards Fund Investment returns – USD S Accumulating Unhedged
‘We invest in a select group of global companies that we believe can deliver attractive returns on capital and can do so over the long term, thanks to superior ESG and stewardship practices’
Global focus
Active engagement
Article 9 SFDR
High active share
Low turnover
Morningstar Sustainability Rating:
Fund size
as at 31/08/22
$226m
For professional investor use only, not suitable for a retail audience. The value of an investment can fall as well as rise and capital is at risk. Investors should consider the risks that may impact their capital, before investing. A decision to invest should take into account all characteristics and objectives as described in the Prospectus and Key Investor Information Document (KIID). Please refer to the Prospectus and Key Investor Information Document for a full list of risk factors and pre-investment disclosures. Risks Capital: Investment markets are subject to economic, regulatory, market sentiment and political risks. All investors should consider the risks that may impact their capital, before investing. The value of your investment may become worth more or less than at the time of the original investment. The Fund may experience a high volatility from time to time. Concentration: Concentration of investments within securities, sectors or industries, or geographical regions may impact performance. Currency: The value of the Fund may be affected by changes in currency exchange rates. Unhedged currency risk may subject the Fund to significant volatility. Emerging markets: Emerging markets may be subject to custodial and political risks, and volatility. Investment in foreign currency entails exchange risks. Equities: Investments may be volatile and may fluctuate according to market conditions, the performance of individual companies and that of the broader equity market. Hedging: Any hedging strategy using derivatives may not achieve a perfect hedge. Sustainability: An environmental, social or governance event or condition that, if it occurs, could cause an actual or potential material negative impact on the value of an investment. Please refer to the Fund offering documents for additional information on the risks associated with investing. This material and its contents may not be reproduced or distributed, in whole or in part, without the express written consent of Wellington Management. This information is intended for marketing purposes only. It is not an offer to anyone, or a solicitation by anyone, to subscribe for units or shares of any Wellington Management Fund (“Fund”). Nothing in this document should be inter-preted as advice, nor is it a recommendation to buy or sell securities. Investment in the Fund may not be suitable for all investors. Any views expressed in this document are those of the author at the time of writing and are subject to change without notice. Fund shares/ units are made available only in jurisdictions where such offer or solicitation is lawful. The Fund only accepts professional clients or investment through financial intermediaries. Please refer to the Fund offering documents for further risk factors, pre-investment disclosures, the latest annual report (and semi-annual re-port), and for UCITS Funds, the latest Key Investor Information Document (KIID) before investing. For each country where UCITS Funds are registered for sale, the prospectus and summary of inves-tor rights in English, and the KIID in English and an official language, are available at www.wellington.com/KIIDs. For share/unit classes registered in Switzerland, Fund offering docu-ments in English, French, Swiss French can be obtained from the local Representative and Paying Agent — BNP Paribas Securities Services, Selnaustrasse 16, 8002 Zurich, Switzerland. Wellington Management Funds (Luxembourg) and Wellington Management Funds (Luxembourg) III SICAV are authorised and regulated by the Commission de Surveillance du Secteur Financier and Wellington Management Funds (Ireland) plc is authorized and regulated by the Central Bank of Ireland. The Fund may decide to terminate marketing arrangements for shares/units in an EU Member State by giving 30 working days’ notice. In Europe (ex. UK and Switzerland), issued by Wellington Management Europe GmbH which is au-thorised and regulated by the German Federal Financial Supervisory Authority (BaFin). Shares of the Fund may not be distributed or marketed in any way to German retail or semi-professional in-vestors if the Fund is not admitted for distribution to these investor categories by BaFin. In the UK, issued Wellington Management International Limited (WMIL), a firm authorised and regulated by the Financial Conduct Authority (Reference number: 208573). ©2022 Wellington Management. All rights reserved. As of 1 April 2022. WELLINGTON MANAGEMENT FUNDS ® is a registered service mark of Wellington Group Holdings LLP
Focus on stewardship
Engagement
Stock-specific diversification
Team
Track record
Important information
Peer group is the Morningstar Global Large-Cap Blend Equity category. Copyright ©2022 Morningstar UK Limited. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. *The inception date of the USD S Accumulating Unhedged share class is 31 January 2019. | Sums may not total due to rounding. | Performance returns for periods one year or less are not annualised. | PAST PERFORMANCE DOES NOT PREDICT FUTURE RETURNS. AN INVESTMENT CAN LOSE VALUE. Fund returns shown are net of USD S Accumulating Unhedged share class fees and expenses. Fund returns shown are net of actual (but not necessarily maximum) withholding and capital gains tax but are not otherwise adjusted for the effects of taxation and assume reinvestment of dividends and capital gains. | If an investor’s own currency is different from the currency in which the fund is denominated, the investment return may increase or decrease as a result of currency fluctuations. | Please note the fund has a swing pricing mechanism in place. | Index returns are shown net of maximum withholding tax and assume reinvestment of dividends in line with the index providers methodology. Sources: Fund -Wellington Management., Index – MSCI. | If the last business day of the month is not a business day for the Fund, performance is calculated using the last available NAV. This may result in a performance differential between the fund and the index Click here for more information on stewardship investing.
