Stewardship Report 2020

Stewardship report 2020

We are delighted to share our latest annual stewardship report with you. We hope that the engagement and voting examples below will bring our stewardship activities to life and show our four stewardship principles in action. 

Engaging with companies has long been an integral part of our investment process and has continued despite the restrictions imposed as a result of the pandemic. In fact, we would argue that during these turbulent times, building long-term and constructive partnerships with our investee companies has become even more important. During 2020, we had over 100 meetings with companies. The majority of these were with companies in which we invest but some were part of our broader investment research.

For more information on our stewardship processes, please read our Engagement and Voting policies which are available on our website, alongside our statement of compliance to the UK Stewardship code and our latest Assessment Report from the Principles of Responsible Investing (PRI).

Company engagement

Principle 1 – An aversion to box ticking:

Our focused investment approach enables us to fully understand the material risks to each business.

Much of our engagement work this year has focused on encouraging broader and clearer disclosure, particularly on environmental and social factors. Despite all the attention given to climate-related issues, many companies, particularly those based in the US, are still not publishing transparent data. Recent analysis by Bloomberg found that over 100 of America’s largest public companies on the S&P 500 did not disclose adequate environmental data this year¹.

However, we fully acknowledge that navigating this territory is tricky. There are many ESG reporting frameworks and standards and without armies of reporting staff, no company can possibly respond to them all. We therefore encourage our investee companies to focus on identifying and managing the most material sustainability risks they face. This means that companies can concentrate on what is relevant to them, rather than on issues that may not have as much impact on the long-term durability of their business. 

For example, this year we began a dialogue with healthcare technology company Cerner about the most appropriate metrics for the company to disclose. For a healthcare technology company, the most material sustainability risks include energy management, consumer privacy, data security, and employee engagement, diversity and inclusion. We believe this will provide a solid framework, not only for disclosure, but for Cerner’s on-going work on establishing long-term objective targets.

Taking a case-by-case approach also informed our conversation with Microsoft. As a very large technology company, Microsoft’s environmental impact could be significant. But with the launch of its ambitious climate targets earlier in the year², we chose to focus on issues that could represent a material risk to the company but are less widely reported: its approach to data security and privacy, and its policies on employee rights throughout its supply chain. During the call we were reassured on all issues and were reminded that when it comes to protecting customer data, Microsoft has an advantage over some of its “big tech” peers: because customers pay for its products, it does not need to rely on monetising customer data to the same extent as other tech companies do. 

Principle 2 – A focus on all stakeholders: we recognise that businesses exist within society and therefore have a duty to all stakeholders, not just shareholders. 

We have long believed that companies do not have to choose between doing good and doing well and this has been demonstrated by many companies, including Unilever, over the past decade. 

During the last year, we have been actively encouraging companies to include non-financial/sustainability goals in their remuneration packages to ensure management is as committed to delivering these targets as typical financial ones. This, of course, fits well with our preference for management teams with appropriate long-term incentives, recognising that financial and non-financial performance are closely linked, and it is an issue in which regulators are increasingly interested. For example, in France, it is already a requirement for companies to include environmental and social factors in remuneration schemes. Several companies in our portfolios³ already include non-financial goals in remuneration packages, in some cases at both executive level and throughout the business. 

When we have raised the issue with companies, several have asked for our input on metrics to include, including Align Technology and Hasbro. 

Principle 3 – A culture of partnership with management teams: we recognise and value progress in pursuit of long-term sustainability. 

With any interaction, our goal is always to work with companies and to encourage improvement over the long term. This starts with the introductory letter we send to companies when we first become shareholders and extends throughout our relationship with them, from how we vote to how we engage with management. We recognise that companies are on a journey and that it can take time for our engagement work to yield results. 

In January, Experian asked for our views on its non-financial reporting. Some of Experian’s ESG characteristics are excellent: improving social inclusion by enabling access to finance (important pillars of the UN Sustainable Development Goals) is at the heart of its business. However, while the company has long been aware of the environmental challenges it faces, reporting of these issues and the setting of clear targets was falling short of best practice. Because of our long-term relationship with the company, we were able to have an open and honest discussion explaining which parts of the company’s disclosure we liked, where we thought there was room for expansion and, importantly, why the management and disclosure of these issues is integral to the long-term success of the business. In September, the company told us it had taken on board investor recommendations and has introduced a new goal to reach net zero emissions by 2030, and is reporting carbon emissions in line with TCFD recommendations⁴. While there are still improvements to be made, we are delighted with this progress. 

Principle 4 – We are prepared to vote with our feet: if we identify a risk to a business’s long-term viability, we will sell.

Of course, building relationships is all well and good, but our fundamental aim remains to deliver real returns for our clients. Should any of these meetings lead us to believe that the investment case for a company has changed, such that our clients’ capital is at risk, then we would vote with our feet and sell the shares. During this year, none of our engagements led us to take such action.